Three years ago, when we started making profit as a bootstrapped startup, I was stunned by how little money I could reinvest in my own company compared to a funded competitor. We paid ourselves 20% of the profit and paid 40% in taxes and reinvested the rest i.e. 40% into our business. Meanwhile, a VC-backed competitor could show losses and invest 100% of the revenue plus the $10 million or $50 million they raised from investors. In this essay, I'll show you how screwed up the incentives are for bootstrapped companies and what we can do to fix this.

Real numbers from my startup

Let me show you the actual financials from my company, so you can see exactly how this works.
Our 2023 performance:
  • Revenue: $730k
  • Operating Expenses: $260k
  • Net Profit: $470k
  • Taxes paid: $180k
  • What we took home: $70k ($35k for each founder)
  • Reinvest in business: $220k
We paid ~3x more in taxes ($180k) than we paid ourselves ($70k total).
Compare it to a VC-Backed competitor:
  • Raises $10 million in funding
  • Revenue: $730k
  • Reports $0 profit (reinvests everything)
  • Pays $0 in taxes
  • Reinvest in business: $730k + $10 million
In other words, my startup has to compete with half of my revenue against funded startup on top of $10 million they raise from investors. A large company like Amazon could simply not generate any profits for several years and reinvest all their untaxed money into making a product and selling them at a loss. A small business owner who has to pay themselves through profit can never compete with them. That's how monopolies are built today.

This Isn't Just Me

  • Nithin Kamath calculated India's tax rates: 52% on dividends vs 15% on capital gains. Companies burning cash get valued at 10-15x revenue. Profitable ones get 3-5x. His conclusion: "If you're competing against someone burning cash, you almost have to match it to defend market share."
  • Deepak Shenoy did the math: burning ₹100 crore is 9x more valuable than making ₹100 crore profit. Pure tax arbitrage.
  • Jason Lemkin described the trap: You make $2m-$20m in profit. Do you distribute it, save it (and pay taxes on money you're not spending), or split the difference? Meanwhile "your venture-backed competitors are investing all of it, not just some."

How the System Favors VC-Backed Founders

1. Long-Term Capital Gains vs. Income Tax
VC-backed founders don't take profits. They hold stock that gets taxed at 20% (long-term capital gains) when they sell. Bootstrapped founders who take profits as income, are taxed at 40%+ (corporate + personal).
2. QSBS: The $10M Tax-Free Exit
Venture-backed startups structured as C-Corps qualify for QSBS (Qualified Small Business Stock). They can sell the first $10M of shares tax-free after five years. Bootstrapped founders usually run LLCs or S-Corps. We don't qualify. We pay full capital gains tax on exit.
3. Holding Companies & Tax Deferral
Big companies move profits into holding companies to defer taxes and keep reinvesting. Bootstrapped founders don't have these tools. We get taxed immediately on earnings. Less money to scale.

What Would Fix This

Governments could introduce tax incentives for bootstrapped founders, similar to QSBS. Here's what that could look like:
  • Tax only the founder distribution: Founders shouldn't have to pay taxes for the profits that go back into reinvesment of the company.
  • Bootstrapped Founder Exit Exemption: A tax break like QSBS, but for founders who grew without VC money.
  • Lower corporate tax for profitable startups: Reduce rates for high-growth companies that fund themselves.
This would let bootstrapped startups compete without being forced to raise money just to play the tax game.

The Geographic Opportunity

Ireland and Luxembourg built entire economies as tax havens for big corporations. They could do the same thing for bootstrapped founders instead. These countries could:
  • Attract profitable, sustainable startups
  • Offer tax deferral on reinvested profits
  • Give preferential treatment to companies that grow organically
  • Build an alternative to Silicon Valley's burn-cash model
Europe and other regions could support the next generation of profitable businesses instead of trying to copy silicon valley.

Why This Matters Now

AI tools are making it cheaper to build software. Smaller teams can launch products that used to require millions in funding. More founders will be able to build profitable businesses without raising money. But the tax system hasn't caught up. It still treats profit as something to penalize, not something to reinvest. Countries could change this. Instead of copying Silicon Valley's VC model, they could offer better tax treatment for founders who reinvest profits. Make it easier to grow without external funding.

Conclusion

Paying 3x more in taxes than what we took home as income was a shock to me at first. I am sure, many other bootstrapped founders are shocked at first that the system only rewards burning cash and staying unprofitable. So, they either chose to play the same game (raising money and show zero profit) or move to tax havens.
For policymakers: You have a choice. You can create tax incentives for bootstrapped founders and companies that build sustainably without requiring bailouts or creating market bubbles. Or you can watch these founders incorporate elsewhere.
For bootstrapped founders: If policymakers don't act, we can build this ourselves. Think Stripe Atlas for bootstrapped companies, a service that incorporates you in countries with favorable tax treatment for reinvestment, where you only pay taxes on founder distributions, not on profits you reinvest.
Countries like Estonia, Ireland, and Singapore are already competing for remote companies. The first country to offer real tax advantages for bootstrapped founders will attract the next generation of profitable, sustainable businesses. We don't need permission to build profitable companies. But we shouldn't have to move countries just to reinvest in them.