Ask HN: How did you transition from FTE to self-employed/sole proprietor?
I would like to transition from my FTE position to a specialized consulting/contracting business that I have been operating for the past several years with annual revenues of $10-12k. Revenues are low because there is not enough time in the day to maintain both FTE and consulting. If you made a transition, how did you do it? I believe I could simply quit and then hold my nose and jump in feet first, expecting a ramp-up time where I draw from savings and hope for a reasonably quick recovery of income. But I suspect there are more strategic options.
74 comments
[ 1.5 ms ] story [ 166 ms ] thread1) Find a single large client with a steady stream of work. Quit your job to contract with this client, use new freedom to solicit additional clients. Avoid becoming entirely dependent on this single client, though.
2) Establish enough savings that you can reasonably coast for 12 months while building up the business. Make acquiring new clients your #1 priority.
The biggest challenge with consulting is not doing the work. It's getting the clients. It's an entirely different skillset than engineering, which is why so many freelancers fail. You should start networking and building relationships with potential clients long before you quit your job.
I watched a friend grow his business over the course of 10+ years from a sole proprietorship to a small LLC to a great digital agency which employed dozens.
One of his first contracts, somehow, was doing design work for a Fortune 100 company. As his agency grew his relationship with them did as well. His company ended up essentially becoming their outsourced design shop, and 65%+ of his revenue came from them. Towards the end he and his team were being flown to Dubai to set up exhibition spaces and shows, then flown around the country for meetings, and times were great.
Then Covid hit. Nobody wanted on an airplane, which tanked his client's financials. Costs needed to be cut, so his client axed their design projects for the next few years. 65% of his revenue went away – along with a huge chunk of his pipeline. The ending wasn't pretty.
Avoid becoming dependent on a single client.
I've seen this go the other way too, where the client ends up talking to the consulting shop and saying, essentially, "what is your price to join us?"
But yes, I agree, in general you don't want to have anywhere near the majority of your income every year come from the same client.
Otherwise it's just a job with additional stress and tax perks.
Figure out what your minimum living expenses are and acquire a part-time job to meet this level (either cutting back at your current job or switching jobs). Then when your business has ramped up enough you can quit this part-time job.
I've transitioned twice from FTE roles to long periods of consulting.
Things I'd consider if I was doing it now (some advice only applicable within the USA, sorry):
Best of luck!A few states have laws on the books which compel health insurance companies there to sell corporate health insurance plans to sole proprietors and single member LLCs. Florida is one example.
(Florida also tends to have some of the best health insurance options in general in the US, at least as of several years ago.)
Sadly, just because the state law says health insurers must sell corporate plans to sole proprietors and single member LLCs doesn’t mean those health insurers will happily sell you a corporate plan without a fight. For example, I tried to buy a corporate health insurance plan via a Florida sole proprietorship, per the state law. Every Florida insurer I contacted refused to sell me a corporate plan.
I ended up calling the FL regulators who ensured me Florida law indeed does compel these companies to sell me the plan. They either just didn’t want to sell me the plan, or their corporate division was entirely unfamiliar with working with sole proprietors. I left the US shortly thereafter.
If I were in the US, I’d try for a corporate plan again, maybe even in Florida. Unless something has changed, the alternative is far worse. E.g. paying $600+ per month for a plan with essentially zero out-of-state coverage, a deductible so high it almost makes no sense to even have the insurance plan at all for a healthy young person, and a bunch of weasely out clauses that let them screw you over even if you pay them ludicrous sums of money. Plus if you’re on an individual plan, the health insurers tend to systematically deprioritize you compared to their corporate customers who have far more bargaining power than you do. I would sooner go uninsured, or leave the US entirely.
I was on an individual HDHP for nearly 20 years (pre and post-ACA) and it maddening trying to explain to medical professionals that I actually cared about the cost of treatments. (Never mind trying to get cost estimates before treatments-- that's nearly impossible.)
I once found myself nearly begging an ER physician to order a specific lower-cost diagnostic test in lieu of the higher-cost test she wanted to order. She couldn't seem to believe that I had a low 5-figure deductible and that I cared about the cost of treatments. She was incredulous. That's happened multiple times.
(If you have children and you talk to medical professionals about pricing be prepared to be treated like a bad parent who places economic value over their child's well-being.)
Yes, doing the work and selling the work and getting paid are 3 different jobs.
It is possible to build a sustainable business on top of 90 day engagements. I don’t recommend it, but it is possible.
You need to consider yourself a small business. Not a freelancer, not a consultant, but a small business.
Get a good accountant to keep you um…accountable.
Alan Weiss is my favorite author on how to run a high margin solo business.
The "value based pricing" book was great. Here's a nice "hot take": https://www.alanweiss.com/styles/pdf/The%20Case%20for%20Valu...
* Value-Based Fees
* Million Dollar Consulting Proposals
Any one of those will have bits of the other two in it. MDC establishes the mindset, the other two are deep dives into setting fees & drafting proposals the learnings in both of which served me very well.
re: sustainable business on short engagements - I had a mix of long-term contracts and short-term gigs. The short term gigs were the most fun, but most stressful, so I always tried to bill them at the highest rate (and didn't mind if I didn't get the gig because I was bidding too high). I valued the long-term gigs tremendously for the "stability" they provided.
Having a diversity of Customers was the key to my piece-of-mind. As long as I didn't do something so bad that my name would appear in the newspaper I knew I could screw-up with one or more Customers and still have a livelihood, even if I did have to tighten the belt for awhile.
I can't agree w/ the statement re: considering yourself a small business enough.
Definitely have an accountant. Learn bookkeeping if you want to minimize accountant expense. Take a 100-level college accounting class and you'll know enough for a solo venture.
A bit of overkill/premature optimization when you are starting, though.
You just file a Schedule C with your personal filing, deduct business expenses, and deposit into whatever retirement account you setup on whatever schedule you want. (Don't exceed annual maximums.)
The IRS doesn't care about dates (or in general how you do your accounting) as long as you consistently "deem" what year they're in. (Though your expense receipts should reflect the correct calendar year if you want to avoid explanations later.)
Deem = if you billed somebody in Dec and you received a check dated Jan, then you can decide which tax year to file it in, as long as you follow that policy next year.
Canada is very similar to the US, and the average person can easily do filings themself in either country.
The cheapest filing solutions are either Taxslayer or a local ethnic accountant (I'm in California, so a Spanish tax preparer) for about $150 - $200. H&R Block is $1,500 for a Schedule C, and isn't any better, and an SV EA is about $1,500, but my last one didn't want to talk directly to clients, so that wasn't worth it.
Standard practice by EAs is to mail a filing extension automatically for all clients before April in case you or them are delayed in filing to avoid filing penalties. I've also done that myself, but not recently.
If you do an online Schedule C filing yourself, allow an extra week or two in case you can't find a menu option. Taxslayer usually gets back in about a day with correct answers.
AMA.
This is still true per the lenders I've talked to as of late last year.
That said, if the thought of shaking hands, giving free talks, and doing anything else to get a large client that you can be certain will actually pay their bill, then you probably shouldn't quit your FTE.
I would not do that approach again.
You've already got some consulting revenue, that's a great start. Do you have a solid 6 months of living expenses saved up? If not, do that. Do you have a portfolio of different projects you've done and a good way to communicate them? If not, do that.
In the small amount of free time you currently have, I'd look very selectively for a large contract. Once you land it, put in your two weeks and make the jump.
Once you're on your own, never stop prospecting. Even when you have too much to do to take on a new client, you have to keep the pipeline full - it's the only way to make it work because you'll invariably have some contracts end abruptly. I was real bad at that part of it, and that's why I stopped after ~4 years.
Time management became my biggest issue, fired one client and now balance two.
And been stuck in USA since covid, sigh.
How does one go about finding a client.
* Tap your network. Post on social, bug old coworkers, ask friends and family. Know what skills you are selling and at what price.
* Build your brand. Create a website, LinkedIn, and social media accounts. Start blogging or posting regularly somewhere. Even if you don't get clients this way, it will increase your credibility.
* Reach out. Look through job postings and hiring sites. Cold email companies that you're interested in working with. Refine your elevator pitch. Join networking communities.
Meaning
Could be _anybody_ you knew
Know
Talk to
See in passing
This girl had huge bubbly energetic personality
But I think the takeaway is that you can/should be in the habit of letting people know
Even people who are not in the business etc
They all know people, are married to people, etc
-rick
I only did big projects (>4 months).
This way I only needed 2 a year.
I searched online and send like 10 applications a month. Which isn't that much.
But since I only needed two companies to agree every year, the odds were in my favour.
You also have to be willing to let go of everything you think you "can't live without". Likely that means being willing to dump/avoid women and/or no longer being an over-extended financially by expenses like having mortgage and run-up credit cards.
You will fail - that's 100% NECESSARY to learn enough to succeed to not fail. So you have to deal with losing these things. Women don't care about your struggles; they only care about standing at the finish lines and picking the winners.
I was forced into it by Silicon Valley age-discrimination - I had to find a way to pay my bills, but every company was telling me I wasn't a good "cultural fit". I was also seeing this when I was passed over for promotion by yes-men who have demonstrably worse track records and lower IQ.
My "lack of cultural fit" was both reaching an age where I no longer gave a shit about "playing the game" and realizing I was smarter than my bosses.
I ended up losing my marriage as a result of jumping off - she didn't want someone struggling to make something better - she only wanted a winner. I had been one but it collapsed on me and she has zero fucks for that.
Eventually I lost another marriage but after that, I had only my own spending to worry about and my own lifestyle needs to meet which were far cheaper than what most women will put up with. You can only succeed as being self-employed or sole proprietor or an entrepreneur if you are willing to lose everything and still claw back to try again.
I sold one of my companies a few years back and that pretty much set me up for several more companies I had in mind. They involve things I love and that are in demand so they will make money. That's how you win. It's ONLY about you, and never we.
If people in your life are constantly dissatisfied and jumping ship due to your self employment work you may be suffering from workaholism. It's true that during certain periods people just don't have time for a relationship and that's fair to avoid that but if you're in an established relationship you need to examine your priorities and have a really serious talk.
You should also be charging _at least_ 2x your desired "salary" rate for your own time, more if you can pull it. E.g. if you made $100k/yr that works out to about $50/hr full time. Charge at least $100/hr. You'll need the buffer for taxes, healthcare, finding new clients, liability insurance, un-billable hours (e.g. writing quotes), etc.
If you are good at estimating, try to get fixed bid contracts rather than time and materials. They'll be more flexible and you won't have to be as meticulous with your time tracking. The projects are usually more interesting as well. Hourly contracts are often more like staff augmentation.
A good way to get work if you need to bootstrap can be to subcontract. Research and reach out to other, larger, consulting agencies. They're always looking for subs. Even the bigger ones like TEKSystems and RHI will take on subs (well, at least they used to, I haven't looked recently).
I would plan to work billable hours at most 75% of the time you want to spend working. The rest should be running your business. Marketing, fishing for your next client, networking, handling your business affairs.
Bring on subcontractors if your marketing/sales efforts get you too much work. This is easy profit if you can pull in the work. You should establish a network of trusted people to send subcontract work.
You probably want to use a pass-through LLC as this is a high margin business and you'll want to take profit sharing rather than salary to avoid double taxation and also want the liability protection of LLC. But talk to a good CPA in your area.
Put this plainly in the contract they agree to and sign up front before the work. Refuse to do business with anyone who pushes back on the late fee or late payment interest rate. This is a huge red flag.
Make sure you have a lawsuit loser pays for both lawyers clause in the contract.
Never quote without a discount (min 15% with 30-50% permissible) and have a clause that discounts are void on late payment.
14 day payment terms in the contract.
Don't accept checks. Specify wire and exclude checks in the contract. No "the check's in the mail" bullshit.
Some other suggestions things to think about:
* you'll need a significant buffer (bare minimum 4-6mo) to smooth out income variability. If you are on your own, you will probably always have high variability.
* Having an "anchor" contract before you transition would really help - e.g. 6-12mo with enough time committed to cover your basics. This shouldn't be more than max 40% time commitment, or else you won't get anything else done.
* You are going to become a salesperson. Commit to being decent at it.
* Understand what service you are selling and who you are targeting. You could have a high value, short engagement consulting business where you mostly talk to execs, you could have a higher volume (hours), lower cost, longer engagement business where you mostly provide bandwidth or experience variability to engineering managers. These are not the same business; trying to do both will probably fail.
* pricing is a signal. It's also hard to change.
* billing hourly is easier for you and them at first, but will put you in a box. billing by value will bring in a lot more $ assuming you can a) sell it and b) deliver
* what work you accept and don't accept is also a strong signal, but in the early days there is a tendency to take anything that comes along when you need revenue. Be careful not to pigeonhole yourself this way.
* cashflow issues will surprise you. If you are billing large orgs (especially public sector) you may have no choice on payment terms (but you will get paid). Outside of that, decide some you can live with and communicate very clearly. Net-15 or Net-30 with a proper discount will help you on flow.
If you're able to do that, it's both a good indicator that you'll be able to do it again in the future, and a good way to avoid too much of an income gap when you quit. Signing that contract is the trigger to quit your FTE job.
However if you can't do it, it's a good idea to figure out why and address the issue before making the jump.
A B C: Always Be Closing. You need to be closing your next deal while you are still working the last one.
Don't be afraid to hire an EA to do contracts and quoting and invoicing and whatnot. Your job is sales and the work itself.
Full time job at startup doing web/mobile dev and infrastructure. I’m the fixer on the whole stack. Lots of personal side projects after hours.
2013: started moonlighting after full time job. An angular web dev project.
2014: started sole proprietor to have the after hours work on the books. Another Webdev project and a few websites. New client for which I am developing a platform that they can resell over and over.
2015: quit my job. Full time on my own. 3days/week at client office doing web/infra/uit. Other client projects on the side. Incorporated instead of sole proprietor for tax reasons.
2016: signed FTE contract as freelancer for more than a year doing web/mobile/backend/infra at startup. Other small client projects on the side.
2017: same
2018: same
2019: scale down long term client. Add other clients on the side.
2020: took on more than I could handle and I burned out. In two steps in June and September.
2021: spent 6 months at home not working. Living on my company savings.
Now I just started working again 3 days a week to make sure I have an income. 1 client in an R&D role. Some creative personal play project on the side.
1.) You're going to do sales, invoicing, collections, bookkeeping and regulatory shit. At various points, these five jobs will make you want to go back to your FTE status.
2.) You will eventually become your own pointy headed boss (at times).
3.) The difference between net income, profit and cashflow will always surprise you in the wrong direction. Try not to spend theoretical dollars...
That's what made the difference for me. I partnered with a marketing consultant and she added me to her services every time she got a new client.
The best book on this would be Million Dollar Consulting from Alan Weiss. Do your job well and then promote yourself to reading Trillion Dollar Coach ;))
You could talk to your current employer about switching to a part-time contract - it seems like in the last couple of years, more companies (especially startups) are comfortable with this + remote. If you can get them at 20/wk, that will give you some good security while you work to fill the other 20 (sounds like you may already have a jump on that).
Have a lot of meetings with friends and past coworkers, and let them know you're striking out on your own with a particular skillset. All of my best projects have come from connections, and my worst ones have been anonymous inbounds/etc. If you're in-demand, you should be able to line something up before reducing your FTE hours or quitting your job. It might take some time to find a good set of clients + rhythm, and you want to avoid "burning savings" during that period as much as possible.
Do good work. It's good for your clients, good for referrals, and good for your soul. You're a craftsman, and your name is attached to your work in a new way as a consultant.
I charge a reasonably high hourly rate for my work, and my clients are usually around 15-20 hours a week. I've found two clients to be the right number for me. For them, it's a way to get senior experience on the team for the yearly price of a more junior dev, and for me it's a way to make a good salary, while getting to work with startups and enjoying some freedom and flexibility to do the things I love (traveling and learning to fly!).
I try to keep a bit of "slush time" (like 5 hrs/wk or so) to work on interesting one-off client projects that come along. They're fun and stimulating, and they keep me sharp at selling my skills to completely fresh clients. I normally work on the frontend/backend, so getting to work with things like Swift or ARKit is great. These projects are also really low-pressure, because my main stream of income comes from steady long-term engagements. This is my "blogging".
I jumped in feet-first, but I was a broke college student (and self-taught developer) when I started so my burn rate was ridiculously low. It took me a long time to find a good pace and to build a good network, and I started a few companies along the way. I'd only recommend doing it this way if you're young and resilient - in retrospect, I could have been doing many of the things I needed to do (getting experience, finding clients, making friends) with a more stable salary. I don't know if I would have, though - so the pressure was helpful in some ways. I was also lucky to be in a stage of life where stability was less important than adventure.
Hope some of that is useful, and best of luck striking out on your own!
Yes, finding work is important, doing the work is important, and getting paid is important, but the latter two are not as important if you know what you're doing and you work with people who will pay you. Those parts are not hard. Sales is "hard," in so much as it takes time.
The risk factor involved in my previous statement is that they shop around and rescind the work agreement because their timetable has immediate needs. Not a lot of clients are patient.
It's sort of a basic thing that goes without saying, but once you get into this line of work, you'll learn a lot about HR, compensation packages for your contractors/employees and corporate tools.
Do what's right for you, but I jumped and never looked back.
The reason I started is for the flexibility. I'd like to be able to schedule a month or two to travel each year and this seems out of the parameters of most FTE positions. I'd also like to enjoy the outdoors more than a typical 9-5 + commute will allow for.
I actually quit my FTE job at the beginning of the year with the intent of traveling for most of 2020. COVID cut that short, and I decided to contract once we got back for maximum flexibility. I did have enough savings for at least 6 months to start, but only ended up needing to draw down about a month's worth before the contracting income was enough to live on.
I started by tapping my network. I also reached out on hiring platforms and tech communities, and started self-promoting via blog and social posts (though I havn't kept this up at all, perhaps to my detriment).
It didn't take long to secure some small contracts, in the $5 to $10k range for a month or two of work. Doing a good job on these opened me up to further work with those companies. I also kept my ear open on LinkedIn, though the vast majority of people on there and most hiring platforms are looking for FTE.
Every company that I've worked for has wanted to engage me for longer, but I've found that startups are most willing to look to contractors for flexible and part time work.
My most lucrative but least fulfilling contract was 6 months of a mostly-9-to-5, this just felt like being an employee with worse benefits.
Currently, I am working hourly for a couple of small orgs doing some odds-and-ends feature work that's outside of their in-house developers expertise, and I have an 11-day-a-month contract with one of the companies I did project-based work with last year.
This is enough to provide a stable SWE salary with a lot more flexibility. I won't be multiplying the value of my time unless I get into "product-esque" consulting (security, SEO, privacy, accessibility audits), or start working with larger companies.
My workload meets my needs for now, but if I want to grow a business I'll need to refine my offering, target larger companies, and generally put a more professional face forward. I'm not sure this is what I'm interested - I've always been more of an engineer than a business person, so I'm leaning towards working on product with some other people in the free time that my flexible schedule affords.
Some tidbits of advice:
* Get an accountant early on. Money well spent, and will save you a brutal headache when you run into tax questions in the next year.
* I havn't felt the need for a lawyer yet. I suspect if/when I start working with larger organizations, I'll need that next. I have not had much difficulty putting contracts together or getting paid, but I suspect my good luck will come to an end eventually :)
* I did incorporate as an LLC. It hasn't been particularly useful yet, but it might in the future.
* Knowing _why_ you are contacting is important. If you're working with people from the same company 9-5 for months at a time, having a daily standup with them - is that really much different from being a FTE? In some sense, yes, because you can change teams more quickly and easily than FTE, but you take on quite a bit of overhead to do it. You'll need to really work at building a schedule that accomplishes _your_ goals. Everyone wants more of your time!
I personally moved to contracting, got a 6 month contract, which wasn't too dissimilar to being employee.
That gave me time in between contracts to build products, which ramped up. Incidentally I went back to FTE with side projects for personal reasons (paternity leave in primis) and I'm now about to do the jump to product only. I'm not excluding doing the odd contract if money is low in the future.
Savings wise we're a bit on the extreme side, we can either buy a house or live for 15 years without work.
I would say 1-2 year of savings would be plenty.
Good luck. There's a lot of surprises. More complex taxes, issues with liability, marketing (not an engineer's strong suit typically), extracting cash from clients, the cost of health insurance/SS, the need to appear to be self-employed from a tax standpoint. Small companies don't know why it's so expensive, large ones push the payment out in time, entrepreneurs will trade you .1% of the company for a ton of work because their idea is so darn good.
OTOH, self-employed IRAs are pretty sweet.