Forums: Discussions for entrepreneurs and small business.

Contact your bank. They may have a plan which will loan you money on your accounts receiveable.  They will may loan you approximately 80% of your accounts receivable upfront and then the remainder upon receipt from the client.  The fee for this is usaully only 1 - 2 percent per month.  That`s a bit high but it may solve your problem.  I believe the technical term is called "factoring".

Therefore, if you have $30k or so in AR you will get a check very quickly for $24k and you can hire someone.

Good luck.

Mike

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_________________
Mike Chandler
President/Founder
408-261-2325 Main
408-348-2399 Cell
408-261-0619 Fax
www.AsicSoft.com

Second worst idea on the planet: factoring.

What is this - dumb idea day? Did I miss the memo?

This one actually makes giving away equity look sane. Factoring is a downward spiral; kind of like crack. I don`t know anything about crack, but I`ve heard stories...

If you`re going to go that route, just hire someone on your Visa card. Much cheaper way to go, plus you get air miles. Think about it: 24% per year to get a new account is in effect discounting your work by that amount. Would you have taken the work for 76% of your quote?

Seriously, why is this client demanding you hire someone right out of the gate? Is this person to be `on-site` for them or something? I would be really wary of a client telling me what to do with my business.

My rule number one for clients: I don`t work for jerks. Rule number two: I don`t do work I don`t believe in. Rule number three: I really try not to end sentences with prepositions, unless I can work them in. 

I`m really hesitant to offer anyone equity unless I truly want them as a partner. It`s not just about skills - they have to share your vision and motivation to really be worthy of a chunk of your company. You`ve worked hard for it, so don`t give it away!

I think contractors are a great way to get your feet wet with managing other people. I subcontract a lot of my work. The beauty of it is, too, that if you negotiate your terms right - they won`t get paid until you do.

Another valid option is that of retainers. I love retainers - they give you steady cashflow upfront to cover some of your costs (including payroll). Even if you got some startup funds at project launch, that could tide you over for a bit. There`s a million and one creative ways to do it, but please don`t give away that equity!

Good luck! It`s a tough leap and you should give yourself credit for getting there. I`d like to be in your shoes!


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Dan Pickett
Principal
Enlight Solutions, Inc.

www.enlightsolutions.com
www.twitter.com/dpickett

You might want to check out Prosper.com as a way to get quick funding.


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LaShon James-Major
Mobile Notary & Loan Signing Agent

The Document Diva
http://www.TheDocDiva.com

"Have stamp, Will travel."

This is a great thread... I`d realy like to hear more stories (and learn from them) of how people made the leap from one person to 2 or more.

I`m currently a 1-man graphic design business with a home office. I don`t like the stigma of "freelancer", so I`m trying to get enough work in to keep a sub-contractor busy (you know, a freelancer!). It seems a prudent step towards hiring an employee.

Everything takes time and effort, of course... looking for qualified people, charging enough, constantly marketing and meeting, paperwork, etc. – the classic "do it all yourself" situation.

Anyway, BrandAlchemy has some strong opinions which sounds like he speaks from experience. Keep those `growth` stories rolling in..!


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:: Good Design is Good Business ::

   bruce colthart creative llc

BrandAlchemy had some excellent points.  Be confident and run your own business. 

Here`s the solution, give them what they want.  Here`s how: politely but firmly tell your client that if they require someone to be dedicated to them full-time, you`d be happy to source that person as long as you received a % of the payment upfront for this situation (you should be receiving some payment upfront anyway).  It can be as simple as that.  You won`t offend them by being firm, they actually expect it.  If they sense that you`re waffling on it...they`ll likely start looking for a firm that has more experience (i.e.- is more confident/firm). 

If it`s really important (i.e.- valuable) to them, they`ll be happy to pay the premium.  If they don`t want to pay the premium, then you`ll know that it wasn`t really that big of a deal to them. 

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Ryan J StarPointe Marketing Website Development, Hosting & Marketing Consulting

I run a busines that supplies local physicians to medical practices when the practice needs more help.  We are all subcontractors (1099s). 

Issues to consider: how reliable are the subcontractors? Do they fit the subcontractor criteria ?  (Check with your accountant, it IS very specific.)  Will they uphold YOUR standards, and deliver the quality of work you want to become known for?  (This has been big issue for my business!)  I suggest having a very clear contract with your subcontractors, noting the obvious (be on time, don`t bad mouth the client, etc.)

 

Good luck. I have been through a lot of this, and hope to hear more from you!

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ExtraMD, physicians helping physicians take care of patients, committed to bringing joy back to medicine. www.extramd.com

Quoting BrandAlchemy...

"Paying with equity is the stupidest idea on the planet. NO form of capital is more costly than equity. I`d delete that idea out of hand. Not like that guy had an agenda anyway...ahem."

It seems like others agree as well that giving away equity is too costly. However, what I haven`t heard is a concrete example with numbers to back that statement up. I have heard this from several people now, so I am hoping to learn why you all think so.

I can share a real-world example that getting equity isn`t costly. I worked as a contractor for an internet startup and agreed to get paid 50% cash and 50% equity for hours worked. I was the key architect and developer from the start and pretty much built the website from day one. The company never did received VC funding and managed to limp along for 5 years or so on angel funding from the founder`s wealthy spouse. However, the founder managed to get the company acquired, and guess what my shares are worth, NADA, ZIPPO, ZILCH.

So I am asking again, can someone give me a specific example of why equity is so costly, with numbers please.

Thanks,
Bob

There are several reasons it is not the best idea.  Can it be a succesful business model?  Yes.

The reasons why imagine most are not thrilled by the idea is because of the future complications.

1. If they own 50% then they have 50% decision making power in your company.  Secondly, If you company does get off the ground and you decide that all you really needed was an employee and not a partner it becomes expensive to reverse.

Their share of the business is worth their percentage of the appraised value of the company. 

Which it may have cost you $5,000 to hire the employee in the first couple of months until things got rolling and now it will cost $50,000 to buy him out.

These are just hypothetical examples but are all true in regards to the financial and legal implications.

It sounds like you got a extremely raw deal because you should have got 50% of the owner`s take for the acquisition.  Unless his share was also $0.

Best of luck to everyone.

Bob,

No problem. There is math, so follow closely:

A startup has 100 shares to split (or 1000, or 1,000,000; doesn`t matter) - i.e. 100% is all there is. No more, no less. A share is simply a % of owner`s equity. It shows up on the right-hand side of a balance sheet. It is, incidentally, cleverly hidden under a big heading of OWNER`S EQUITY. It is generally also underlined.

IF they start handing out equity from day one, they will eventually run out. AND, if the company is ultimately successful, guess what? They effectively ended up paying some schmo programmer/secretary/ - not you personally, of course - whomever, a chunk of their company for what at the time could have been next to nothing. Ergo:

DAY ONE:

Need a third person. Give them equity (company is valueless at this point for market capitalization, valuation, cashflow, you name it. They give away 5% for a third employee. Done deal.

SOME DAY IN THE FUTURE

Business is great! The company is now worth 1 times earnings (low multiple) and they are doing $10 million in sales.

That initial 5% allocation is then worth $500,000. Plus, Ms. 3rd employee, who may never rise above the function with which she was hired, controls 5% of this enterprise.

I`m no math whiz, but $500,000 for an employee seems like a lot of money for a bridge loan, which basically what this situation is presented as being.

Your story does not make sense. If you held equity, and the firm was acquired, then why were your shares not converted at acquisition?

Thus ends this edition of `Why Equity is Expensive`.

 In our next lesson, stay tuned for `Why Water is Wet`.

Geez.