- Secrets of Bootstrapping From an Entrepreneur Who Leveraged his 401(k) - February 17, 2022
If you’ve never bootstrapped a business, you’re going to need to be prepared for the unexpected. I learned this myself when I transitioned out of the U.S. Army and became a federal decision officer for the Department of Veteran Affairs. Delays in the system impacted my income and my ability to provide for my family, causing me high feelings of anxiety, guilt and hopelessness—feelings many of my fellow veterans experience when integrating into civilian life.
Soon, I realized that my experience working with the VA could offer other veterans critical guidance and expertise to help them not only get their VA claims approved, but improve the benefits they would receive from those claims. This realization planted the seed for what would eventually bloom into my own business, Seven Principles, although I soon realized that building this business would require funding my day job couldn’t offer.
Like most other entrepreneurs who don’t have access to funding, but know that the service they can provide others is vital, I decided to bootstrap Seven Principles from the ground up. I started my business at my kitchen table and scaled it without investor funding, leveraging my 401(k) while working for the VA. No, it wasn’t easy, but it was absolutely worthwhile. Now, I want to help others understand how they, too, can learn the hidden secrets of bootstrapping to grow their business.
How to leverage your 401(k) to bootstrap a business
Now, before you go about leveraging your 401(k) for funding to bootstrap your business, make sure you’ve created a fundable business and that you’ve exhausted all other funding options, both traditional and alternative. Digging into your retirement should be a last resort since you won’t be able to contribute anything to your plan if you have an outstanding loan. One way to circumvent this, should your 401(k) plan allow it, is to roll over your plan into a new one for your business, especially if you need $50,000 or more to get it started.
A rollover for business startups, or “ROBS,” is possible if your business and 401(k) meet specific criteria. First, make sure your business is registered as a C Corporation since this is the only type of business that can sell its shares to a retirement plan account, which is what you’ll need to release to access funding. Next, create a 401(k) plan for your C Corporation. No plan is a one-size-fits-all for every business, so consult with experts on what plan would be best for you, your company and its employees. Once this is done, you can rollover your 401(k) plan into your new ROBS plan.
The next step is the most important in this process: You’ll need to issue shares of your C corporation’s stock that your ROBS 401(k) can purchase. This step is so important because it is the vehicle that puts funding from your 401(k) into your business account, which is how you will access it. When going through this process, keep in mind that there are a lot of rules, regulations and risks involved. For you to successfully leverage your 401(k) in bootstrapping your business, those risks must be navigated and rules followed to a letter.
Be prepared to make up the costs of learning from mistakes
One of the most critical tests of leadership — be it in military service, politics, business or everyday life — is how you, as a leader, will react to failure even when you believe you did everything correctly. Now, no veteran should have to wonder how they can lead a company if they can lead people in times of war and combat. The principles of leadership remain the same. It’s only the context and setting that change. Regardless, leading a company you bootstrap, like leading soldiers into combat, will force you to improvise, learn and adapt when mistakes are made. And they will be made.
Leading a company you bootstrap, like leading soldiers into combat, will force you to improvise, learn and adapt when mistakes are made.
When bootstrapping your business, essentially all its operations are funded directly by whatever capital you have access to. Hiring, paying and letting go of employees who aren’t the best fit for your business all come out of your pocket. The cost of marketing — creating emails, websites, CRM pipelines, as well as automating these processes and going back to improve them — doesn’t come from outside investors or alternative financing. Every step forward you make with your business will be met with new challenges. When bootstrapping a new business, navigating those challenges also comes with added costs. At some point, you’re going to have to find out how you will recover from those costs and the mistakes you will inevitably make.
Oftentimes, we entrepreneurs believe that we are the only ones who understand our business and the vision we have for it. In bootstrapping that business, we become even more emotionally and financially invested in it and its success, but we still have to remember the limitations of our abilities and knowledge. If you find yourself struggling to stay afloat or recover expenses, seek the advice of others who have been in your shoes and lean on their wisdom to guide you.
Ultimately, there is no single assured way to successfully fund and grow your business, especially when bootstrapping. The path forward is full of unknowns. There are bound to be times when you feel like scrapping it altogether, but those times are when you need to focus on the mission your business seeks to accomplish. If that mission is to help others and improve their quality of life, keep refining your process until you see results. If you can place yourself in the shoes of your clients and customers, you’ll be able to understand their wants, needs, and expectations and structure your business around these factors. It won’t come quickly or easily, but nothing worthwhile ever does.
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