Recently I was asked for advice by a man I have worked both for and with for the better part of 3 years. He's in between jobs and looking to land some temporary consulting work until the next employment opportunity comes along. Since the telecom industry is such a freakishly small community in this town, I won't mention his name. But suffice it to say, he's one of the most-brilliant engineers I've ever had the pleasure to know. The man has literally forgotten more about RF Engineering than I could ever hope to know.
So I was greatly humbled when he asked me for advice. I mean, what do I know about this? I've had some moderate success contracting. I'm working on having some success running a products company. But in the end I'm simply figuring things out as I go along.
He wanted to know what I thought about him going out on his own. How should he price his services? Should he work as a sole-proprietor or form an LLC? Should he let the companies he's interviewing with know he ultimately wants to be an FTE (full-time employee)?
I've seen a few people make the transition from employee to entrepreneur via consulting. I've also seen a few people who have made a real go of being an independent consultant. They work 6 - 8 months out of each year, then spend the remaining months sailing the Caribbean, or living in a ski-in Yurt in Jackson Hole, or following Phish around on tour. The most, however, dip their toes into the proverbial water, so to speak, then jump right back into the safety of a company.
Obviously, every person's situation is different. There are no hard and fast rules for how to succeed in consulting. But here are 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 the Question:
For many this is little more than a financial decision. It costs money to incorporate with the state, even if you're putting together a very simple Member-Managed LLC. For many who are starting out – particularly if after having recently been laid off – the preservation of cash is a top priority. No one wants to be spending money needlessly if they don't have to. But from my perspective, it costs more money (potentially) not to incorporate. Whether we like 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 attorney now reading this will tell you, simply incorporating will not automatically keep you from being sued personally by a disgruntled customer/client/employee/activist. What it will do, though, is put a layer of insulation between your business and your personal assets that, if you do business legitimately and legally, should dramatically slow down (if not stop) someone from coming after your family's house because they have an argument with your business.
Incorporating has the psychological effect of making you seem more professional than you might otherwise present yourself. And it has the added benefit of allowing you to scale your consulting work, via sub-contractors or employees, should the need arise.
The paperwork shuffle the state requires you to perform each quarter (or month) is a bit of a drag, admittedly. But if your float (the difference between your bill rate and what you actually pay yourself) is sufficient, you can hire yourself an accountant who will do all of this paperwork shuffling for you.
In God We Trust – Everyone Else Signs a Contract:
Don't ever do any work without a written agreement explicitly stating how and for what you will get paid. Period. Don't do it.
My very first gig as a consultant, I made the mistake of starting a job for a client while we worked out the details of the contract. Four and a half weeks later, I received their attorney-approved contract that basically excluded compensation for half of the work I had already completed. I protested, of course. But their response was simple: This was the contract they would agree to. If I didn't agree to it as well then we'd simply part ways with me receiving no compensation.
Having no money in the bank at the time, I felt forced to accept a distasteful contract. I needed the money, after all. But doing so only poisoned the relationship further. In essence I was letting the client know that I didn't value my time or services enough to walk 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 contract when asked to do so.
Save yourself a ton of heartache and get yourself a boilerplate contract drafted by a reputable attorney. If your budget doesn't allow that, there are several great online resources for lower-cost agreements. Worst-case scenario, ask someone you know if you can use their contract. But by all means have something in hand when you sit down to negotiate terms with a client.
Show Me the Money:
This is place where most new consultants fail, in my experience. They never think beforehand how much they should charge for their time, then feel put on the spot when a potential client asks.
Thinking on their feet, most can do a quick, back of the napkin calculation converting their old salary into an hourly rate. But then they blurt it out, suddenly worried that the rate is too high and the potential client is going to pass. What they don't count on is that the potential client will agree (eagerly, perhaps). It's only later, when they're struggling to pay their bills, do they realize why their client was so eager to agree to their rate. It was low. Dramatically so, most likely.
If you want to get an accurate assessment of what your bill rate should be, think of yourself in this way: what would it cost you to hire yourself as an employee?
Well, first there's your salary. That's the easy 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 automobile subsidy? Electricity? Water? Heat? What about vacation time and holidays? You're not going to be able to bill your client for those hours – but you probably still want to get paid enough that you can afford to take some time off everyone once in a while. What does it actually "cost" to provide you with a 2, 3 or 4 week vacation every year?
I've been using one form or another of this Employee Calculator for a number of years to figure out the answers to these questions. The spreadsheet can help you quickly calculate various factors that go into either an hourly rate or an annual salary. I find it particularly useful when I'm trying to compare costs between employees and contractors for various positions within our company (see my post on the Cost of Having Employees, which is the source for this spreadsheet).
My Time is Your Time
One of the most-surprising aspect of contracting for most people is the fact that your time (when under contract) is not your own. Nearly everyone I've known who has contracted went into it honestly believing that they were taking a giant leap forward in the ownership of their own time. That they were going to be the masters of their own destiny. That they would pick their hours, their projects, their clients. That they would have ample time for vacations and family events and would be whistling Hosanna as they skipped down the hallway in footed pajamas to their lavishly appointed home office, holding all of their meetings via Skype, and cutting off early whenever they wanted to enjoy the day.
Again, every contract is different, but from my experience on the software side of the house, you can pick our clients – and that's about it.
When a client is paying between $100 and $200 an hour for you to be at their beck and call, they expect you to take their call regardless of your personal situation or what you perceive to be important.
If that means their website stops accepting orders on Thanksgiving, expect to get a call on Thanksgiving. And expect to have your client not care in the least about the fact that you were just about to sit down for dessert with your family – because their website is not accepting orders!
It's Not All a Bed of Roses
The most important thing you can do if you're considering becoming an independent consultant, 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 that everyone is looking out for your best interest, you will probably be taken advantage of. Conversely, if you go into it thinking that every client is going to take advantage of you, you will probably find few clients.
But if you go into it with honesty and predefined boundaries about what you will and won't do for money, it can be a pretty straight-forward (and lucrative) way to make a buck.
Richard Luck is the co-founder and CEO of Loudlever , which is building an online service for magazine publishers to help them lower their content acquisition costs, while getting a better handle on their copyright, license and royalty obligations.
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