Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Richard Luck
Recently I wasasked for advice by a man I have worked both for and with forthe better part of 3 years. He’s in between jobs and looking to land sometemporary consulting work until the next employment opportunity comesalong. Since the telecom industry is such a freakishly smallcommunity in this town, I won’t mention his name. But suffice it tosay, he’s one of the most-brilliant engineers I’ve ever had the pleasure toknow. The man has literally forgotten more about RF Engineeringthan I could ever hope to know.
So I was greatlyhumbled when he asked me for advice. I mean, what do I know aboutthis? I’ve had some moderate success contracting. I’m working onhaving some success running a products company. But in the end I’m simplyfiguring things out as I go along.
He wanted toknow what I thought about him going out on his own. How should he pricehis services? Should he work as a sole-proprietor or form an LLC? Shouldhe let the companies he’s interviewing with know he ultimately wants to be anFTE (full-time employee)?
I’ve seen a few peoplemake the transition from employee to entrepreneur via consulting. I’ve also seen a few people who havemade a real go of being an independent consultant. They work 6 – 8 months out of each year, then spend theremaining months sailing the Caribbean, or living in a ski-in Yurt in JacksonHole, or following Phish around on tour. The most, however, dip their toes into the proverbial water, so tospeak, then jump right back into the safety of a company.
Obviously, everyperson’s situation is different. There are no hard and fast rules for howto succeed in consulting. But hereare some of the highlights derived from the conversation I had with my friend. Perhaps they apply — but if not, I’d love to hear feedback.
To Incorporate or Not to Incorporate; That is theQuestion:
For many this islittle more than a financial decision. It costs money toincorporate with the state, even if you’re putting together a very simpleMember-Managed LLC. For many who are starting out – particularly if afterhaving recently been laid off – the preservation of cash is a toppriority. No one wants to bespending money needlessly if they don’t have to. But from my perspective,it costs more money (potentially) not to incorporate. Whether welike the reality of it or not, we live in a highly litigious society. Things can go wrong. To believe that nothing bad is possible is a fools’errand. Just as I maintain insurance on my house to protect me if(forbid) my neighbor slips on my sidewalk and ends up in a coma, I maintain”insurance” on my personal assets by incorporating my business ventures.
As any attorneynow reading this will tell you, simply incorporating will not automaticallykeep you from being sued personally by a disgruntledcustomer/client/employee/activist. What it will do, though, is put alayer of insulation between your business and your personal assets that, if youdo business legitimately and legally, should dramatically slow down (if not stop)someone from coming after your family’s house because they have an argumentwith your business.
Incorporatinghas the psychological effect of making you seem more professional than youmight otherwise present yourself. And it has the added benefit of allowing you to scale your consultingwork, via sub-contractors or employees, should the need arise.
The paperworkshuffle the state requires you to perform each quarter (or month) is a bit of adrag, admittedly. But if yourfloat (the difference between your bill rate and what you actually payyourself) is sufficient, you can hire yourself an accountant who will do all ofthis paperwork shuffling for you.
In God We Trust – Everyone Else Signs aContract:
Don’t ever doany work without a written agreement explicitly stating how and for what youwill get paid. Period. Don’t do it.
My very firstgig as a consultant, I made the mistake of starting a job for a client while we worked out the details of thecontract. Four and a half weeks later, I received theirattorney-approved contract that basically excludedcompensation for half of the work I had already completed. I protested, of course. But their response was simple: This wasthe contract they would agree to. If I didn’t agree to it as well then we’d simply part ways with mereceiving no compensation.
Having no moneyin the bank at the time, I felt forced to accept a distasteful contract. I needed the money, after all. But doing so only poisoned therelationship further. In essence Iwas letting the client know that I didn’t value my time or services enough towalk away from an insulting arrangement. It was a bitter pill to swallow, but I honored the original agreement,which thankfully only had a term of 3 months, and did not renew the contractwhen asked to do so.
Save yourself aton of heartache and get yourself a boilerplate contract drafted by a reputableattorney. If your budget doesn’tallow that, there are several great online resources for lower-costagreements. Worst-case scenario,ask someone you know if you can use their contract. But by all means have somethingin hand when you sit down to negotiate terms with a client.
Show Me the Money:
This is placewhere most new consultants fail, in my experience. They never think beforehand how much they should charge fortheir time, then feel put on the spot when a potential client asks.
Thinking ontheir feet, most can do a quick, back of the napkin calculation convertingtheir old salary into an hourly rate. But then they blurt it out, suddenly worried that the rate is too highand the potential client is going to pass. What they don’t count on is that the potential client willagree (eagerly, perhaps). It’sonly later, when they’re struggling to pay their bills, do they realize whytheir client was so eager to agree to their rate. It was low. Dramatically so, most likely.
If you want toget an accurate assessment of what your bill rate should be, think of yourselfin this way: what would it costyou to hire yourself as an employee?
Well, firstthere’s your salary. That’s theeasy part. But what else? Health insurance? A laptop computer? A cell phone? Contributions to a retirement plan? An office space? A bus pass, or parking or automobilesubsidy? Electricity? Water? Heat? What about vacationtime and holidays? You’re notgoing to be able to bill your client for those hours – but you probably stillwant to get paid enough that you can afford to take some time off everyone oncein a while. What does it actually “cost”to provide you with a 2, 3 or 4 week vacation every year?
I’ve been usingone form or another of thisEmployee Calculator for a number of years to figure out the answers tothese questions. The spreadsheetcan help you quickly calculate various factors that go into either an hourlyrate or an annual salary. Ifind it particularly useful when I’m trying to compare costs between employeesand contractors for various positions within our company (see my post on the Costof Having Employees, which is the source for this spreadsheet).
My Time is Your Time
One of the most-surprisingaspect of contracting for most people is the fact that your time (when undercontract) is not your own. Nearlyeveryone I’ve known who has contracted went into it honestly believing thatthey were taking a giant leap forward in the ownership of their own time. That they were going to be the mastersof their own destiny. That theywould pick their hours, their projects, their clients. That they would have ample time forvacations and family events and would be whistling Hosanna as they skipped down the hallway in footed pajamas to theirlavishly appointed home office, holding all of their meetings via Skype, andcutting off early whenever they wanted to enjoy the day.
Again, everycontract is different, but from my experience on the software side of thehouse, you can pick our clients – and that’s about it.
When a client ispaying between $100 and $200 an hour for you to be at their beck and call, theyexpect you to take their callregardless of your personal situation or what you perceive to be important.
If that meanstheir website stops accepting orders on Thanksgiving, expect to get a call onThanksgiving. And expect to haveyour client not care in the least about the fact that you were just about tosit down for dessert with your family – because their website is not accepting orders!
It’s Not All a Bed of Roses
The mostimportant thing you can do if you’re considering becoming an independentconsultant, I believe, is be honest with yourself. Consulting is a job.Just like any other job, it has its perks and pitfalls. If you go into it believing thateveryone is looking out for your best interest, you will probably be takenadvantage of. Conversely, ifyou go into it thinking that every client is going to take advantage of you,you will probably find few clients.
But if you gointo it with honesty and predefined boundaries about what you will and won’t dofor money, it can be a pretty straight-forward (and lucrative) way to make abuck.
Richard Luck isthe co-founder and CEO of Loudlever , which is building an onlineservice for magazine publishers to help them lower their content acquisitioncosts, while getting a better handle on their copyright, license and royaltyobligations.
