Politics

Obama’s Overtime Rule Is Going To Be A Disaster For Startups

Obama’s Overtime Rule Is Going To Be A Disaster For Startups by Dan Gelernter, Foundation For Economic Education

Dear Congress: Please Fix This!

The Hon David Vitter, Chairman
The Hon Jeanne Shaheen, Ranking Member
Senate Committee on Small Business and Entrepreneurship
428A Russell Senate Office Bldg
Washington, DC, 20510

Dear Madame and Sir,

I am co-founder and CEO of the technology startup company Dittach. Dittach is my second company. My first ultimately failed after two years of hard work, but I took the lessons learned and started again.

In Dittach’s first year of operation, we raised some $600k to build our software and our business, and we had to spend in excess $55k on legal costs — nearly ten percent of the total. The great majority of these costs were simply in satisfying the compliance burdens already imposed on us by local, state and federal regulations — to make sure that our company was formed according to the rules, that our contracts and stock issuance was in order, and so forth.

Having spent this money on legal fees has made a material difference in our ability to succeed. I could have used that money to hire another developer — if not for those compliance costs, together with the specter of additional costs and mandatory benefits that effectively penalize the company for each employee hired.

As a tech startup founder and employer, I think the Department of Labor’s newly proposed overtime regulations will do more harm than good for our industry. Larger companies may have a variety of ways to cope with the increased cost of this regulation, but startups do not.

In the early stages, we typically have no revenue at all. We’re building a vision or a product from scratch — it may be years of work before we make our first sale. Our money is extremely limited: We have only what we raised from investors, and fundraising is itself so difficult a process that most startups fail before they’ve raised any capital at all.

For those of us who raise money successfully, each dollar represents a piece of our company that we had to give away in exchange for it.

We have no way of passing increased costs to customers. Raising the cost of performing a task — either through raised wages or simply the increased cost of compliance with new rules — means we can do less. In a startup, where our margins are already so tight, where we enter this difficult and dangerous field knowing that the vast majority of us will fail, a small increase in operating cost — a fraction of a percent, even something that costs only a thousand dollars — can make us insolvent. It can mean that all the money and energy we spent up to that point was wasted. It can mean that instead of employing a half-dozen people we can now employ no one at all. It will be cold comfort to the newly unemployed to know that he would be earning more than before, if only he still had his job.

The difference between success and failure for a tech startup is a minute, and the judgment is exact and brutal.

We might be told that the answer for a startup is simply to “go and raise more money.” But — aside from diluting the founders who are paying for the company with their sweat in exchange for the hope of a payoff that comes in years, if ever — raising capital is the single most difficult thing I do as a startup entrepreneur. I would invite anyone not in our field to give it a shot before he endorses a regulation that will impose greater capital costs on us.

Regulators often act as though they cannot imagine a world where a few hundred or a few thousand dollars can make the difference between success and failure. If you raise our costs even modestly, you will put some of us out of business.

To increase our chance of success, I would recommend exempting newly formed companies from taxes and rules on wages for the first three years of a company’s existence. The few thousand dollars a company pays the government in early compliance is nothing compared to the jobs, tax revenues and benefits a business can produce when it reaches maturity.

Respectfully Yours,

Dan Gelerenter

CEO, Dittach, LLC

Obama's Overtime Rule Is Going To Be A Disaster For Startups

Obama’s Overtime Rule

Overtime