Going from Corporate America to Self Employment: Lessons Learned

I’m going on two years of self-employment, as the sole person behind Sundog Software. I left a high-paying, successful career at Amazon.com – not by choice, but due to personal circumstances I couldn’t control. We packed up the house near Seattle, and moved to a suburb of Orlando where high-paying, high-tech jobs are relatively scarce. But much to my pleasant surprise, it has in fact worked out. With the benefit of hindsight, here’s what I’ve learned along the way. Perhaps it will help others considering a similar career move.

Overcoming the FUD: But, health care!

Leaving the security of a corporate job is a scary proposition. There’s so much they take care of for you – health care, life insurance, retirement plans, withholding taxes & social security, etc. But the truth is, it’s not that hard or expensive to do it yourself.

With all the rhetoric surrounding “Obamacare,” you’d think that the self-employed are just horribly screwed when it comes to health care. Well, yes and no. If you try and purchase your own coverage with the same benefits as what you have today, yes it’s going to cost a fortune.

But – you wouldn’t consider leaving your job and working for yourself unless you had at least a few months’ worth of savings right? (If you don’t, just stop reading now, go back to doing your job, and come back when you have a financial buffer of some sort.) Here’s the thing – individual “bronze coverage” plans with high deductibles probably don’t cost much more than what’s being deducted from your paycheck already. I’m paying about $800 a month to cover my family of four with medical coverage through a PPO plan  – that’s an individual plan offered by Aetna, and you could get the same deal through “Obamacare” via healthcare.gov. I have a deductible of $10,000, but since I have more than that in my emergency fund, I’m really just insuring myself against the minor health issues that are likely to occur. My health plan isn’t just to cover the possibility of something horrible happening though – it does cover preventative care at 100%, and when I do need to pay for something out of pocket, it’s at Aetna’s negotiated rates so it usually doesn’t end up being too much.

If you have $10,000 in the bank and your family’s in good health, health care isn’t exactly cheap, but it isn’t going to be a problem. If you happen to qualify for subsidies (ie, you expect to earn less than $90K with a family of four,) your rate will be cheaper if you go through www.healthcare.gov. HMO coverage is also less expensive, but for me it isn’t worth the hassle.

You might also need to replace company-issued life insurance (I had my own anyway, since my benefit plan didn’t provide enough,) and if you need a physical office outside your home, you may also need to purchase general liability coverage for a few hundred bucks.

But, my stocks and RSU’s!

If you’re working at a tech company, you probably have a healthy amount of income in the form of equity in your employer. These “golden handcuffs” can be difficult to walk away from.

At Amazon, I got perfect performance reviews almost every year over 9 years, and basically maxed out their compensation system as a result.  Amazon’s stock rose by about a zillion percent during that time. But, I’m actually earning more on my own now than I did there.

With stocks and RSU’s, you are betting your future entirely on your employer’s future performance (which you have very little control over, be honest,) the whims of stock traders, and the condition of the world economy. There is also an upper bound as to how many shares of stock your company is willing to give you, no matter how good you are.

When you work for yourself, you are betting solely on your own performance, and there is no limit to your potential earnings at all.

So, you really need to make a brutally honest assessment of your own capabilities and of your plan for generating income on your own. Do you think your odds of success are better than the odds of the stock market? If so, what’s actually the riskier choice to make – working for yourself, or working for others?

But, taxes!

I’ll admit, taxes suck when you are self-employed. Not only are you going to get nailed on any profits you make, you’re also on your own for paying social security and Medicare withholding on your income through the “self-employment tax.” It seems like every time I make some extra money, I’m writing a check to the IRS to give it all away. My effective tax rate this year is something like 22%, and that hurts.

But, actually managing it doesn’t have to be hard. All you have to do is get a 1040-ES form, and send in estimated tax payments quarterly. Just send them 20% of whatever you made and it’ll be close enough in the end.

You will need to hire an accountant, as there is a whole new world of tax credits, corporate structures, etc. that can make a big difference on your final tax bill. If you’re in tech, make sure your accountant is familiar with the R&D tax credit in particular (although alternative minimum tax is likely to limit your actual credit there.) At the end of the day however, you just send the IRS a check once a quarter, send your QuickBooks file to your accountant at tax time, and that’s it. It’s not hard.

But, licenses and permits!

If this scares you, just hire a business lawyer to deal with it. I did it myself – it wasn’t hard, it cost under $500, and it’s been fine. In my case, I registered with the state as a single-member LLC, and as part of that process it guided me through getting the necessary local business licenses as well. Once a year I need to renew everything online and it’s super-easy to do.

There are some nuances as to whether your LLC should be set up as a single-member pass-through entity or an S-corp to start with. Basically, if you want access to all of the money you earn, go single member – but it means you’ll pay taxes on every penny of your profits. If you intend to pay yourself a salary and keep the business funds completely separate, an S-corp can save money on self employment tax, although you’ll still need to file another return for the corporation. Part of this depends on whether you’re going to set up a growth business or a lifestyle business, which I’ll get to shortly. But, you should have a lawyer on hand anyhow, so you may as well find one and get his or her opinion on this before setting things up.

But, money!

You had better have a plan, with contingencies in place, on how you will place food on your table. In my case it was like this:

Products, not services.

I had been writing software on the side as a hobby, and there seemed to be a demand for it. There is a market for SDK’s sold to defense companies and game companies for a healthy sum, for add-ons to hobbyist game engines, and for simple consumer products built around them. My plan was to refine the pricing for these products I created, market them appropriately, sell them online in as automated a manner as possible, sit back, and collect the checks.

For the most part, that’s how it has worked out.

Some important points: early versions of this software existed before I contemplated going it on my own. This reduced a lot of risk, as I didn’t have to burn through savings while developing a product I wasn’t sure would work out. Doing this involves a lot of extra work while you’re already working your day job, but if it’s something you’re passionate about, it doesn’t feel like work. In my case, I had been doing this mostly to keep my skills up as a programmer while working as a manager, and not part of a nefarious plan to become self employed at all. It turned into that out of necessity.

These products are also well diversified. I have customers in game development, simulation and training, defense, film, and consumer flight simulation. If one of those segments has a downturn (like defense did last year,) the others will keep me afloat while I adjust. I also sell my products on the Internet around the world, so I’m not beholden to the health of one country’s economy. I’m part of a local business incubator, and most of my fellow companies there are selling in the traditional manner where they make cold calls, go on site to do in-person demos, and work hard to make sales that are limited to their local area. Instead, I offer free evaluations of my software over the Internet and online ordering. Perhaps the old way closes more sales per prospect, but I have orders of magnitude more prospects doing it my way. The first time I hear from most of my customers is when they send me money.

This is why selling products is better than selling services. There is no limit as to how many products you can sell, especially when they are digital and sold over the Internet. There is, however, a limit to your time. If you’re a software engineer, you can command a lot of money for your time – over $100 per hour as an independent contractor, and that can be tempting. Indeed, I still do a small amount of contract work (that’s what this website is for) just to prevent boredom and pay for extra things. But I’ve set up a system where my software sells itself with very little involvement from me; I could do nothing but spend an hour a day responding to emails related to tech support and business development, and spend the rest of my time on the beach. I just find it hard to actually do that with a clean conscience, and in reality you do need to keep your products updated and current which takes some extra effort.

Possessing skills that are in demand makes for a great “Plan B” however. If my sales completely tanked, I’ve made enough connections in the process of making my existing sales that I can always fall back to doing more contract work to make ends meet. And the best part is, as a knowledge worker you can work from anywhere over the Internet.

Products, not features.

Working to  launch an entirely new product will always make more money than working to add a feature to an existing product. Always.

Lifestyle, not growth.

I guess this is more a personal decision, but there are two ways to structure the goals for your business.

One is the growth business. This is the one you hear about when you watch Shark Tank or read about startups in Silicon Valley. It goes something like this: you are a young, 20-something single male (sorry, but that is just the sad reality) who lives near Silicon Valley and venture capital firms. You take VC cash to start your business, hire a bunch of people and a board of directors way too soon, pay yourself virtually nothing, and hope that you build something that catches Google’s attention. When they acquire your company, the VC’s and everyone else take their cut, and you make a ton of cash and/or Google stock.

Except that very rarely happens. VC’s basically assume that the vast majority of the companies they invest in will fail. Even if you do get acquired, you’ll probably find yourself working for Google as part of an “acqui-hire” deal if your idea didn’t actually end up being that valuable. Which isn’t bad, but if your goal was to go live on your private island, that’s not likely to happen.

A growth business depends on, well, growth. Not just growth in number of customers and revenue, but growth in numbers of employees. Employees you need to pay somehow and provide benefits to. Employees you need to manage and keep motivated. Employees who may have interpersonal issues you need to deal with. Employees who might not be all that good and need to be fired. Employees with a bunch of legal requirements you need to provide for. That’s a lot of unpleasant crap to deal with, but the reality is very few companies will get acquired unless they come with some talent (employees) as well that can be absorbed.

The other option is the lifestyle business. This is a business that exists purely to maximize your own personal happiness. The idea here is to create a passive income stream, like selling software online, that creates enough steady revenue to let you and your family live comfortably while leaving you with enough free time to actually enjoy life a little. When things get busy, I don’t hire employees – I pull in contractors instead, and leave their management to someone else. Although it’s possible my company could get acquired just for its intellectual property, without employees it’s less likely to happen. But, I’m doing what I love with no office politics, commuting, or anything, and working about half the hours I used to at a traditional job. Also, I have no obligations to investors whatsoever since my business is small enough to be entirely self-funded. If you have investors, they expect you to have an exit plan to sell your business so they can cash out.

“Slacker!” the workaholic may cry. But when you work for yourself, it becomes painfully apparent which activities actually lead to revenue, and how many hours in the day you spend just filling time on tasks that produce nothing of real value. Sales, marketing, and product development are pretty much all that actually matter, and for a small business, that doesn’t necessarily add up to a full time job if you remain focused and outsource the parts that make sense.

Have a fallback plan.

There is a distinct possibility that your business will fail, despite your best efforts. You can either live in fear of that happening, or be ready for it if it does. Have enough savings / 401K money / assets so you will have plenty of time to react to unforeseen problems. The key here is to not ignore problems – recognize them and address them, instead of waiting until they slowly bleed your savings dry. Watch your metrics and projections every month so you know well in advance if trouble is brewing, and throw in the towel before your own cash reserves are too low to fund a job search.

I have friends who have been through one or two employers while I’ve been working for myself, so I don’t believe that running your own business is inherently more risky than working for someone else if you have the acumen to manage yourself.

When we moved to Florida, I also made sure to move to an area that has at least some tech employers and a demand for software engineers. Worst case, I can always get a “real job” again without much trouble.

Some famous guy said “only the paranoid survive.” You do need to work toward the best outcome, but always be prepared for the worst. Even if your business does fail, if you’ve done it responsibly without taking on debt, you’ll have gained valuable experience and learned a lot in the process.

 Slow and steady wins the race.

Remember – most businesses fail. If you’re taking out loans, mortgaging your house, and spending your kids’ college money to start up your business, you’re doing it wrong and setting yourself up for something truly tragic. It is better to start small with as few expenses as possible, and invest portions of your profits back into the business, growing slowly over time. Initially you are the only employee, you are working from your home, and ideally your only expenses are your own living expenses, a computer, a website, and Internet service. Ideally you didn’t quit your day job until you already had something to sell and cover these expenses, making your business profitable from day one.

All that stuff about “go big or go home” is in the context of growth businesses. If that’s what you’re aiming for, great – but there is much more personal risk in that direction. If you’re at a stage in your life where you are only responsible for yourself, perhaps that’s acceptable – but don’t bet the future of your family’s well being if you don’t have to.

That’s all I have to say for now – as I learn more, I’ll keep this post updated.

 

 

 

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