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How to Start a Startup (Part 3)

In Part 1 of this miniseries, we considered some fundamental points like choosing your company and website names; also, getting a professional graphic designer to create your logo and templates for things like your letterhead and PowerPoint presentations. In Part 2, we cogitated on topics like the “look-and-feel” of your website, the importance of backing up your company data, the necessity of engaging legal and financial professionals, and the requirements for marketing and networking. Now, let’s ruminate on some additional topics that may be of interest, the neglect of which might prove to be unfortunate if you don’t do things the right way.

Of course, the concept of “right way” is a bit nebulous in this context. What might be “right” for one person or company may not work for another, but it certainly pays to at least ponder these things before leaping headfirst into the fray with gusto and abandon.

Business Plan

When I’m performing an engineering task, I can work with any number system known to humankind, but I find it difficult to balance my checkbook. If you are anything like me, you will need to have someone else in charge of finances. This doesn’t mean you abdicate responsibility – just that you have someone who has a clue when it comes to painting the broad strokes.

In particular, before you form your company, you’re going to need a business plan. This isn’t written in stone – it’s a living, breathing entity that will evolve along with your company – but you need some sort of strategy (“If we don’t have a plan, we’re no better than the French,” as we English say – words that I feel are as true to today as when they were first intoned deep in the mists of time). 

How much money do you have to start with? How much money do you expect to come in the door and in what timeframe? How much money do you expect to go out of the door and in what timeframe? Someone has to keep track of the purse strings and account for fixed and ongoing expenses like wages, rent, phones, internet, office furniture, general insurance, liability insurance, health insurance, and mayhap special life insurance on the founding partners (if you have partners).

If you can’t articulate your business plan, you’re in trouble from the start. In my case, when I and two friends formed a company back in 2000, I was lucky because – in addition to being technical — one of my partners was great at the business side of things and the other was great at nitty-picky organizational details, thereby leaving me to focus on writing and engineering.

Exit Strategy

Part of your business plan is to have an exit strategy right from the start. Are you intending this business to run forever with yourself at the helm, or do you hope to build things up and then sell out to another company for a vast amount of money? Either way is good, but if you don’t know where you are headed and you can’t articulate your ultimate goal, then this dramatically diminishes your chances of reaching your desired destination.

Partners till the End

Should you form a company with partners, or should you go it alone? There’s no right answer to this question – we each have our own path to follow. I know people who have formed companies with their best friends, only to end up worst enemies. I know others who have remained staunch companions and have grown to be the business equivalent of a married couple. Whichever path you choose, I hope it works for you.

I do have a couple of thoughts to share (did you ever doubt me?). First, if you have a silent partner (an individual whose involvement in a partnership is limited to providing capital to the business), make sure they know what the word “silent” means. One of my wife’s friend’s husbands (hmm, that sounds like she has multiple husbands. How about, “the husband of one of my wife’s friends”?) recently formed a small contracting company with the aid of a silent partner who can’t stop talking and trying to direct operations. I fear things won’t end well.

Something else to think about if you form a company with one or more partners: what happens if there’s a falling out and one of the partners wishes to leave the company. Suppose they want to take their share of the company with them – will you pay them in cash (which you might not have), and how are you going to value the company?

Other possible scenarios off the top of my head include one of the partners having to move away to look after a sick relative, or becoming too sick to work, or even dying. In this latter case, what will the other partners do when the spouse of the dear departed comes knocking at the door demanding their share?

The answer to all these conundrums is to be found in Part 2 of this miniseries – the bit that talks about getting legal representation – because this is the sort of thing a lawyer can write up as part of your business agreement.

Know Your Worth

If you are planning to offer a service, you need to learn how to quote jobs. As part of this, you need to know what others charge for this type of work so you don’t underprice or overprice things.

When you are starting out, you may be a little desperate, but don’t start off by letting people talk you down (at least, not easily). If you agree to a 50% discount for the first job, what do you think they are going to expect to pay next time?

Learn how to estimate properly. How long will this job take? Remember that things always take longer than you think. Whatever number you come up with, add a contingency.

In some cases, you may agree to a retainer – that is, a guarantee of a certain number of days’ work a month for a fixed price. In this case, make sure that the agreement states that anything over that number of days will be a cost extra. Also, that this is a “use it or lose it” agreement – if they don’t use all of their days one month, those days won’t automatically roll over to the next month.

One last piece of advice here is that if someone pays you for work in advance, DO NOT SPEND THIS MONEY! Set an appropriate amount aside for taxes, pensions, etc., and then put the rest in a separate savings account and leave it there until the work is done.

This may seem like an improbable situation, but it happens more often than you might think. It’s not uncommon for a company to be approaching the end of its financial year and for departments to want to spend any monies that remain in their budget (otherwise, next year, the bean counters will say, “You didn’t spend all you asked for last year”).

So, what they do is come to you and ask you to invoice them for something you haven’t done yet with the understanding that you will do it at some time in the future. The big problem here would be if you spend the money as soon as it comes in, because when you actually do the work later, it feels like you are working for free.

Milestones and Expectations

If you are quoting on a big job, break it up into “chunks” and specify deliverables and milestones (and possibly payments) associated with each chunk.

It’s important that the customer sign off on each milestone as it’s achieved and delivered. Also, that the contract specifies that any changes the customer requests after signing off on a milestone will incur an added cost.

If things start slipping, tell the customer immediately. Depending on what’s happening at their end they may not care. Alternatively, they may not be happy, but they’ll be a lot less happy if you wait until the delivery date to tell them that you are behind schedule. From the customer’s perspective, this may trigger a domino effect of unwanted consequences. The earlier they know there’s a problem or a delay, the better able they are to mitigate against it. 

Corporate Culture

Every company has a corporate culture. I worked for one large company where it was forbidden for husband and wife teams to work in the same department. I worked for another company that was formed by a husband and wife, and that positively encouraged husbands and wives to work together.

I once visited a company in Silicon Valley. The CEO had a huge dog that she brought into work each day and that hung out in her office. As a result, all of the employees had started bringing their dogs into work. It was a bit of a surreal experience walking down the corridors glancing into the glass walled offices to see a different size and shaped dog in each room (you should have seen the lunchtime “walkies”).

I once worked for a division of a big company. The guy in charge of the division was a brute of a man who ruled by screaming and intimidation. Since this was the way he did things, all of his lieutenants followed suit. The end result was that no one enjoyed coming into work, productivity suffered, and people bailed out to get other jobs as soon as they could.

As a somewhat related point, I personally recommend that you require yourself, your company, and your employees to be ethical in all your dealings. Apart from the fact that this is the right thing to do, it’s something you can boast about.

The bottom line is that it’s up to you to set the culture of your company. What sort of a company do you want it to be? How do you want your customers and employees to remember you in years to come?

So Much to Say, So Little Time

I tell you, I could waffle on about this stuff for hours. Things keep on popping into my mind, like the importance of adopting a simple style guide for all of your company’s writings, the importance of using a copy editor (I can recommend some if you want), why having a “Death by bullets” home page on your website is not a good idea… and the list goes on.

However, I fear I am in danger of boring you, so we will pause here for the moment to peruse and ponder what we’ve talked about thus far. If you want me to continue on this topic, let me know by clamoring for more in the comments below, otherwise we will move onto other things. Until next time, have a good one!

3 thoughts on “How to Start a Startup (Part 3)”

  1. This is one of those topics for which there is so much to say — it’s also something you learn by experience. There’s an old saying that applies to just about everything in life, including starting a startup: “Good judgement comes from experience; experience comes from making mistakes; and mistakes come from bad judgement.”

  2. Hi Max, all good points. I’d especially like to chime in on breaking the work into reasonable chunks and charging what you’re worth.

    Four of us within the IEEE EMC Society have led a “Consultant’s Tool Kit” workshop at their annual Symposium on EMC. The upcoming one in Reno for 2020 will be our tenth anniversary. We each have our contributions, patterned much like your ongoing (I hope) series and each year, we invite one guest speaker. Several years ago, our guest was Keith Armstrong, one of your UK colleagues. He advocated breaking up your statement of work into manageable chunks – each chunk leading to the next and charges separately and with client approval for each step. This has works so well for me, as well as the clients, because we each have a better idea of the progression of work effort, the estimated costs and deliverables.

    For example, a client calls me with a product failure for radiated emissions (very common in the EMC world). Rather than jump on a plane and work for days trying different mitigations, I’ll suggest the usual stepped strategy: perform a design review (giving specific recommendations for improvement; 1-2 days) and if that doesn’t lead to success, then jump on a plane and provide hands-on help (1-2 days). This can be followed up with future training for their designers (2 days, plus possible consultation on products currently under development).

    By breaking up the task into chunks or a stepped strategy the client feels they have more control over the outcome, especially if they and I work as a team to achieve a goal.

    The other point I’d like to add has to do with how one values their time. If you’re currently working as an engineer for a large corporation, you might be making a take-home pay of $50 to $70 per hour (let’s say). So, you decide to leave the company and work as an independent consultant and you figure, “well, I’ll double or triple what I was making at XYZ company”. Wrong.

    You actually cost your company 4-5X your “take home” pay, due to taxes, insurance, 401K, stock purchase plans and other overhead costs like floor space charges. You’ll need to do the same, and even more. There’s bookkeeping, CPA, legal, insurance for your company vehicle, umbrella policy, business insurance (including “errors and omissions” insurance for some), federal and state taxes (plus withholding), social security, worker’s compensation tax, business licenses, health plan and insurance, etc. As Max stated, this should all be a part of your business plan.

    Then, you need to estimate how many jobs you think you’ll have each month and how long each job will take on average. Of course, this will likely ramp up and you’ll be able to estimate more accurately with time. But, you’ll need to account for the “down time” in estimating what income you’ll need to keep “the home fires burning and food on the table”. Let’s say there are about 2000 “work hours” per year (40 hours x 52 weeks). How many of those days will you actually be working and making an income? I find I work 1-2 weeks per month and use the remaining days for family time, writing, and promoting my business (actually just announcing new articles and training videos on LinkedIn and on my quarterly newsletter). I average 50 to 100 clients a year with an average job length of 2-3 days. But that’s after working this business for over 10 years. It certainly didn’t start out that way, but I digress.

    The bottom line is that you need to charge a lot more than you think. The IEEE does an annual “consultant’s survey”, which includes, among other things, a survey of the hourly charge versus “service category”, such as software engineering, hardware engineering, and in my case electromagnetic compatibility (EMC) consultation. The range of hourly charge is generally $150 to $350 per hour and is slightly rising each year. What you charge depends somewhat on what others in your field charge as well. This means you need to ask various colleagues (usually privately) what they charge to get a ballpark idea where to start. Like Max suggests, don’t start off too low or you’ll regret it with the real potential of failure in the long run. You need to decide whether your consulting (or business start-up) is a “hobby” or a real business. I rarely have a client bat an eye when I tell them my hourly rate (it’s admittedly high) and find most clients are just happy to know what the total estimated cost will be so they can budget for it.

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