Contracting can be a beast in an of its own. Startups with founders that are worth their salt will often contract work out instead of hiring employees. There are pluses and minuses to both situations. Likely though, especially for someone they’ve never worked with, the hiring manager will push for a 3-6 month contract to start. If your heart is set on full time employment there are some things you can do to get compensated for your work. So read on for my own experience as a contractor and how you can do it too.
After landing the interview
Awesome, you have an interview! First you want to prepare some thoughts and questions around the company that you are interviewing with. I took the time to write another blog post which talks about the best questions you can ask during a startup company interview. Some other compelling interview techniques include the briefcase technique which is covered in detail here.
Once you have some background knowledge and a plan you also need to know your numbers. What is your salary? What is your salary if you’re contracting. The later should be more because your contracting salary doesn’t include perks like dental/health insurance and investment accounts. How can you approximately determine what you should be paid? Here’s a quick formula:
Normal monthly salary + monthly health care costs + (optional) travel expenses, etc. = Contracting Salary
Note: that this is based on the fact that you will be working for the company full time. If this is not the case, adjust the proportion of the costs accordingly. Every contracting agreement is its own special snowflake so proceed the best you can just remember to never undersell yourself! Unless, you are doing it intentionally with the goal of gaining of partnerships, relationships, or work experience.
After the offer
Navigating the Paperwork
Typically, when given an offer you will have to sign at least two documents. the first document outlines the standards of the hiring company, assignment of intellectual property, when you will be paid, and if any litigation is necessary where the litigation will be held. This is the more «official» portion. The only thing that you should understand or have a lawyer advise you on is anything that may put the you at an unfair advantage. For instance, a clause that states that the company can terminate your contract without cause and payment is not something you want to be signing!
The second document is usually some kind of statement of work. This statement of work is used to describe what your responsibilities or deliverables in a company are. The longer your contract term, the more likely that these are vague and more overarching. I highly recommend defining these deliverables in as much detail as possible. I have seen many contractors get burned because their work was not defined well. Thus, when it came time to figure out whether or not the contractor delivered or someone new came in to manage that person wires were crossed and they couldn’t really do anything about it.
Additionally to the above pieces of paperwork, a mutual or one-way non-disclosure agreement may be needed. These types of agreements are useful for both contractors and companies as they are a written indication that, in the case of a mutual agreement, neither party will divulge private information until a set date or event. For example, an event may be the date of a product launch, a minimum of 2 years, or which ever is earlier. This way either party can seek damages if you decide to spill all their intellectual property across the internet or into the hands of their competitors.
Sometimes contractors can negotiate business travel costs. If you are working in a hardware startup, you will likely have to travel at some point to a factory. Even when not working for a hardware startup, travel costs can be a huge burden and it’s a burden, generally, that a company should bear, not you! So, be sure that your contract covers any business travel expenses including flights and food. As a rule of thumb, especially working with companies who have limited funding, require prepayment up front of the approximate travel costs. You do this for two reasons:
Getting your money reimbursed can be a hassle and can take up to a month depending on how often the CEO or CFO signs checks. Additionally, most startup companies don’t have a good way of handling expenses. I have had invoices and reimbursement requests get lost only to find out when I went to ask 1.25 months later.
If the company you’re working for may have a dodgy financial status, you are not on the hook for the money you spent to travel for them. Should they go out of business, you are better off than if you did not require any upfront payment at all. Thus I always recommend you ask the right questions before signing anything.
Startups will often opt, especially for full-time contractors, for a bi-weekly flat pay structure. This is great for a contractor because they don’t have to track hours but it’s not so great if you start working more than the anticipated 40 hours a week. If you anticipate working much more than this, be sure to negotiate your salary accordingly.
Also, be aware what pay structure works the best for your financial situation. Some folks are ok with billing only the hours that they accrue while other folks need the steady paycheck. In reality, a steady paycheck doesn’t match the ebb and flow of the market but that’s what most people are used to these days. Additionally, ensure you negotiate nothing more than a billing period of 1 month with payment within 1 week unless you have a good handle on your finances.
Please note: I am no means a tax or legal professional only speaking from personal experience. Your mileage may vary and you should always seek the help of a certified professional should you have questions!
When and how to invoice.
Invoicing can be tricky. There are plenty software programs out there that make it much easier but when you’re working for a small company full time it’s as easy as filling out an invoice template. Microsoft Word has a really basic but effective invoice template. You can also download it here. Generally, every two weeks (or whatever invoicing period you negotiated before) you update your invoice with a new invoice number and dates. Thereafter, you can send the document in PDF format to accounts payable. Then watch it like a hawk to ensure that things are moving along swiftly. If you need a reminder I suggest BCC’ing FollowUpThen. That way you’re always on top of outstanding invoices.
The finances, how quarterly filings work. How and when you should pay your approximated taxes
In the USA and working as a contractor you get the special responsibility to pay your estimated taxes quarterly. This is essentially the equivalent of what a full time job does for you every you get paid. In this case though, it’s (almost) up to you how much you pay to the government and when.
Calculating your estimated tax payments requires you to estimate your yearly income, determine the tax on that income and then divide it by four quarters. The IRS has a handy form that you can use to estimate your estimated tax payments. The online calculator can be found here.
It’s fairly tempting and easy to cash a whole paycheck and not withold any of the cash for paying taxes. Unfortunately though, the skills required to handle contract work taxes are not given to us at birth. So, I highly suggest that as you receive payments for your services you place approximately the percentage of taxes to be paid in a separate account that you can’t touch or easily use. Be sure to sock away enough cash to pay for both federal and state estimated taxes. That way, when you have to pay up, you won’t be stressing because you spent everything.
Every three months you can log on to the the federal payment website to issue you your payment to the government. This is the same website where, after filing your taxes, can pay any outstanding debts to the government. I recommend using the bank account method as there is no further cost to you. If you pay via credit card there is an extra fee on top of everything. It’s a little troublesome to set up first but it’s well worth the effort and convenience.
Bear in mind that any company or entity that pays you $600 or more must issue a 1099-MISC. This is a tax document that you can reference at the year end when filing your taxes. This is the document that you should be looking for in the mail as long as the company you’ve done work for is doing their taxes properly as well. I highly recommend keeping a spreadsheet containing the history of all your contract work checks. That way, in the worst case of not receiving your 1099-MISC, you can still complete your tax returns without too much of a fuss. The company you worked for is still obligated to provide this documentation. Therefore sending a polite reminder is all that is needed usually.
Reviewing your work
After the 3 or 6 months is up, if not earlier, it’s time to review your work with your manager. The best way I have found is to do your research beforehand and and make a list of all the ways you’ve positively touched the company. This could be a detailed list on a piece of paper again using the aforementioned briefcase technique. That way, there is no argument what effect you have had and what the company would be losing if they decided not to hire you on full time.
Not only is this a good time to review what you’ve done great but also what you could improve on. There are always things you can improve on and it’s impressive to see when folks call themselves out on their flaws. That means that they’re that much closer to fixing those problems in order to become a better contractor/employee. Nobody is perfect so never make that assumption about yourself!
Reevaluate working together
Finally, in addition to evaluating the work that you’ve done for your customer re-evaluate your current working situation. Take the time to re-evaluate and ensure you’re giving sufficient enough value to your client and they are providing you the opportunity or work that you’re satisfied with. Why work on a project that all of a sudden turned for the worse. Most contracts allow the company and/or the contractor to terminate the contract with some advance notice.
The whole point of a contract is to see if the two parties can get along together. So when things don’t work out, leave on good terms and move on to the next opportunity. Remember, opportunities are like ocean waves, they always keep rolling in.
Working as a contractor is a unique experience and lots of responsibility comes with this type of work. Not only are you on the hook for your work quality/quantity but you’re also responsible for your finances which most normal employees take for granted. Working as s contractor truly makes you grateful for all the things that are handed to you as an employee. It also gives you an opportunity to experiment and see what suits you best. Many people make great livings working as a contractor and there’s no reason why you cant either!
What are your biggest struggles?
Thanks for reading this blog post. Now it’s your turn to write! If you could take just 2 minutes and tell me what is the single biggest challenge that you’re struggling with related to startups, a) it would mean the world to me and b), most importantly, I’ll be able to use that information to gear my upcoming blog posts toward topics you specifically want to know more about.