The Power of Being Small

How much more money does Facebook have to make this year in order to have a “good” year?

Well, last year their profits grew by about 27%.

Trust me on the numbers here, but to grow another 27% this year Facebook will have to make an extra billion dollars in profit ($1,000,000,000!).

Sure they have sales people and infrastructure, etc…. but with all of that if Facebook makes an extra $500 million, it would be a bad year for Mark Zuckerberg.

He would be deeply disappointed if they made $500 million in profit this year.

Small Businesses

Now, take the owner of a business that does a mere $100,000 in profit per year.

If they did, say, an extra 50% ($50,000) this year… the owner would be stoked!

Imagine if someone gave you a 50% raise at work… you’d be thrilled, rushing home to tell your close friends and family.

But only is it extra money in the owner’s pocket, it’s also highly motivational.

And there’s the real power in being small: it’s much easier to grow $50,000 than $1,000,000,000.

It just doesn’t take as much to move the needle.

Humans are happiest when they’re progressing! You could be genuinely be happier growing $50,000 than Mark Zuckerberg growing $500,000,000.

Use that to your advantage.

Ignore being a huge company and focus on where you’re at now.

If you’re doing $100,000, how many more customers do you need to get to $150,000? Probably not that many.

You could brainstorm some awesome ideas right now while reading this on how to move the needle that much. When you’re small it doesn’t take much to move the needle.

Celebrate the size of your business. It’s an asset to your psychology.

 

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How to Hire An Accountant (Without Knowing Accounting)

Let’s say you’re a developer or designer.

You know how you go to an accountant’s website and it always looks horrible. 

Kinda like this:

Screen Shot 2016-03-08 at 6.32.56 PM

Or this:

Screen Shot 2016-03-08 at 6.33.06 PM

Or this:

Screen Shot 2016-03-08 at 6.33.12 PM

Or this one:

Screen Shot 2016-03-08 at 6.33.26 PM

Wow these are horrible

Screen Shot 2016-03-08 at 7.32.27 PM

Mein Gott.

Screen Shot 2016-03-08 at 7.32.45 PM

Hey, a form!

Screen Shot 2016-03-08 at 7.32.35 PM

(Good night.)

The websites suck because the accountant doesn’t know any better. They’re good at numbers and rules, not marketing or art.

Now, as a designer/developer, do you do your own accounting? 

Then guess what: an accountant would recoil in horror upon viewing your self-made financial statements.

Yes, your finances are in the same shape as the above websites.

But hey, it’s not your fault you suck at accounting. It just ain’t your field.

(Please, stop sucking at accounting. Get yourself help right here.)

How to Hire An Accountant When You Don’t Know Accounting

Hiring for things like accountants and lawyers can be tough. You don’t actually know their advice is truly bad until the IRS starts sending you letters.

So what do you do?

First, remember what you have on your side: you know your business, cold. Whether you have some employees or you’re a full-time 1099 contractor, you know your revenues, expenses, and the general “lay of the land” better than anyone.

Use that to test your accountant.

Questions you can ask:

  1. What’s the typical cut you see Apple take from your other iOS developer clients?
  2. What are typical red flags that businesses like mine run into?
  3. Have you run into any issues with 1099Ks with other clients?

You get the idea. You want someone who has experience with your type of business. Which brings us to…

Find Someone Who Has Clients in the Same Industry As You

You don’t want to be someone’s first rodeo. And someone who has 20 clients that like Just Like You is going to be really good at making sure all your i’s are dotted and your t’s are crossed. You want someone who is bored by your type of accounting, because it’s so simple.

Find Someone Who Will Work to Earn Your Business

Lots of CPAs have been around a LONG time. They have large books of business, usually with lots of big, multi-million dollar clients.

Even if you have only a few employees, you’re going to be small potatoes to most old-school tax accountants. You’re just One More Tax Return to them. Heck, your whole return might pay for a whole lunch between your accountant and one of their large clients.

So what do you do?

You find someone with big firm experience who is just starting out on their own.

Most tax accountants work for a big firm for a few years. They get trained and get tons of good, real-world experience.

Only then will an enterprising accountant usually try starting their own firm.

That’s when you want to find them. You want someone with experience, but who’s hungry to earn your business.

Even if you’re small potatoes they’ll take care of you. They’ll answer your questions. They’ll return your phone calls and emails. They want to make you happy so that 1) you refer all your business-owner friends to them and 2) in case your business blows up (good for your, entrepreneur!) you decide to stick with them because they’ve always been good to you.

This has worked great for me, and can be repeated.

Don’t Be A Crappy Website

You know what I mean: your books are like those websites above… whether you know it or not.

Hire an accountant – a good one – and have the most pristine financials in the land.

PS: Download a sample chapter from my course: Learn Everything a Contractor Needs to Known About Accounting (without becoming an accountant)

(The best looking accounting website I could find)

BONUS QUESTIONS

If you stick to just the two points above you’ll be fine, but here’s more questions to ask your potential accountant. Some of these are critical if you’re going to be working with a large firm (aka any firm when the guy you talk to is not the person working on the actual return):

  • Will I always be interacting with you?
  • Who does the actual return?
  • Are you available year round?
  • What’s your experience with the IRS?
  • What do you need from me to best be able to prepare my return and save me money?
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pablo-4

Self-Employed People: Take Advantage of Retirement Plans Made JUST FOR YOU

If you’re self-employed you already have to deal with a bunch of extra crap like paying more in taxes and running your entire business yourself.

So here’s a cool benefit of self-employment: you get access to better retirement plans than when you’re an employee.

What’s so good about them?

They let you save more. In some cases, a lot more.

(All of the plans mentioned below are tax deductible. Meaning, whatever you contribute in a given year you can deduct from your taxable income for the same year.)

So, what are your options?

Solo/Individual 401(K)

How much can I contribute?

  • $18,000 + 20% of your business’s earnings (25% if you’re not a sole proprietor or single-member LLC)
  • If your spouse is an employee you can double the contribution
  • Up to $53,000 per person
  • Bonus: employer contributions are deductible as a business expense

Administrative Burden?

Medium-high. An annual report is required if your account has a balance greater than $250,000.

What to look out for?

This is only available to people with no employees (other than your spouse)

SEP IRA

How much can I contribute?

  • 25% of your W2 income, OR
  • 20% of your Schedule C Income
  • Up to $53,000

Administrative burden?

Low. Basic paperwork to setup, and no annual reporting to the IRS.

What to look out for?

If you have employees they have to be included in the plan, and you can’t contribute a larger % of your earnings than you do for them.

SIMPLE IRA

How much can I contribute?

  • $12,500

Administrative Burden?

Medium-low. Basic paperwork to setup, and while there is some annual reporting required to the IRS it’s pretty straightforward.

What to look out for?

This is mainly for self-employed people who eventually plan to hire employees. Once you hire an employee, you’ll have to match your employees’ contributions, up to 3% of their pay.

How Do I Set One Of These Up?

Similar to other investment accounts, practically any financial institution that offers investment services will offer these types of accounts to you.

Here’s a few to get you started:

Fidelity

Schwab

Vanguard

 

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Everything You Need to Know About Your 1099-K

The 1099-K is a relatively new type of tax form.

And while it’s much discussed online, there’s lot of confusion on where its numbers come from and what to do with it for your taxes.

Some people have even made the mistake of ignoring the 1099-K in reporting their income. This is a really bad idea, and can lead to difficult conversations with the IRS and/or huge tax bills:

1099-k_twitter_conversation-204x300

(See the end of the post for a Q&A with the developer here to find out how he dealt with the IRS.)

What is a Form 1099-K? Will I get one?

Basically anyone who uses a 3rd party to process transactions is going to be eligible to receive a 1099-K.

Here’s a short list of companies that issue 1099-Ks:

  • Uber
  • Apple (mainly to developers who sell iOS apps, but also people who sell content in iTunes)
  • Google
  • Stripe
  • Braintree
  • Square
  • Airbnb
  • PayPal
  • Google (for its Google Play Store)
  • and a ton of other companies

The good news is that to actually get a 1099-K you have to pass certain criteria.

Specifically, you have to pass all of the following 3 things:

  • Account must be US based (applies even if you’re not a US citizen)
  • Account must process more than $20,000 in gross sales (i.e. before fees, refunds, etc. more on this below)
  • Account must have more than 200 charges in a year

When are 1099-K Forms Issued?

The issuing companies are required to send them by January 31st.

And while you don’t have to keep track of any of the criteria yourself, you should be aware of whether you’ll be getting a 1099-K.

If you think you should be getting one but it still hasn’t showed up by mid-February, you should contact the company to see what’s up. One year Apple sent my 1099-K to the wrong address.

What Does the 1099-K Include?

Here’s an example of a blank one:

1099-K Example

The important part is boxes 5a through 5i. That’s where the company reports total gross volume for each month.

This is where most people freak out.

They think the total gross volume is the same as their revenue. But it’s not.

“Those numbers are way too high. I know they take a cut of each transaction, but this doesn’t even reconcile.”

The reason those numbers are so high and don’t make any sense to you is because they are the gross total of all sales transactions process for you.

Let’s use Stripe as an example.

Stripe is going to report the total volume of all sales they process for you. Before any refunds, before chargebacks,  etc.

For example:

Stripe issues you a 1099-K that says you had a gross of $100,000 for the whole year. (To keep things simple, let’s assume you had 1,000 transactions, and each of them was for the same amount: $100.)

But when you go in to your bank account and add up what was actually deposited into your account by Stripe for the year, you only see a total of $95,000.

What’s going on?

First, Stripe kept their fees. In this case (trust me on the math) their fees come out to $3,200.

But $100,000 – $3,200 = $96,800, not $95,000. We’re still off by $1,800.

The remaining difference could be refunds (i.e. charges that went through Stripe but were reversed), shipping costs, conversion fees, sales taxes, or something else. It’s going to depend on your business.

What Do I Do With the 1099-K?

Whatever you do, do not just ignore it and report what you think your “real” numbers are.

You need to report the 1099-K numbers as income.

But what about the difference between what you actually received and what is being reported?

You report the difference as an expense.

And as I mentioned in the Stripe example, this difference (and therefore the expense) will depend on your business.

In some cases, you’ll already have it tracked.

E.g. if you collected payment for shipping from a customer and already paid the shipping vendor.

Same goes for things like sales tax.

In other cases, you won’t have it tracked yet. Like if you sell apps in Apple’s App Store.

If you’re like me you  probably just look at what you get in the bank and forget the extra 30% even exists.

But when tax time comes, I report the full 1099-K as income, and then create an additional expense for Apple’s fee.

What happens when you do this wrong?

If you underreport income with something like a 1099 that is easily checked by the IRS (i.e. done by computers) you’ll likely get a letter in the mail saying you owe more money.

Carlos Ribas, indie developer and creator of HoursTracker for iOS, went through this. He didn’t use the 1099-K numbers and eventually got a letter from the IRS saying he probably owed more money.

He was nice enough to answer some questions to give an idea of what the process is like.

1. How long did it take after you filed your taxes to get a letter from the IRS?

I received the letter in March 2015 for my 2013 taxes.

2. What did the letter say? Did it demand payment, ask for evidence to support your claim, something else?

It said they corrected the return based on the information submitted to them. After corrections there was an amount due.

The letter said Agree and Pay, or Disagree and explain.

3. What did you do after getting the letter?

I sent them a letter explaining the return was prepared based on bank deposits. I explained that the 1099Ks, due to various App Store-specific things such as the 30% revenue share and a 45-day payment lag, do not match up with the 1099K figures. I proposed revisions to the return to base it on the 1099K numbers, including adding an offsetting expense for the 30% fees.

I also included printed copy of the developer agreement and highlighted the portions about 30% and 45 day payment terms.

4. What did the IRS say when you explained what had happened? Was this via email, letter, phone? Did an accountant do all of this or was it you?

About 30 days later I got a reply saying my letter was received and that I would hear back within 180 days. Probably 130 days later I got a letter saying my revisions were acceptable and no tax was due.

I did it all myself via post letter.

5. What was the final result? ( i.e. did you have to pay more than if you had done the taxes correctly up front)

The end result was a small refund for tax year 2013.

Final takeaways

If you want to get this right the first time:

  1. Report the 1099-K total gross volume as income
  2. Report the difference between that and what you actually received as an expense
  3. Make sure you don’t double count any expenses (e.g. if you’ve already reported shipping costs, etc.)
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Tax Tips and Advice for Developers

15 Frequent Tax Mistakes Made By Freelancers

You work hard to make your money… don’t let this be you!

Let’s get to it.

1. Reporting your net revenue instead of gross revenue

Developers who are in the App Store, Google Play Store, or who sell via Stripe, PayPal, Square, or other vendors, are likely to receive a 1099-K from them at the end of the year.

(The rule is they have to send you one if you did over $20k gross and had at least 200 transactions.)

That 1099-K is important because it gets sent to the IRS. So they’ll very easily know if you’re reported your income from those sources correctly.

The number that the IRS sees as “income” is the gross revenue, i.e. before merchant fees, refunds, returns, shipping fees, conversions, etc.

So you need to make sure to calculate that out yourself (or have your tax accountant do it for you).

So for example, as you know Apple takes 30% from all developers.

What some developers do is report the NET revenue (i.e. after Apple’s cut). That is incorrect, and could lead to a hefty tax bill a few years down the road.

Apple 1099-k Questions

Instead, you should report to the IRS your gross income, i.e. whatever was reported on 1099-K.

Then, to make sure you don’t pay taxes on all that “extra” income, show deductions/expenses for that 30%.

One line can do it, “platform expense” “distribution expense” “third party expense” etc. Whatever you or your accountant wants to call it.

It’s a real expense. It really does count as a business expense and deduction. But you have to make sure both the expense and the income get reported.

2. Not deducting all the business expenses you legally deserve

This is incredibly important, because business expenses reduce both your income tax and the self-employment tax.

Don’t be afraid of counting business expenses.

Here’s a list to get you thinking:

Office supplies
Cabs, subways, buses
Books, magazines, reference material
Telephone/Internet
Promotion
Office rent (or home office deduction)
Gas and electric
Memberships to professional organizations
Messengers, private mail carriers, postage
Business insurance
Tax preparation
Travel
Business meals and entertainment
Equipment
Software
Mortgage interest/taxes
Legal and professional fees
Travel and hotel
Utilities
Professional Development
Advertising and marketing
Unpaid invoices (if you do accrual accounting)
Professional development (conferences, classes, etc.)
Health insurance premiums

3. Not making quarterly estimated tax payments

This is brutal. It is such an easy thing to do.

Here’s the thing: everyone already makes estimated tax payment.

You’re just accustomed to your employer withholding your taxes and doing it for you.

So if you don’t have an employer to do you that favor, you have to make quarterly estimated tax payments.

“But how much do I need to pay?”

I’ll show you! It’s really easy.

Find your tax return from last year and come back here.

Okay….

Step #1: Find your form 1040 or 1040EZ.

Step #2: Find the line where it says “This is your total tax”. That’s line 63 on a 1040 and line 12 on a 1040EZ.

Step #3: Divide that number by 4. That’s your quarterly tax payment.

(There is ONE exception to this rule: find your adjusted gross income (AGI) on line 37 in a 1040 or line 4 in a 1040EZ. If your AGI is > $150k, multiple #3 by 1.1. That’s your quarterly tax payment)

Quarterly estimated tax payments are due on April 15th, June 15, September 15th, and January 15th.

You might hear about another rule that’s 90% of your current year’s tax, or annualized income calculations… whatever. Sure, there are other rules to do estimated tax payments.

This one though is simple and will not fail you. If you make your quarterly estimated payments, and they add up to at least 100% (110% for our one exception above if you made more than $150k) of the taxes you paid in the prior year, you won’t be penalized for late quarterly payments.

4. Not Keeping Receipts

In an IRS audit a credit card statement is not enough. The IRS will want to know the item that was purchased, not just who the vendor is.

That said, the IRS doesn’t require you to keep receipts that are less than $75.

5. Misclassifying employees and independent contractors

If you’re a developer paying another, remote developer for some help, he/she is probably an independent contractor. Especially if it’s a temporary gig, they’re using their own equipment, and you’re not telling them exactly how to do the job.

Misclassifying an employee or contractor can have horrible consequences. The employee can report you to the employment authorities.

And if for some reason the employee doesn’t report you and just doesn’t know, they’ll get a hefty extra bill at the end of the year when they find out that you haven’t been withholding taxes for them.

Don’t mess this one up.

6. Not asking for W9s when hiring contractors

Related to #4: when you hire someone, and especially before you pay them, make sure to get a W9. This is what gives you all the information necessary to provide the contractor a 1099 at the end of the year.

If you don’t get a W9 and the contractor, worst case scenario, goes crazy on you, you might not have their social security number or EIN, which is possible to overcome but is just an extra headache.

Just ask for the W9 when you start working together, and put it in a while with all the other W9s from the contractors you’ve hired for the end of the year.

7. Mixing Business and personal accounts and expenses

Strictly speaking this isn’t necessary unless you’ve formed an entity. But even if it’s just you, keeping your books separate will help SO MUCH in keeping track of what’s for your business, and what’s personal.

Why does this matter?

Because from point #2, you don’t want to underreport your business expenses. Every $1 of expense you don’t report can mean losing $.50 or more in real, after-tax money.

Keeping your books separate insures that you get ALL your business expenses included when you do your taxes at the end of the year.

Pro Tip: If you don’t do this, or do this badly, go through ALL your personal bank and credit card statements at the end of the year. Find anything that might be related to your business.

My wife does this every year with her wedding photography business and inevitably finds a few business expenses that she otherwise would have forgotten to report as part of the business.

8. Not hiring a monthly bookkeeper

Sure, you only have 50 transactions a month and you could do this yourself every month, but do you actually do it?

Bookkeepers that compile transactions into financial statements (and do nothing more) can be found for relatively cheap. $20–40/hour, depending on where they’re located (and of course you can hire a remote bookkeeper).

This will 1. give you up-to-date information on how your business is actually performing, and 2. make your life so much easier come tax season.

Instead of worrying about whether you have all your expenses included, or downloading old credit card statements, or going through all your transactions (and finding things you should have gotten refunded!)… you just hand your tax accountant an income statement and a balance sheet. Bam!

9. Not hiring a tax accountant

Have you seen CPA websites? They’re horrible. That’s what happens when a CPA tries to roll their own tech.

That’s what your taxes look like to an accountant when you try to do them yourself.

If you’re a developer, you can definitely afford paying someone to do your taxes. Their rates are probably even lower than yours.

10. Paying for deductions when you don’t itemize

Charitable contributions are tax deductible, right?

Well, sometimes.

They are if you “itemize your deductions”.

Choosing whether to itemize your deductions is a simple math problem. To itemize, your qualifying itemized deductions need to exceed your standard deduction, which for most people is one of the following:

Standard deduction for single taxpayers – $6,300
Standard deduction for married taxpayers filing a joint return – $12,600
Standard deduction for head of household taxpayers – $9,250

So if you’re single and don’t have more than $6,300 worth of itemized deductions to take, you will not save on your taxes by making a charitable contribution.

What are itemized deductions? The list is long and, frankly, complicated, but the main ones to be aware of (and that most people who itemize use) are:

  • Mortgage interest on up to two homes
  • State and local income taxes paid
  • Medical expenses (after they exceed 10% of your adjusted gross income (AGI))
  • Gambling losses, up to the extent of your gambling winnings

As a general rule, if you’ve itemized in the past, it’s likely you’ll itemize in the future. So just ask your accountant.

11. Not Buying Health Insurance

Under Obamacare you are legally are required to own health insurance.

If you don’t own insurance, you’ll pay the higher of

  • household income, up to national average cost of a Bronze plan sold in the exchange

or

  • $695 per adult, up to $2,085 per household

Get insured.

12. Not paying (or saving for) self-employment taxes

Self-employment taxes are just another name for the taxes that you and your previous employers paid together.

Except now that you’re the employee and the employer, you have to pay both. It’s ~15% of your annual profit, after all business expenses.

The good news is that if you paid attention to #10, you won’t suffer too much here. If nothing else, you won’t be penalized for paying late.

But self-employment taxes still surprise some people by the amount. They get to the end of the year and realize they haven’t saved quite enough.

So, every time you cash a check, set aside some for self-employment taxes at the end of the year.

13. Not paying “reasonable” wages to shareholders of an S-Corporation.

For you fancy pants who have S Corporations you need to make sure ou pay a reasonable salary to the owners.

You can’t, say, pay yourself $5,000 in salary for the year, then take a distribution of $150k to avoid the self-employment tax.

The IRS has come after this exact situation a lot lately, too. So avoid an audit by avoiding this situation altogether. Pay yourself a reasonable wage.

14. Not Taking Advantage of Self-Employment Retirement Plans

There are plans that you uniquely qualify for as a self-employed person without employees.

They’re awesome because they generally allow for much larger contributions than a typical 401(k).

Solo 401(k)s, and SEP IRAs, are your main options here.

15. Reporting too many losses

The IRS is happy to let you deduct business expenses if you’re really running a business.

But it won’t be happy if it finds out you’re working on a hobby, and trying to pass off the expenses as “business expenses”.

How do you avoid this? Basically, make sure to report at least some profit. You don’t have to do this every year, but more than 2 years in a row of repeated losses and the IRS will start to wonder whether you’re really a business.

And you really are a business. You have nothing to hide. So just make sure your business is profitable.

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How I Sold my Bible App Company

It all started with an email I wrote last November:

I’m a Spanish Bible salesman. Kind of.

The goal was just to pay our rent, but instead the Spanish Bible app I made turned into a successful 6-figure business.

That was sent to Gimlet Media November 12, 2014 pitching my Bible app story for their podcast, Startup.

12 days later I was being interviewed by Alex Blumberg.

Gimlet Media published that episode on January 5. My interview ended up being half of the episode and I thought it went great. I’m a huge This American Life and Startup fan so just being interviewed by Alex was fun, let alone being on the show.

I got a few “congrats!” on Twitter/Facebook etc. and I thought that was the end of it.

Until Business Insider found it.


The First Email

About a month later in February, Business Insider published a post that summarized the interview.

This would end up changing my life.

Business Insider’s reach is incredibleand as a result of that post:

  • The story was written about on over 1,000 other websites
  • It was shared over 4,000 times from Fox News’ Facebook page
  • They discussed it multiple times on the the Fox News morning show
  • I was a guest on the Huffington Post’s morning show
  • I was interviewed by a bunch of other smaller media sites

And of course the kicker: the following email landed in my inbox on February 6th:

Trevor,
Great to meet you. I work for Salem Media and I read the story about your Bible App. Sounds like you have really created something that is doing very well. I would like to talk with you because we are interested in buying the app from you if you have any interest. You can check out me on LinkedIn if you want and we can set up a quick call just to say hello and see if there is anything there…

(Emphasis mine)

I instantly recognized the company and knew this was a very real offer.


Salem Media

Back in 2012 when my apps started really picking up steam I dug into and learned a ton about the Christian media industry.

(For example, I learned that the #1 selling English Bible, the NIV, is owned by Rupert Murdoch and News Corp.)

In my research I found a public company called Salem Media, worth $160 million as I write this. They got started in the 80’s as a radio company.

I pored through their 10-K/10-Q filings, in particular their acquisition sections.

I found things like:

“On May 15, 2012, we purchased Churchangel.com and rchurch.com for $0.2 million. “

“On August 30, 2012, we acquired SermonSpice.com for $3.0 million.”

“On October 1, 2012, we completed the acquisition of Godvine.com for $4.2 million.”

The joy of doing business with public companies; all this info about previous acquisitions, prices, dates… available to anyone.

Even back in 2012 it was apparent very quickly that they buy digital properties all the time.

Websites, apps, Facebook pages, domains… you name it.

Back in 2012 I had no way of getting their interest. But when that first email from them landed in my inbox in 2015, I knew it was real instantly, and that it was game on.

I didn’t respond until 24 hours later. The negotiations had already begun.


The whole process ended up taking 7 months, and basically played out as follow:

1. Agree on price
2. Due diligence
3. Asset Purchase Agreement term negotiations
4. Closing

1. Agree on Price

After we each signed an NDA we got on the phone. My contact for this entire process was a nice guy named David. It’s his job to be nice and get good terms from target companies. He does his job well.

David walked me through basically their entire process, e.g. they make acquisitions of all shapes and sizes, they like what I’m doing, would I be interested in hearing an offer, etc.?

I said that all sounded fine, so he sent over an email with some preliminary questions:

1. What analytics do you use to monitor the app? Is this something you can give me read only access too?
2. Can you give me the revenue numbers by month for the last 12 months?
3. What are the monthly sessions for the last 12 months
4. What are the monthly active user numbers for the last 12 months
5. What are the monthly download numbers for the last 12 months
6. Do you collect email addresses as part of your business?
7. Is there any contracts, litigation or business reasons that would prevent you from being able to sell the app to us?

Pretty reasonable stuff, so I sent over a detailed email with answers, numbers, etc.

And then I didn’t hear anything for a week.

Thankfully I’d also received interest from a different, private investor.

I was nursing both these leads simultaneously and it was around this exact time that I got an official offer from the private investor. It was too low but that didn’t matter. I could still use it to negotiate with Salem Media.


It was a late Tuesday night for him on the east coast, but after a week of silence I got a response to my “I have another offer email” just 15 minutes after I hit send:

I would like to move forward I am at a conference all week. Can we talk Monday? Sorry for the delay.

A few more emails/phone calls laters (this became a theme) they finally made their first offer. It was around 3.5x revenue. I said thank you and that’d I’d get back to him.

I thought about it, and here’s what I knew:

Edit: Story that I forgot to tell in the original post!

David had mentioned to me that most of his team worked remotely. For example, he’s based on the east coast, but his boss and Salem board member (who had authority to yay/nay my deal) worked at headquarters out of their offices in California.

I also used a CRM called Streak that, among other things, tells you where people are when they read your email.

During the times when I was waiting for them to get back to me I had no idea what was going on on their end. Were they really that interested? Were they just busy? Were they talking about it?

The joy of Streak, and the fact that they work remotely, is that I could see them forwarding my email to each other. You’ll see in the map below that it was opened in multiple locations, multiple times.

Screen Shot 2016-02-01 at 12.55.40 PM

It’s like sending a text to someone you’re interested in after a date, and knowing that they’re talking to their friends about how to respond. They’re interested.

This doesn’t always work obviously, but it gave me a ton of confidence in the moment.

End edit

My goal became to convince them that the apps were a strategic purchase (vs. just straight cash flow).

I responded with the following email:

David,
I’m still interested in moving forward and appreciate the offer.
The offer was enough to begin a serious conversation, but I think it was on the low side. Here’s why:
– We’re the #1 downloaded Spanish-language Bible in the App Store. In fact, we get more downloads than the vast majority of English bible apps.
– We’re a Top 10 Free app in the Books category. Better than Disney, Google’s Play app, Barnes & Noble, Marvel Comics, DC Comics, and others.
– The business is very consistent, and has been for some time (> 2.5 years). This isn’t a trend or a seasonal app.
– We rank #1 for “la biblia”, #2 for “biblia”, #2 for “spanish bible” and top 10 for many other phrases.
Since the app performs so consistently and takes so little of my time (~1 hour per month) it needs to make financial sense to give it up…
Given the strategic value of the app, Salem Media’s unrivaled ability to monetize media properties, and the other factors mentioned above, I could accept an offer of 6x revenue.That would give Salem Media the most popular Spanish-language Bible app at a reasonable price and provide me enough incentive to give it up.

Frankly it also helps that you guys have experience with app properties and that I can trust you as a buyer.
Let me know what you think. I can move quickly if the deal makes sense.
Trevor

They came back with an updated offer of 4.5x revenue, a bump of 1x.

But I knew they could do more.

I countered again, basically reiterating the previous email, lowering my ask to roughly 5x revenue.

Finally, he emails me:

Trevor,
Let me know if you have a few minutes this afternoon. I think I have a way to get to 5x revenue but I want to be sure you are good with it before I send along the offer.
Hope you all are having a great trip. David

The timing for this entire process was less than ideal as my wife and I were in Europe for all of March and April.

But I still remember where I was when I “accepted” their offer: having dinner with my wife in Germany.

I’m not gonna lie, saying yes on the phone from a restaurant in Germany to a big company offering to buy my company felt pretty cool.

Once we’d agreed on the price it was time to begin due diligence.

2. Due Diligence

After we’d agreed on price the joy of due diligence began.

I already had all my ducks in a row so it was pretty easy to get them everything they asked for:

What wasn’t fun was how long it took. We agreed on the price and started due diligence around March 10th, and I didn’t get the first draft of the initial asset purchase agreement until April 21st. Just awful.

In the first half of April they’d asked (and I’d complied with) multiple due diligence asks, phone calls, etc. Eventually I had to put my foot down and say no more. I wasn’t giving them a single more minute or document until I got the draft agreement.

It worked.

I worked up more and more moxy as the process continued.

3. Asset Purchase Agreement (APA) Term Negotiations

I finally got the draft APA on April 21st. It was a 63-page document, so I finally hired an M&A firm to help.

I ended up only having to spend ~$5k on lawyers for the whole deal, which sounds like a lot until you work with lawyers. I was happy to pay it for the advice I got. I actually wish I’d hired them a little bit sooner.

There were quite a few things we negotiated to change in the APA, but the two that took the longest were:

  • Confidentiality
  • Indemnification

Confidentiality

Basically I spent 2 weeks convincing them to let me write this blog post!

No joke. The original terms were something along the lines of that I couldn’t tell anyone about the sale, ever, which is crazy since it’s going to be publicly available in their Q3 10-Q in about a month anyway.

Thankfully they finally agreed to let me talk openly about most things in the transaction, which is why I’m able to write this post.

Indemnification

For people who aren’t familiar: indemnification means “if I get sued for something you did, will you protect me?”

This is generally a reasonable term and is included in basically every M&A deal under the sun.

Generally the pieces that get negotiated are 1. how long does it last and 2. whether there’s a liability cap.

E.g. How long after the sale do I have to indemnify them, and in some disaster scenario if they got sued and lost, what’s the max I’d ever owe them?

In the end we agreed on a length of time and cap that was comfortable for both of us.

I will say this: I had to push back hard to get my terms on this point. Initially they wanted uncapped liability forever, which was unacceptable.

The most tense moments in the entire 7-month process was on a phone call about this very subject.

I told them I was going to walk away from the deal (after ~6 months of work) if I didn’t get some sort of compromise. That was followed by roughly 45 seconds of silence on the other side of the line, but eventually the guy spoke up and said he’d see what he could do.

And I wasn’t bluffing.

From this phone call we were able to finally agree on indemnification terms that were acceptable to both parties.

4. Closing

The best day of all.

Once we’d agreed on every detail in the APA it was time to schedule a day to close the deal. In my case that meant signing and transferring the assets all in the same day (in high profile acquisitions you see online the announcements happen after the deal is signed but usually before it’s closed.)

So sure enough: I transferred the apps from my iTunes Connect account to theirs. I gave them my login details for my email list, my hosting account, and a few other things.

Then they wired over the money.

And just like that the deal was over and I’d sold my first company.

My wife was out of town so to “celebrate” I treated myself to In-n-Out for lunch!

Mental Exhaustion

The deal made a ton of sense and I’m glad it got done.

But it did take over 7 months, hundreds of emails, and dozens of phone calls. It was psychologically exhausting and definitely the hardest part of the 3.5 years I ran the business.

I’d heard so many horror stories about failed acquisitions that I always assumed it was dead until the cash was finally in the bank.

Even literally the Monday before the sale closed I spent all day in bed worried about whether it would actually go through. That was not fun, and various levels of depression occurred throughout the sales process.

That would explain the relieved smile in the picture above.


Thank you Salem Media. It was a pleasure doing business with you.

Here’s to the next side project.

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Why is Everyone Like Their Parents?

Why do so many people end up in the same socioeconomic place as their parents? There are at least two reasons I can think of.[1]

First, it’s easier to accomplish something when you’ve seen someone else do it.

To use a popular example: many thought the human body could not run a mile in less than four minutes until Roger Bannister did it in 1954. But once he had shown it was possible, two months later two other runners did it in the same race.

That’s probaby not a coincidence.

It’s the same with being raised by parents who are successful. You can probably think back to specific memories of your parents working, whether that’s making stuff on the computer, phone calls with coworkers/partners, whatever.

If your parents are successful, you’ve seen the thousands of baby steps that go into, say, running a business or creating something new. It’s not some mystical, ether-like idea.

On the other hand, if you’ve never seen someone go to college you probably don’t have a great idea how the application process works. How thorough does the application have to be filled out? What are colleges really looking for?

It’s hard being the first to do basically anything.

Second, I think everyone has what I call an “internal productivity quota” (IPQ). Your IPQ is the amount of stuff you need to accomplish so you feel happy and productive instead of lazy and depressed.

IPQ levels are different in everyone. They help explain (part of) the reason why people who don’t need money continue to work so hard: they’d feel unproductive if they didn’t.

Like other human behavior I think IPQ’s are a function of nature and nurture. I believe humans tend to fall and rise to the average behavior of the people around them.

If we spend our time with people who, say, don’t get a lot done, or who watch a lot of TV, our IPQ will adjust down.

We won’t be as productive, but over time that will feel okay because it’s what everyone else is doing.

But if we’re around friends who hit the gym at 7am and work disciplined 12 hour days, our IPQ will slowly adjust up. We’ll feel the difference.

So to answer the question in the post title: most people end up like their parents because no one else has as large an influence on one’s IPQ.

And because our parents probably chose to live in a place with people similar to them, practically everyone you knew growing up was the same way, too. It can be difficult to break out and do something different after being surrounded for 18 years by the same type of people.

The practical takeaway to all this? Choose friends that will make you better and inspire you!

Obviously don’t be a jerk or actively push “unambitious” people away. But do make time for people who are interested in the things you aspire to build and create.

  1. I’m purposely leaving out a discussion of all the (very large) benefits that come directly from social and economic wealth. I’m more interested in talking about ambitious middle/low income people who realize they’re starting without that help. 
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Product Roadmaps

I’m lucky in that once a week I get to sit down and hear founders pitch their companies and products. As I listen I’m asking myself two things:

  1. Why or why not might this work?
  2. How can I add value to this team? I want to talk about #2.

Generally, the people who add the most value in the pitch “post-mortem” are those who can see the future of the product.

Said another way: people who intuitively see where a product is headed in terms of features, partners, and distribution add immense value. Granted, many startups end up changing their idea altogether.

At the beginning founders probably won’t know what their product will morph into 2 years down the road. But there is value in seeing the next steps, and founders will appreciate hearing those ideas.

Ideas that fit the product road map, with suggestions about partners and distribution channels that compliment the product. It’s valuable enough that Paul Graham said “Sometimes I can see a path that’s not immediately obvious; that’s one of our specialties at YC.”

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App Store Pricing and Top Charts: A Lesson on Apple’s Priorities

Marco Arment wrote there are three problems with the “Top Charts” list in the App Store:

  1. It encourages shallow apps with really low prices
  2. It’s easy to game
  3. The rich get richer

For the most part these simply aren’t true.

It encourages shallow apps with really low prices
This argument falls apart quickly if you look at the reviews of apps that are ranking well.

I just scrolled through the 300 currently Top Grossing apps on the iPhone. Going through all those apps it’s apparent that 75%%2B of those apps have 4 or more stars. And the vast majority (all but two!) had 3 or more.

(For the curious the two offenders were Zoosk with 2.5 stars, ranking #22, and MS Office Mobile, ranking #113 with 2.5 stars.)

Glancing through individual categories you see the same trend. Many (most?) of the apps ranking the highest in Top Grossing have 4 or more stars. Practically all have at least 3. Whatever the problem, the people reviewing these apps seem quite satisfied. I don’t think a bunch of 4- and 5-star reviews shout “shallow.”

There are a few spammy apps here and there that are making decent money. I think that’s to be expected in any lucrative and hot marketplace. But it’s not nearly as prevalent as say, Twitter spam, which is currently an accepted part of that ecosystem that users simply must deal with.

It’s easy to game I’ve spoken with developers who paid for downloads in the hopes of “sticking” in the Top Charts. They all told me it was not worth it. In fact, they said that while they ranked in the top 200 for a day or two they immediately fell off the charts.

My hunch is that gaming the App Store with directly purchased downloads would require a significant budget of 6 figures, minimum. It would have to be enough to rank in the top 20 or so apps. Of course some companies with deep pockets are paying these large sums to rank well.

But even so, doing this is not “easy” and definitely can’t be done by spammy developers looking to make a quick buck. (Whether you’d classify some social gaming companies as spammy is a separate debate.)

The rich get richer
This is the most true of the 3 assertions. But it’s also true for capitalism in general. Life is a hits-based business. If you win you’re going to be there for quite a while.

All that said, we still don’t actually know whether top ranking apps receive materially more downloads because of their ranking. Marco sums this up well in a footnote that I agree with 100%:

“This is all just speculation based on fuzzy data, since developers still don’t have another important metric: where buyers came from. It would be extremely helpful to even have a simple breakdown between three huge channels: browsing the App Store, searching the App Store, or following a direct link […] > > Without this information, we have very little insight into why people buy our apps, which makes it harder to know where to invest our marketing efforts, how to price our app, or how to improve it. (Emphasis mine)

The fact is we don’t know why people buy apps. How can we demand a solution when we can’t even analyze the problem? If anything our current battle should be getting that data from Apple.

No one has a good solution
In the many articles written on this subject there are a few solutions proposed to the App Store discovery issue. Unfortunately they likely won’t work, either:

Use engagement, as measured by # of times an app is launched, amount of time spent in app, etc. This won’t work because apps are not comparable across these metrics. Some apps are “successful” if they help the user perform a task really quickly. Others, like games, are doing their job if the user spends more time in the app.

Other apps are used frequently and throughout the day, like Tweetbot. But banking or movie ticket apps are used only occasionally.

Even the # of launches isn’t great evidence. Some apps like Dark Sky have people so accustomed to push notifications that, while they love and use the app, they don’t ever open it!

Show Gamer Favorites This obviously would only work for games, and would likely mirror the current Top Grossing ranks anyways.

Apps used over long periods of time should be given more weight. This is the best of the three suggestions, but still lends itself towards the “rich get richer.” What if I just launched an app and people love it but have only used it for a few days?

What Does Apple Want?
It’s important to remember Apple’s priority order: 1. Apple 2. Customers 3. Developers

Apple will always put customers before developers. It’s part of what makes Apple great.

With that in mind…

Apps are Complements to iPhone and iPads
Joel Spolsky wrote a great post on the competition between technological complementsChris Dixon wrote a similar post predicting, way back in 2009, the confrontation between Twitter and Twitter clients.

The idea is that there is a finite pie customers have to spend on the iOS ecosystem. The less customers spend on device complements like apps the more they can spend on Apple hardware.

From a slightly different POV, think of iOS as your mom might see it. A big part of the iPhone is having 100’s of thousands of apps available for < $5.

Imagine how much less desirable an iPhone is if suddenly most apps are $20%2B. At that point the ecosystem is too expensive for casual users. And while we techies frequently forget it, casual users are 95%%2B of Apple’s customers.

For both of these reasons Apple wants to keep app prices as low as possible.

Competition for Developers
Apple does have to compete with Android for third-party developers. But right now that alternative is still not financially viable for most of the developers I talk to. Even at current App Store prices, Apple has more than enough devs creating great apps.

Marco’s request that they “start rewarding great software” is simply not an objective of Apple in and of itself. Sure, it falls under the umbrella of “make a great iOS ecosystem.” But helping developers at the expense of customers is the last think they’ll do if that ecosystem is already running smoothly.

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Why You Should Stop Worrying About Being Perfect

I sell some audiobooks through Audible (owned by Amazon). My first book went live last September, it makes about $300 a month, and I still have yet to receive a single payment from Amazon.

Why?

Because Amazon’s form to provide your banking info doesn’t work. Literally.

I entered my account number & my routing number, clicked saved, refreshed the page to double check and… it was all gone.

I did this about 3 times a month, every month, just to see if I had gone crazy or if it was a one-off error. Nope. Always broken. [1]


The first version of my first app looked terrible. [2] Just awful. I wouldn’t show it to people in person because I was embarrased.

But I put it on the App Store, and the first month it made $1,500, or 3x what it cost to make.


Have you read Hatching Twitter? Fantastic book about the history of Twitter from formation until IPO. Not only is it well written, but it’s largely accurate, according to multiple Twitter investors. [3]

The biggest takeway from the book is that behind the scenes, Twitter was a shitshow [4]. But they absolutely nailed the product.

So much so that it’s largely unchanged from when it launched 8 years ago.


Why does any of this matter?
Amazon’s business did fine while this was broken. My app did fine when I launched, even though it hardly passed as a solid 1.0. And Twitter of course is one of the top 10 iconic technologies companies and isn’t even a decade old.

These examples of awfulness passed because they did nail the few things that mattered.

Amazon is great at selling my audiobooks.

My app made users happy because I was the first to pay attention to them.

And Twitter had a practically perfect product out the gate.

All that other stuff that we tend to think matters (e.g. how the product looks, getting coverage on HN or TC) doesn’t, as long as you get the most important things right. [5]

Don’t worry about being perfect. Just do your thing, and do it well!

Did you know? I’d love to meet you on Twitter.

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