DECIDING ON BUSINESS PARTNERS

The first person I ever talked to who told me I was crazy for getting a partner was an attorney. He looked at me like I was about to drink a vial of cancer. Given that he was near retirement, I tried to take him as serious as possible, but I honestly didn’t have enough practical experience to know how to actually do it. I’ve learned since.

What I’m going to do here is give you at least what I consider to be the vitals on this decision, and hopefully some mechanisms to measure how well things are going. I’ve been had by the best, nearly lost everything due to folks simply breaking down, and enjoyed fantastic partners who never cease to amaze me in the darkest times.

Try to answer “why” you need a partner

There are two types of people in this world, entertainers, and the entertained. The latter need not apply to the world of corporate partnerships. The answer that should leap out at you when asking yourself this key question is “I need to duplicate myself.” When starting a company, you should be able to complete all relevant jobs solo. This is obviously a statement applied to small businesses, but even in a large start-up, each job that is entrusted to a single employee is a direct increase in the risk to failure should they get hit by a bus.

If you’ve read my previous post, you’ll know that starting even the smallest business is going to require a massive investment in time and probably money. Therefore, you need to ensure that whoever you invite to this party is 1000% dedicated for the long haul. There are many estimates circling the web and good old boy clubs about how long a business should be attempted until you quit. Some say 18 months, others say 36 months. I’m going to tell you a better answer, continue for as long as you gain a little bit every day (without lying to yourself), and for as long as you can enjoy the journey. If you start losing money, going bankrupt, or hurting those around you, it’s time to bail or try something completely different.

Assess your partner candidates

What does this mean? This means get real very quick. There is no place for “personal information” in a partnership. If you had a twin sister or brother, you should know your partners life BETTER. You need to know if they’re happy. If they like their marriage. If they have a history of finishing what they start. How long are their average projects? How do they handle failure? What’s the toughest thing in life they’ve ever endured? You must get into their business, and into their home life. If that’s too scary for you, then stay solo, or stay out of anything but hobbies that earn you money on the side. Running a business is for grown ups who are in it to win it. You may indeed be invited to a business without this psychological colonoscopy, but then you are probably dealing with folks who believe they already know this about you, or at minimum have an ejection seat already strapped to your back.

Also remember that people change over time. Any flaw in their character will only get bigger and more dangerous for your company. If they drink a little, they’ll be drinking a lot more after a year has gone by. If they’re complaining about their wife, divorce may be immanent. If they complain about being tired, they’re going to bail when the going gets rough. I can’t stress it enough, your partners need to have centered lives, and being in peek physical and mental condition prior to entering a new business.

Determine what your partner wants from the venture, then protect yourself

Everyone is different, and this means the world when it comes to success and earning money. Some folks want to build an empire to last a lifetime or to pass it to their children. Others want to make one large sum of money and cash out. You need to know this information before signing a partnership agreement. If you can, embed this information inside your contract or bylaws. You can make up whatever you want, so be creative and comprehensive. Have clean exit strategies defined early. People unknowingly lie when things are starting out. They’ll get frustrated when things don’t go right, and want a big settlement with zero dollars in the bank; the old “if I can’t have it, neither can you” treatment.

My advice is to avoid the debate. Have all the options predefined to your liking, lay them on the table and make them an offer with the resolve to withdraw the offer should they get finicky. You don’t want folks who are difficult as partners.

Make sure they can not only see the vision, but feel it, and expand on it

Every ship needs a captain, but sometimes it’s nice to have partners who can think for themselves. Upon explaining your business model to a potential partner, look for a person who immediately “gets it.” You want folks who drool over your idea, and who immediately want in. Let’s face it, you’re going to get tired from time to time, and you can always benefit from someone who knows how to complete a task in your absence, or when you’re gone, or when you’re making bad decisions due to fatigue. Once you have a great partner, you have a true blessing in your midst.

Attempt if you can to triangulate the venture. Meaning, find partners that deliberately see things from a different perspective than you do. One is good, but two opposing views is great. Your meetings will be brimming with great ideas that you’ll have to work to organize and implement, but the overall vision will be pushed forward if you do it right, and each partner will possess the genetic ability to stimulate the rest of the employees as well as the other partners.

Overall partners can be great additions to a business model. Those who take it lightly pay dearly. Those who handle the concept with great caution sleep at night with a smile on their face. Be the one who smiles.

DIVVYING UP STOCK OPTIONS

Okay, so you’ve decided to take on one or more partners, great. Now you need to decide how to divide up the ownership of your company to reflect the partner’s roles in the business. This is one of the most undocumented areas of business start ups there is. Not the “how to” but the “what to.” Before we get into the technical areas, let’s take a step back and review reality for a second.

The routine default action is to divide up all the stock evenly. Two partners 50 / 50, three partners 33 / 33 / 33. It is possible that this makes since, but when you examine the daily activities and responsibilities, this is rarely the way it pans out. Someone is taking on way more individual tasks with more hours than the other, and it is this reality that needs to be considered prior to making any offers or discussing a partnership. The best way to tackle this is by examining the roles that are needed in the company and create a stock package that matches those roles. If you approach someone with a nicely proportional package, you can avoid setting their expectations too high, which is almost impossible to adjust without losing their interest, and making them feel like you’re a conman.

Protecting yourself

To review our previous lesson, partnerships always benefit the lazy. Once a company is divided, you’ll never be able to get their stock options from them unless you create some very specific bylaws defining each role, and the measurable milestones of success. People usually don’t have the financial power or foresight to create such language when creating a partnership. Please understand that it would serve you well to postpone any signing until these documents are clearly defined. A basic document outlining roles will address the following:

• Name of the position.
• Define a list of responsibilities under that position title.
• Define the first 24 months of operation from this role.
• Define clear milestones that must be accomplished within those months.
• Define any tolerable conditions that would justify delays, such as approved strategy changes.
• Define acts of god such as health conditions, etc., that would allow a partner to be absent.
• Define exit strategies should that person need to be replaced due to any of the above circumstances prevailing over the job.
• In the event of death or divorce, conditions for buying back all stocks for a reasonable price.

Once the roles are clearly defined, communicate this to a potential partner during the discussion to ensure they see the big picture. If you plan to bring on additional roles, go over those as well so they understand why they don’t have a larger share coming their way.

Dividing the shares

Okay, so you’ve defined your roles, you’ve developed some legal language to protect the company should someone start to slip on performance, and now it’s time to divide the company into pie slices. I’ve been through this a number of times and it’s felt like a random science until this last decade where I finally gained enough practical knowledge to put a formula to the task. What you may not know is that when you create a corporation, you are free to design its internal affairs (within the constraints of your state and federal law) to your hearts content. What this means in the real world is that you create different “classes” of stocks, and this is the key to not losing control over your company to employees and perhaps partners that although provide a great service to the company, lack the years of experience related to running a company of your type. What I’m going to outline here are two different classes of stocks. We’re going to call them Class A and Class B stocks to keep it simple. These are arbitrary names, but highly recommended should you go this route.

Class A – Voting Shares

Voting shares are magical shares that give the possessors voting power within your company. The are shares that are legally defined within your corporate bylaws that are different than ownership shares. Again, I’m defining these as voting shares. You could make them “get free soda” shares, but for the sake of my recommendation, I make Class A voting shares.

Core partners that possess diplomatic skills and good experience within the areas of owning and operating businesses should be considered for voting rights. As the founder, you can always keep these for yourself and issue ONE share of voting stock exclusively for you if you prefer a dictatorship. Know that being a dictator is not like running Communist China. It just means that you don’t have a candidate up to par with corporate decision making; tough luck, but you’re not running a popularity contest, you’re running a business. Few will complain unless you make a string of bad decisions.

Class B – Ownership / Dividend Shares

This class of stock is reserved for dividing the ownership of the company. This means that an employee or partner gets proceeds from any dividends paid, or profits as a result of an eventual sale of the company. The number of these shares is usually in the thousands, and contrary to your first impression, you shouldn’t give them all away on the first day. When a corporation of any kind is created, they ask you who owns the shares. Ninety nine times out of a 100, all the shares are given to the founding partners in total. The problem this creates is that in order to allocate more shares, you need to file with the state of your residence to tell them your changing everything. This can get expensive if you have to hire an attorney for help.

The best method is to divide up a sizable share to yourself as the founder, and using your handy guide as described above, a proportional allocation to your partners, all the while leaving a chunk reserved for new employees or investors. There is nothing like promising a new employee they’re going to get stock, only to postpone them for weeks while the paperwork gets filed with the state. You can sign letters and contracts promising this, but I’ll tell you, I have a couple companies that still owe me the official documents, and I’ll probably never see them and have to sue them in court should they sell for any amount of money.

This is the overall information you need at a minimum to get started. Know that stocks are very psychological items that shouldn’t be thrown around lightly. People invest a lot of their future expectations into thinking that their time invested will result in a payout one day. The decade of the dot coms and the Enrons taught the public at large that stocks can be used as weapons of manipulation to get folks to work hard with no real chance of winning the lottery in the long run. The best thing you can tell anyone getting stocks is that there is no guarantee, but that if you meet your clearly defined goals for the company, you’ll be in best position to succeed.

DETERMINING IF YOU HAVE A BUSINESS

Having an idea for a business and actually executing on that idea to generate sustainable income are two entirely different things. A lot of the time an idea is a slight modification of an existing business that will have to compete with steep competition and thus exponential marketing dollars to get off the ground. Other business ideas are so fresh, and so new, that for only pennies on the dollar, they launch, go viral, and change the world. This article is aimed at assisting you in determining where on this spectrum your idea falls.

Service Oriented Business

A service business is simply that, you offer a service to people instead of a tangible item. This is where many early business owners begin. Why? Because they don’t have to engage in manufacturing processes which can be extremely expensive to begin, or perhaps cooking that magic apple pie that no one has ever tasted that requires state certified kitchens. I started in service, and later migrated to products. It was something I could afford in my early 20s.

So how do you determine if the service you have is worthy of a business? The answer relates directly to the market you’re joining. A good indication would be the chatter around your industry. For example, if you work in internet programming, and a new language hits the market, you may hear or see several indicators that the market is in dire need of engineers in that area of development. At that point you can decide to jump in, learn the language, and solicit yourself to the universe in that area. This strategy has served me extremely well.

On the flip side you may be choosing something that you love, but is either dated, or highly saturated. This is a danger zone for your future. It used to be that companies would pay hundreds of thousands of dollars for HTML programmers. Very few folks understood the language, and even fewer knew how to do anything impressive with it. Nowadays, children in middle school know how to modify code and get some pretty amazing results from this language. In turn, it would not be intelligent to start a business in this line of work, because unless you live in a third world country and can funnel revenue from first world countries, you probably can’t survive off the income.

There are however staple markets where services are always needed, and fortunately, these markets are saturated with extremely irresponsible transient workers that if you are willing to be accountable, you can clean up the clients. These staples are in the area of hands on repair and maintenance. People always need their cars fixed, their homes repaired, the washer and dryer belts replaced, etc. If you have skills in these areas, you simply need to get the word out that you are the right man for the job. There are some multinational corporations that are trying to dominate these markets, but you’ll find that you can often beat their prices, and offer a more personal service in these areas.

Product Based Business

You have a new invention! Great, but you need to be careful about how to proceed in this area. I’ve met individuals from all walks of life who wanted to create light bulbs that save energy, to cookies, to dolls, t-shirts, LED toys, you name it, and they all have failed to get anything off the ground. The reasons are always the same. They had no idea how expensive it is to enter this market. Let’s go through some examples to hopefully help you understand the basics.

The first order of business when you have an idea is creating prototypes of your concept. If you are making a light bulb, you need someone to make it. That costs money. If you’re able to build the prototypes in your garage, then great, but those prototypes need to be tested not only for durability, but for customer acceptance. There is nothing more enlightening, than putting what you think is a slam dunk idea in front of a potential client, and seeing them draw no enthusiasm from the idea. Sometimes we incubate more excitement than anyone else will ever feel. Still, if you believe in your idea, keep refining it until you get that excitement, but be willing to listen to your customer. If they say they wouldn’t be interested regardless of what you do to your idea, then you may want to consider changing plans. If you’re trying an inventor, you’ll make new ideas forever.

The second level, if you’re able to get past prototyping without losing your investment capital in the process is to ensure that your idea complies with all state and federal regulations. In some cases regulations are put in place to keep the public at large safe, say in the area of food. I once met a young lady who had a cookie recipe that was so amazing, she started to put the local competition out of business quick. She wasn’t greedy, kept her prices down, and cleaned up. When the competition felt their pocketbook sag, they called the authorities and discovered that she was making these in her home kitchen, which is illegal in the state of California unless your home is certified to do so. She then explored moving that business into a local restaurant, and now had to add additional costs of renting the kitchen, and scheduling time on off hours which didn’t work out in the long run.

Another friend of mine wanted to create an energy efficient light bulb, so he setup shop in China, and worked for two years to come up with an invention that met all the standards and financial numbers. Unfortunately, he had no clients, and so the venture ran aground. He also learned that shipping products from China to America needs six month lead times, and could result in a container falling overboard, being damaged, and with a shipment not being made, he would most certainly lose his first clients forever.

The bottom-line is that product based business models need to be dealt with extreme caution. If you are made of money, you will be able to endure the setbacks and financial pain of the process, but in the end you are responsible for creating a profit, so you should refuse to lose money unless you’re in it to win over the long-term like a major corporation does it.

Assessing Your Competition

This area might seem trivial, “Of course I’m going to check my competition.” However, few folks know how to do this in any level of detail. When one comes up with a business idea, it’s like a drug, and what I mean by that is that one tends to refuse bad information or negative indicators. I will tell you that if you have a normal family and normal friends, you will hear plenty of negativity. Some of this comes from people who would rather not see you succeed, because it will force them to deal with their lack of motivation and or success. True friends will cheer you on for life, and do whatever it takes to help you reach your goals. Examining your competition is a surgical multi-layered process that you need to take serious or risk losing everything.

I’m going to prove to you that this isn’t easy, by giving you one example. A novice will buy magazines, or cruise the internet, or read a newspaper to discover what’s going in their realm of business. This can work, but you need to be careful. What is published today as the “trend” to be in is always yesterdays news. Anyone rushing out to compete in today’s peak is investing in old hats. Given that a business takes 18 to 24 months of hard work to get off the ground, regardless if you make a product or offer a service, you need to be so intimately versed that you can predict safely what the future is going to want in 18 to 24 months if not further. One reason why Apple, Inc. did so well, is that Steve Jobs never looked at today to determine what product he was going to have Apple make. He dialed into the universe, and determined what “should” be happening in a particular industry, and put all his forces into creating the future.

My recommendation to you is to study the market extremely close for at least 18 months prior to jumping in. If you can, procure experts in that market to shortcut this timetable, but don’t go in it blind unless you like throwing darts into a dark room. The good news is that a lot of you are feeling the spark of creating a business, because you have been in the industry of choice for a long time, and you feel the next thing that hasn’t been done. You are the best candidate for a new business. I urge you to read everything I have to offer to ensure you hone your craft and approach to the best of your ability.

Avoiding Screw Ups!

Let’s say you’ve read every single word on my site regarding the precautions of starting a business, you’ve also read a few books, talked to successful friends, and you’re ready to go. Everything is perfect! Now, you need to plan for the worst. You need what is called a “contingency plan” to mitigate everything that could go wrong.

There are two things that will happen if you do this right. One, you won’t live in a ball of stress. This is critical for a new business owner, for even if everything goes right, you will have pressures you’ve never felt before. You may do well with these pressures, but if anything goes wrong, the error will act as a multiplier for your emotional distress. So plan to make no errors.

Secondly, if you have plan in place in case people don’t perform, people don’t show up, shipments get lost, power gets cut, internet connections go down, your client will never find out. The client won’t care if you have to replace an individual or drive clear across the state to get their part, etc. As long as the quality of your service or product is on time, and on budget, you’ll still get that accolade and hopefully referral.

So what do you do if you do screw up? Plan for that too. Be extremely apologetic, and genuine. Whatever you do, don’t disappear on the client. This is one of the most routine and rookie moves I see in business. Something goes wrong, and you think you can avoid it for a day, then two, then a week, then perhaps a month. This is the kiss of death. A client can hear bad news. Just be honest with them, and avoid transferring panic to them. The best way to do this is not to panic yourself. Delays happen all the time, and even though you didn’t envision it happening to you, it did, so just relax, and deal with it. Be careful not to minimize it too much, and if you can roll it into other scheduled events to make it a non-issue for the project, do it. I will write another article on risk mitigation, so for now, just be careful.

I hope this helps you understand some of the factors in starting your own business. My goal is to empower you to gain that level of success by hearing many of the unspoken issues that plague new business owners.

HOW MUCH SHOULD YOU CHARGE?

One of the key questions that plagues nearly all sectors of business is how much to charge for a service or product. My companies have usually dealt with services, so I’m going to focus on that area in this post. Determining product pricing is a science all onto itself, which I’ll have to cover in a different lesson. We’re going to start off by estimating a single individual’s worth, and then explain how this formula can be applied to multiple employees through your company to determine your overall payroll and expenses.

The Golden Rule Of Getting Paid What You’re Worth

I have told friends for more than 20 years that the secret to getting paid what you’re worth is to know what you must charge in order to survive, and to ensure that if you bring something special to your art, that you are confident in that profit margin. The goal is to stare a client in the eye with confidence rooted in your bone tissue that you are worth X amount of dollars per hour, per year, or per service. If there is any hesitation in your voice, or in your bodily frequency, your client will smell it a mile away and know that you’re over charging them, and unless they are backed into a corner, they simply won’t pay it. You don’t want to be this person. You want to reek of confidence in not only your rate, but that you are the best person for the job.

In order to achieve this enlightened level of confidence and security, I’m going to help you organize your expenses, and see the rate in your heart of hearts. You will ask for the right amount of money, and if denied, you will leave the potential work behind with the knowledge that if you took less, you would not be able to survive on the revenue generated.

Getting Your Costs Organized

Why do we charge money for anything? If we do what we love, why charge for it? Isn’t it enough that we get to do what we want? Obviously a million answers come to mind; most namely, because we have to live, and it is this basic necessity that forces our hand to charge for our time. If you sat down with 20 people and asked them to write down why they had to charge money for their time, you would have 20 lists with largely diverse results. When combined into a single list, you’d notice some patterns, but also some chaos. I’m going to begin by breaking down these areas into logical piles to make it as easy as possible to come up with some base numbers that will feed your minimum hourly rate, as well as your profit margins.

Category One – Your Personal Bills

If you’re like everyone else in the world, you have to either pay rent or a mortgage to keep a roof over your head. Most of us have a car payment that keeps us on the road. Add to that the utilities, cellphone bills, internet connections, meals, perhaps student loans, essentially every single bill we pay on a monthly basis to survive. Your first task is going to be to write down or document perhaps in Excel or Numbers these expenses so that you know what your minimum monthly net income needs to be. I say net, which means after all forms of taxation are removed. I’ll give you a little trick of removing taxes in a moment, but first we need to add more costs to your list.

Category Two – Your Business Expenses

One of the initial mistakes people make is combining their business expenses with their personal expenses. What do I mean by business expenses? The simple rule is “any expense you incur as a result of having your business that would otherwise not exist.” This is usually meals in foreign places, travel costs such as gasoline and wear and tear on your vehicle, clothing that is necessary to keep up appearances, absolutely anything that is triggered by the needs of the business. I want to clarify that not all these expenses will be tax deductible, but you must know them nevertheless, and you must account for them 100% before finishing your expense sheet.

In addition to ongoing costs such as fuel, meals, etc., there are usually some one time setup costs such as business cards, website setup, perhaps some hardware that need to be accounted for and averaged over the year. The truth is you can’t start a business without some out of pocket money in most cases, but you can often get by on very little money in the beginning. You could write these on your list to be recouped during the first month of operation, but unless you already have a client with a paying project, and the knowledge of a large down payment with extra monies, you most likely won’t recover these setup costs right away. However, you should attempt to earn this money back over time; they are business expenses.

Category Three – Your Sanity Money

People often forget this layer of much needed money. Depending on what type of individual you are, your sanity money is going to vary from other folks you meet. Some of you own every toy in the world and need nothing to keep entertained as the weeks go by. Others have hobbies where you perhaps see movies, go to an amusement park, or down to a local restaurant. Regardless of your pastimes, you need to account for the fact that money needs to be set aside for your mental health. It could be something as simple as a massage to keep your stress level down, a little extra money to eat organic food, or that $3,000 for the yearly vacation (divided by 12). Whatever it is write down what you think you need to spend each month to enjoy a bit of life.

Examining Your Initial Costs

By now you should have a very interesting lists of solid and potential expenses that will start coming in the mail once you start your business. Understand that this is serious. No bill collector is going to care about your heartfelt story of failing to start your business when they want their money, and this is why you need to be as brutally honest as possible when making these three lists. At this point we want to total your monthly expenses into a single number. For the sake of this lesson, I’m going to pick a nice number like $50,000.

Calculating Your Salary And Hourly Rates

Okay, so we’ve totaled everything up, and we have a need to net $50,000 after taxes. So how much is that before taxes or rather what is our gross income? Everyone is in a different tax bracket as you know, but I usually try to play it safe when estimating my withholdings. I like to claim ZERO on my W9 and let the government take maximum withholding so that I rarely owe anything at the end of a tax season. The percentage I use is 38% withheld. You may be lower based on your end number, so feel free to adjust. Once you have your tax withholdings percentage you can subtract that from 100% and whatever you have left, move the decimal two places to the left. So in my case I have 72% left, which becomes .72. Once we have this number we divide $50,000 (or your total expenses) by .72 giving us (in my case) $80,000 roughly.

So what does that tell us? Well, we know we now have to charge a minimum of $80,000 for a person of our capability and status in life to get by. If we need an hourly rate, we simply divide $80,000 by the number of hours worked per day, 8, by the number of days per week, 5, per the number of weeks we’re actually going to work, lets say 48 out of 52 weeks. This gives us an hourly rate of $42/hour. I subtract four weeks from the total number of weeks knowing that I’m going to be on vacation, and the client is most likely not going to work through major holidays. What this does is increase our hourly rate to account for the lost wages earned during this time. If you divided by 52 weeks, you’d come up with an hourly rate closer to $38/hour, which would leave you paying expenses for four weeks off out of your savings. You don’t want that.

But What About Profit??

Yes, we haven’t done anything for profit. All we’ve done is calculate our base needs. Now we need to determine if we have room to add more to our rate based on our industry health, and very importantly our skills within that industry.

Right off the bat we need to comes to terms with our skills. Are you an expert? A beginner? Or a moderately talented person? People sometimes struggled to come to grips with their abilities, because our egos get in the way of a clear answer. I summarize my own skills by this regimen:

• How long have I been in this business?
• How many projects have I led to completion?
• How successful / profitable have my projects been for clients or companies that I’ve worked for?
• Do I know something that very few folks know that cut costs, reduce risk, and result in higher levels of success?
• Is my knowledge of the industry current?
• Am I still operating at expert levels of contribution?
• Is my industry healthy enough to pay prime rates for service?
• Is my industry outsourcing what I do for a living?

The answers to these questions will determine how much profit one can rightfully add to the current going rate for what I do. If you know your industry, and I’m sure you do given that you want to start a business in it, you’ll know the going rates for the services that you’re going to offer. You need to understand where you plug into that rate structure and based on the questions above, how well you fit into the equation. Let’s go through two scenarios just to illustrate a point.

You’re hot on the trail of something new, something edgy. Your industry is booming. Investors are literally dumping money into your market and can’t find enough workers to complete the backlog. You know it all! You are the expert of experts. You’ve worked in the trenches. You’ve excelled into upper management. You’re the head guy who knows how to train, roll up your sleeves and get dirty, and you’re hungry for everything that could come your way. In this example, you are poised to demand the highest rate your industry will allow. If you were an iOS developer, that might be an hourly rate of $150. Regardless, this scenario means you’ve answered every question with glowing results, and should have nothing to worry about. Now let’s flip that upside down.

You’ve been in the industry for decades. You’re tired of being pushed around at the company you work for. You see them hiring younger folks straight out of college living in rented rooms, driving beat-up cars, and working 14 hour days. You’re often tired, and you just know you could run things better if you could just get out of this rat race. You quit your job. You dust off that home office with the dot matrix printer that you know has more life in it. You go down to the local bookstore to brush up on your skills, and you instantly feel ill looking at all the new technology that’s polluted your previously pristine world. Your industry is sagging too. It isn’t growing. What used to be done by humans has now devolved into automated or overseas outsourcing that although suffers in quality, has every CEO in your industry convinced it’s worth the hassle. This scenario speaks of disaster. If you are able to find work outside of the corporate dinosaur you work for, you’ll most likely have to survive on a starving hourly rate. Your best bet is not to get fired, and use that spare time to transition to a new career. Perhaps turn a hobby into something profitable.

You might be asking yourself why I gave such a dire example. The reason is this scenario happens all the time, and spouses can see it coming a mile away and try to support their loved ones only to plunge the family into financial ruin. There are ways out of any job, but you need to be smart, and devise a backup plan first.

What If You’re Young?

I had an issue when I was in my early 20s. I graduated high school with a college level of understanding and skill in computer programming. By the time I got into programming only months after graduation, I grabbed an hourly rate of $5.75, but I was allowed to work as many hours as I wanted to. It resulted in a yearly wage of $36,000, which in 1987, wasn’t bad money. A year later I had moved deeper into development, and was in need of a new car. I had a new boss, and went to her to ensure that I was going to get a raise in my hourly rate to cover the costs of my new car. She said yes, and so I agreed to finance the car by myself. The risk was high, but I had done my homework. I was the best at what I did in the company. What I could do in one day took folks in their 30s a week to complete, and mine worked the first time.

I got back to work and my newly appointed boss handed down a salary of $24,000. What?! When I asked her why, she flat out told me “You should be thankful to make that much money at your age.” Well it didn’t take too long before the company ran into financial trouble and laid me off, which sent me into the video game business two days later.

Now fast forward some years later. I was working for a huge corporation making $22.50/hour at the age of 23. I was again, one of the top database programmers in the industry, and I was happy as a clam to be making what I was making. Then a different company offered me $45/hour. What?! People make this sort of money? I was naive. I called my employer and demanded more money. He was a shady guy who talked me out of the exact rate of $45/hour claiming he would take care of me if work dried up. I took his reduced offer of $39/hour and BAM, I was making nearly double overnight. I was 23 years old in 1993 making $80,000. Guess what that did to my confidence from that point on? I started to do my research on rates. I started to examine and compare my skills with other developers before walking in taking a job.

I tell you these anecdotes to help you understand my answer about age verses rate. They are going to try and screw you. You don’t want to work for folks who will screw you. If you know in your heart of hearts based on my questions above, you have the skills to do the same job as a person twice your age, then you go get that rate. You ask for it in a calm confident voice, and if need be you bring examples of your work. Where you lack maturity, and you will, you let them know you’ll make it up in overtime and dedication (they know their workers over 40 are slackers, trust me).

There is one little question you need to ask yourself if you’re young, and you may not like it. But here it is…are you a cocky asshole? Do you have more ego than experience? Have your parents paid your way up until the moment you present your rate? If so, it’s a good time to chill the F out. You’re playing in the big league now, and where you might have been the tallest basketball player in your little hometown, you are about to be crushed by seven foot tall monsters who know all your tricks. Be humble. Be smart. Keep quiet until you know you have something to contribute of value, and not merely to contribute your voice into the room. Carefully observe every person around you for the qualities you want most in yourself. Don’t just mimic others. Make their actions your own. Try to improve them, and get paid what you’re worth regardless of your age.

What About My Partners?

Now that you know how to estimate your own rates, it’s time to apply these equations to your partners. Have them do the same exercise you did. Brace yourself for higher expenses from other folks. You may have a partner with more bills than you, or higher ones at a minimum. You might have the opposite, which means your partner may be able to save more than you do if you pay yourselves the same wage, which I recommend against unless you do exactly the same thing. I’ve run companies where my partners were all paid the same amount, while not contributing to the same level. I’ve also paid my employees far more money than I pay myself. You have to do what’s right in terms of work output and sustainability. If you know you’re not going to be contributing a ton of sweat to a project, you can opt to pay yourself less if things are tight. Chances are you might get a bonus and they don’t.

What About My Employees?

The golden rule for billing employees is that “Time is Money.” Aside from understanding how long it takes to complete a project, you need to understand how much it’s going to cost you to keep that employee during that time. If you make a mistake in estimating a project’s length, it could cost you everything if the client isn’t willing to endure some additional charges. Don’t make that mistake.

Above all you need to lean on the industry rates. If you know your business you know what to pay folks. Once you’ve decided on their individual rates, you need to estimate their cost to the company. Do you have benefits? Bonuses? Computers? Software licenses? Do you cover expenses? Do you train your employees? Every single dime need to be pushed into a single number that can be billed to a client.

If you’re employee runs you $65/hour, you need to probably charge $85/hour just to break even. Given that you need to generate profit, you’re probably going to charge something in the neighborhood of $100 to $120/hour to be able to pay rent, and hire new folks to find more work.

Fixed Bids Verses Hourly Rates

This is one of the most vital lessons you can learn in this post. When to charge using a fixed rate, and when to charge using an hourly rate. I have a very simple approach for this.

If the client is dreaming, meaning, they haven’t made up their mind, you bill them for every single hour they are “imagining” what they want. This will keep the stress off your back as long as there isn’t a deadline sliding out. You’ll have the funds to pay the bills, and if you’re smart, you’ll make that À la carte rate high. You don’t want clients building things out of bouts of uncertainty unless they have the money to back their indecisiveness. Your company needs to operate on a schedule as well, and you need to know if you’re going to be out of work the next day. A client that can’t make up their mind sometimes decides to quit trying, and you’ll need money in the bank to carry your employees to the next opportunity.

If the client can group a sector of work into a nice bundle, and you feel confident that you’ve gathered all the requirements, and understand what finished means, you can quarantine that work into what is called a fixed bid. One price for all the work. It is vital that you define what work is inside the bid. Any ambiguity can lead to slimy clients pushing more work into the project with demands that it’s included in the original price. Some clients do ask for more and understand they need to pay more. Be careful getting angry until you know which client you’re working with. Also make sure to document your work to prove what you’ve done in case there are any disputes. Sometimes both parties can be angry for a moment until clarity is found.

One can also incentivise the client into making up their mind by offering the “discounted” rate. As mentioned above, you want your singleton rate to be high. This is to cover your costs, but also to demonstrate a lower rate to give them a goal to decide. Also consider giving discounts for longer term projects. A client that is willing to pay you over 10 months should get a 5% to 10% discount, because they are giving you stability in your own company. Just remember that sometimes clients go out of business, or refuse to pay for some reason. I’m going to be writing a separate lesson how to structure a contract to hopefully cover this area in more detail.

I know this lesson was rather long, but hopefully you can find some valuable information in the niches that are seldom documented.

HOW BIG DO YOU WANT TO MAKE YOUR BUSINESS?

“As big as I can make it!” is not an answer. One needs to understand the potential answers in order to address the question. I once had the privilege of sitting down with Ruthann Quindlen, author of Venture Capitalist. I had a big idea and I wanted to share it with her to get her advice and see if she was interested in helping. It remains one of the most fascinating 45 minutes of my life. She taught me more in that short time than I had learned to date. I was 30.

I had an idea to create a software solution for Apache web servers that turned out to be on several people’s agenda. I use a package today called CPANEL that is as close to the idea as I could define at the time. I did have visions of it being something like WordPress, and I actually ended up developing the idea into something I called Synergy, but with Ruthann’s perspective, I was able to approach the market with a very clear notion of what I wasn’t doing. I wasn’t creating a large business. Here’s a quick summation of what I learned.

Lifestyle vs. Big Business

Ruthann had helped some companies go public: AOL, Electronic Arts, Netflix, you name it. Her and her husband were big players, and so it made it extremely easy to sit and listen and not question her statements. She taught me two categories of business: lifestyle businesses, and big businesses. I was approaching her with an idea that had it hit its maximum apex of it would have merely enhanced my personal lifestyle and made very little money for anyone investing, for the returns would have been small, and the growth potential even smaller. How many people would actually buy an Apache control panel package? Not many. Even if I could convince them to pay a fee for the service, it still would have been small change. What it would have done is grant me personally an income that would allow me to buy a nice house, a nice car, put my kids through Harvard, but little else for anyone else.

In comes the definition of a Big Business. A big business is something with wings. A business model that can earn billions year over year, and have a growth curve equally rewarding. Companies such as AOL offered a unique service in the late 80s and hopped on the internet bandwagon throughout the 90s. They were able to purchase Time Warner, a company over a hundred years old with their perceived value. That’s a big business.

If you’ve ever attempted to raise money for a company or a budding idea, you will quickly learn that raising money for a small company is more difficult than raising money for a huge company or concept. To the laymen, the problem is confusing. Why can’t they give you money? It’s only a little amount, and they’re guaranteed to get their money back, plus interest. What’s the deal? The answer may shock you in its simplicity. They don’t have any interest in making small amounts of money.

When an investor gives you their money, they are concerned about a few things. One, your idea. Two, how much money they will lose access to out of their wallet during the venture. Three, just how long will it take to make back the money? Four, how much can they earn per dollar on the venture?

These core questions will prevent you from raising money nearly every time due to this lifestyle verses big business proposition. An investor seeks the highest yield possible, and small businesses are usually run by rookies, meaning folks who haven’t done this before, with lengthy timelines for return on investment (ROI). What they seek are big ideas, with big margins, unlimited customer base, and low risk to market. They don’t like complicated ideas, unproven markets (never before offered concepts), and folks who are pushing into new levels of business management.

For this reason, we want you to ask yourself, what kind of business are you? Are you a lifestyle business? Or are you a big business? It’s okay to be either, but understand that raising money in the former category is going to be tough, rely on angel investors or family and friends, and you’ll have to answer more questions than someone engaging in a large venture, which usually comes with a personal background with experience.

Considerations For a Lifestyle Business

As mentioned previously, it’s okay to have a lifestyle business. Most of the world has survived on lifestyle businesses. The local shoe repairman, the farmer down the road, the wedding photographer, etc. Life is more enjoyable at these levels quite frankly. You will maintain a far more intimate relationship with your friends and family running a small business. There are some differences from big businesses, so be aware.

One of the toughest aspects of a lifestyle business is passing it down. If your children have no interest in your pastime, it will most likely end after your passing. Some families have no problem training the next generation in taking over the family owned business. I have family who have done extremely well doing just this. I’ve also seen business owners that refuse to allow their children into their business due to cynical perspectives of their market. Sometimes I agree with this, but most of the time I find this lame. A child can infuse new and exciting energy into an old ideas. Preventing your children from the chance to explore the options is ridiculous. With colleges raping children with huge tuition fees and very little to look forward after senseless degrees, a family business is sometimes the best option until a child can figure out where they want to be in life.

The other drawback that we’ve discussed at length in previous lessons is the burden of owning it all. When the buck stops with you, that means you’re life is never yours. You are owned by your business, and if you’re like me, you’ll love it 98% of the time. Big businesses can allow you to take a backseat as new employees can replace virtually all of the functions you previously held such as Microsoft’s Bill Gate’s not writing code for Windows 95 and above.

Considerations For Big Business

If you think you’re headed in this direction, you’re probably not inclined to have read this far into this post and or site. However, if you’re new and have that idea, then please allow me to impart what I’ve learned from afar. Note, I haven’t built a fortune 500+ corporation in my lifetime, but I have consulted with many who have.

The big business model is almost entirely different in every way from a lifestyle business, and you might assume that I’m talking about burden, task count, dedication, and I think that’s only partially correct. I’m willing to wage that either business will consume and equal amount of your time. The major difference is in the ownership of the eventual company. It is very rare that a business founder in a big business venture ends up owning the majority shares. When you ask for big money, they ensure you will be giving them the controlling portion should you succeed. You need to brace yourself for this eventuality.

A great example of how this sort of thing pans out is in Apple Computer. Steve Jobs and Steve Wozniak created a computer. A computer that everyone wanted, but they had a problem. They needed to manufacture millions of them. The cost and logistics of meeting this requirement was so vast that two kids in their twenties could not handle the basics. They had to raise money from investment firms, hire adults that were older and more clever than they were, and entrust the company in other people’s hands.

In the end, both geniuses became extremely wealthy. Steve Jobs maintained control for more years than most, but eventually had to concede to a board of directors, a CEO that wasn’t him, and we all know what happen. After creating two amazing computers, being the Apple II and the Macintosh, the company was saddled with the bomb Apple III and the Lisa that drove down revenue and soured the environment of Apple from within. Steve Jobs elected to quit in 1985, and started his own company from scratch, where he soon learned what he didn’t know how to do.

I think we can all agree that few of us reading this article are more brilliant than Steve Jobs, and he had his company taken away in a very short period of time. He was extremely fortunate to get a second chance, but everyone knew he was only influential in the path of Apple, and still had to impress through presentation and track record all future plans. You too will have this burden.

In conclusion, I have found that folks who are into lifestyle businesses are truly happy individuals who have families and personal lives. They keep their businesses until they die, and sometimes hand the baton over to a family where possible. Folks who seek the hardcore adventure of big business, seldom have families, and enjoy living on jets at 40,000 feet. They amass extreme wealth if they succeed, and die with nearly all of it in the bank. Consider this information with great care, and take pride in any decision you make. Best of luck.

ARE YOU AN ENTREPRENEUR?

This question is seldom asked, and for that reason, never answered, but something you should ask yourself before attempting to start a business. Before I continue, please understand I want you to succeed. I want you to have the American dream of working hard, and lifting yourself out of the corporate servitude that forces you to work for someone else your entire life. I always note to people, 150+ years ago, we all worked for ourselves. Since the industrial revolution, we’ve all become sheep to other people’s ideas, and unfortunately, we’ve allowed our brains and overall education to atrophy in the process. My hope is that if you’ve stumbled onto this obscure website, written by some weirdo who wants to share his secrets to success, you’re the type of person who should be here.

So you want to start a business?

That’s good. At least you’ve been bitten by the bug that haunts many of us. What I want to try and do is get you to take a careful look at your history and try to identify your past urges to do this before. Were you the kid who sold lemonade in front of your house? Did you move cookies, candy bars, or magazines for your school? Did you offer a service to get through college like repairing computers? Or did you at any point feel the urge to do this, but never got around to it for external factors? If you answered yes to any of these questions, you probably have a genetic quality that will be useful as you move forward.

One of the most basic milestones in becoming an entrepreneur is seeing the world in a different light. We are brought up to think that working for someone else is the ONLY way to handle life, and for some, any other form of life is simply that, too daunting. Sometimes you’ll have a spouse who can’t imagine it, and you’ll need to factor that in when starting off. He or she may not support you, and attempt to sabotage your venture from the start. If that were the case, you’ll need to plan like a mother. Start slow, explain your intentions, outline what is a success and a failure, agree on a sum of money you’re both willing to sacrifice to get the dream started, then work like hell to make it a reality.

The first thing I noticed when becoming 100% self-employed is that there is a microcosm of the population that are also self-employed. We drive the streets when everyone else is at work. We eat lunches together at odd hours, and show up to our offices on the weekends, while others are basking in the summer beaches during prime time. What I also realized is that self-employed small business owners stick together. We buy products and services from each other, and the money just goes in circles forever. We barter services when we’re broke, and refer other friends to them to keep the dream alive. You too will join this brotherhood as soon as you can survive off your income.

The other question I ask people who tell me about their dream of starting a business is whether or not they have any relatives that have created a business. This usually catches folks off guard. As soon as they think back a couple generations, they can always find one, because again, we were all self-employed not too long ago. It is valuable to take pride in the blood that is running through your genes. You have knowledge stored up in that bloodline of yours, and it can sometimes be the reason people suddenly get the urge to break free from the constraints of the day-to-day lives. Once you start enduring some of the pain you’ll encounter by starting a business, it will help to say, “I am a [SURNAME], and we have done this for centuries!” There is a lot of sucking up to be done from your past habits when you go solo. I find this technique works wonders in a psychological pinch. When I found out my great great grandfather was one of the oldest serving soldiers in the Civil War, and that he was a patent holding inventor, I was intrigued. I already knew my other grand parents were business owners and farmers, so there was no mystery why I was drawn to go it alone.

Defining your end goals

When deciding to start a business, you need an internal goal. There are usually two primary groups for this: financial gain, and lifestyle improvement. If one is going to focus on a financial gain, there are some key things to keep in mind. One, you’re not going to be as passionate about the business itself as the person who is going for a lifestyle change. A person who is focusing on a lifestyle change is someone who is running a lifetime marathon as opposed to trying to create that winning lottery ticket. I have not personally seen anyone achieve the financial goal objective, and this is due entirely to their lack of commitment to the business as a whole, and their patience for the time required to reach the financial sum. Folks who want to do what they love, are not preoccupied with a financial landmark. They simply want to enjoy their life, make a decent wage, save for a rainy day, and get by. This latter group seldom ever utters the word “retirement,” where as the financially focused obsesses on the notion.

Having separated these two objectives, I do want to stress that a business without an income is a hobby, plain and simple. So if you find yourself in this latter group of lifestyle seeking adventurer, please understand you do need to earn a living wage. If the business languishes, and starts to create pain and suffering within your family, that would be a good time to restructure your goals to include money.

If you are the former more financially driven entrepreneur, you need to ensure that you don’t become some soulless drone that can’t get a client, or fulfill the  work ordered, because you simply don’t care about anything other than the paycheck. This might sound absurd to mention, but I run into these types all the time. If you build a successful business, you’ll make money, but that requires you to put passion into what you do, even if all you do is act as a middle-man.

The first 40%, the next 55%, and the final 5%

Any project in the world has three phases: the first 40, the middle 55, and the final 5. These are the percentages that define the psychological struggle one goes through to get to the finish line. Each is double the difficulty of the next, and for those of you bad at math, the last 5% is four times as difficult as the first 40%. Some will tell you it’s higher, and I won’t argue with them.

I have a nickname for the first 40% that I call the “fun 40.” Virtually everyone lying to themselves about their dedication and or qualifications to start a business leave the project the moment the 41% occurs. This is due to the honeymoon being over with no hope of return. When a partner shows the ability to sail through this threshold, you know you have a good candidate on your hands. When they make it through the last 5%, you know you have gold. I want to note that the first 40 doesn’t necessarily mean the first 40% of the schedule. The first 40 refers to the first 40% of work that needs to be done, and typically entails all the setup phases. It could be something as simple as procuring office space, or arranging a bunch of assets to prepare for work. In the video game business, it’s often laying out all the class libraries or doing some preliminary sketches. Once the code needs to be written, and final artwork created, you’re in the thick of it.

The next 55% is the grind. It’s the rinse and repeat cycle of crawling up the steps of the Aztec pyramid to your goal. This is a very tricky area to try and advise another human being on. This is where “love” comes into the picture. If you love what you do, you can usually endure this lengthy grind phase. Love will help you spring out of bed in the morning and do what it takes to get in front of the computer, or on a construction site, or whatever it is you choose to do. If you have partners, this is where you guys can lean on each other. Just be cognizant of how much you take. Make sure to give back as well. Keep reiterating the end goal, and the benefits of success. Understand that it may not go the way you planned, but getting to the finish line has massive benefits for any group working together.

The last 5% is the real challenge. The best way I can describe the last 5% of any project is that it feels like you’re dying inside. Every single day you feel like you should be done, but some little detail rears its ugly face, and keeps you from deploying your game, collecting your check, and moving on with your next project. The best way to shorten this last phase is to plan your butt off. Plan for every single thing that can go wrong. We call this a contingency plan. I find that telling my groups about these phases really helps them set their personal expectations and to make adjustments accordingly. In the video game business, this involves working late hours, working on weekends, and denying themselves other luxuries until we launch.

Above all, if you decide that entrepreneurship is for you, please realize that only your partners will share this perspective with you. Your employees will be your employees. They won’t help take out the trash, or sympathize when you can’t make payroll. The burden is on your shoulders. Plan carefully, and get your goals