I'm also bootstrapped. I am not sure if I'm really a 'success' yet, but I'm beyond where you are. I've been running businesses all my life and it's kinda hard to pinpoint where this one started, but I started selling my current product in 2005. At this point, my company has around $200K/year in revenue, which is about double what we had the previous year. I have one full time employee, and I can pay myself $30-$40K/year while buying the equipment required for growth without debt; so we're ramen profitable, but not yet opportunity cost profitable.

I am not sure why you are giving up at this point, but I can point out some mistakes you made that I don't think you see:

It's fine to bootstrap on five grand; but if you only have five grand? you will almost certainly need to keep your dayjob. I have been running side businesses for most of my life, but for nearly all of that time (until 2009 when prgmr.com really took off) I also had a dayjob.

Dayjobs are great. Someone else gives you enough money to pay your rent and keep yourself in personal computers, chairs, food, etc... and more importantly, someone else pays for your training. I've always worked as a SysAdmin, and I've learned a whole lot operating other people's fleets that I could turn around and apply to my own operations.

Most companies are okay with your side projects. be up front, most places have a form where you write down your own 'inventions' or whatever before they hire you... but again, if we are bootstrapping and not swinging for the fences, there's little chance of your employer becoming interested. To most companies, another couple hundred thousand a year is not enough to bother the lawyers about.

Note, the company will be bothered if it looks like you are spending effort on your project at the expense of spending effort on the stuff they hired you to do. Once I was asked to choose between my own business and my dayjob. (I chose the business... worked on my business for a few months then got a full-time contracting gig)

I've always cycled between a full time dayjob with benefits (get one every time COBRA expires.) corp to corp contracting gigs (for venture capital; I am in a capital intensive industry; corp to corp gigs allow you to spend pre-tax dollars on business equipment... but be /very careful/ with this- tax debt is not discharged through bankruptcy. Once you have enough revenue that paying taxes on all of it would be a big deal, get an accountant. Note I said revenue; this counts the money you are getting from the corp-to-corp contracting gig.) with the occasional month or two full time on the business mixed in.

Next, avoid loans as much as possible. you /will/ fuck it up. Over and over. It happens. Without a loan, you really only return to zero, and eh, you still have that dayjob, right? it's not that big of a deal to be at zero when you get massive checks every month. I mean, you can also return to zero with bankruptcy, but to make that worth the lawyer time, you need to get fairly large loans, which isn't as easy as it sounds. Getting $10-$20K in debit is irritating, can kill your business, and usually isn't worth the lawyer time and hassle of bankruptcy. And a loan doesn't always look like a loan; at one point I signed a contract for a year of bandwidth at $1500/month; this was back when I needed between 1/10th and 1/100th the amount of bandwidth that the $1500/month got me. I mean, I was launching a product that could have used it, if it really took off, but the product didn't take off, and I was full time on the business barely clearing rent, so I ended up with rather a large amount of debt. (I ended up paying it all off as a contractor... honestly, it may have been best to just fold the company at that point and declare corporate bankruptcy; maybe they wouldn't have come after me personally? I don't know. but my point is that leases should be looked at as debt.)

Spend dayjob money on rent at the place where you sleep. Spend the five grand on flyers and other business expenses. (though, five grand is a whole goddamn lot of flyers and business cards. $50 worth of businesscards gets me and my employee through a year, usually.)

If you only have five grand with zero income, the office fridge wasn't your big mistake, the office was. You can get an office once you have business income. Until then, use your garage or front room or what have you.

Anyhow, if the other business owner called you rather than sending a lawyer letter, he's willing to talk. Call him back and explain the situation. Be open about your numbers (this isn't always a good idea, but in your case, you have nothing to lose by letting him know you are not worth suing.) Ask him if you can work something out. This is the advantage of not having any money; Sure, just about anyone could sue you and put you out of business, but there'd be no profit in it; lawyers only work for a percentage of the winnings if they think the winnings will be large enough to give them a better total expected return on their time than working hourly. The guy isn't going to sue you unless he's mad enough to pay a few hundred dollars an hour just to put you out of business.

Of course, if he's a competitor, it probably won't work out. but otherwise, maybe it will. worth a shot.