Ask HN: consultancy, how to?

https://news.ycombinator.com/item?id=664954

by ErrantX • 17 years ago

34 34 17 years ago

news.ycombinator.com

Hey guys looking for some insights.

Im working full time for a company who dont mind me consulting on the side so long as it is not in business time (win). An ex-university friend has approached me with a proposition to do some websites - he works for an IT consultancy that doesnt do web design but has said it is willing to hand off customers who want sites to him (in the region of 2 or 3 a month). It's a good gig and looking over the specs for the first job he has it looks like a reasonable amount of work.

He wants to split 50/50 - he brings the clients and does the design work pluss some admin etc. I do the site building and technical consults. Again it seems a fair deal because he can bring the serious clients.

Anyone spot a catch? More importantly any advice on how to get set up?

Obviously I will want an actual agreement - would a simple partnership (im in the UK_) suffice do you think?

Also as I am working remotely (though will be paid a day's travelling per job so I can meet clients face to face initially - I feel this is important :)) does anyone have recommendations for tools to collaborate on these specific projects (I will probably use bitbucket for SCM and ticketing etc. so more in terms of communication & work hour tracking).

And finally if your already doing similar work what kind of rate would you expect to be paid for this work (initially we are looking at £25/hr to get initial traction going up to £70/hr as things progress / we get a reputation)? + any other advice :)

Cheers peeps :)

salvadors• 17 years ago

The agreement you have should reflect how well you know the person, how well you trust them, and what the worst case scenario is. I'd suggest you almost certainly want lawyers involved in this part as they can give you a fairly boilerplate agreement that's tailored around the 4 or 5 key questions that you'll need to think really hard about.

Bear in mind that in a partnership, rather than a limited company, you have full personal responsibility for all debts (and not just in the normal course of business: you also need to consider someone suing you, such as disgruntled client). A simple partnership, without an explicit agreement to the contrary, will also include joint and several liability. In other words if one partner were to do something incredibly stupid, all the partners would be liable for up to the full amount owed.

There's no reason why that sort of set-up _can't_ work: there are numerous businesses that run like that quite happily, but you should be sure that you're comfortable with the risks.

demosthenes• 17 years ago

Keep in mind that you can set up a Limited Liability Partnership, which would seem to make a lot of sense in this situation. Liability is limited in the same was as in a Ltd. company, but it differs in how profit sharing is handled. Check with an accountant for details.

http://en.wikipedia.org/wiki/Limited_liability_partnership#U...

ErrantX8• 17 years ago

Yes this is vaguely what I was thinking too (I have taken this LLP before).

From the other comments (bar one) it seems to be an ok approach so that makes me more confident :)

mseebach4• 17 years ago

If you need lawyers at this state, you're doing it wrong (specifically starting up with the wrong person)

michael_dorfman• 17 years ago

I disagree completely, unfortunately from experience.

The need for lawyers has nothing to do with how much you trust the person-- the key factor is the amount of money, and your willingness to walk away from it.

If the sum of money involved (now, or in the future) is large enough that you don't want to be able to get screwed out of it, lawyer up.

The people you trust today might just turn out to be untrustworthy somewhere down the line-- you never know.

chollida12• 17 years ago

Couldn't disagree more.

The reason we have lawyers look over documents is that they write these types of documents everyday and they can tell if you've missed anything.

This comes in handy when a dispute arises or some other unforeseen event.

Joel talks about this on the Stackoverflow podcast when they discuss using a lawyer to review the FogCreek office rental agreement.

The gist of it is that when lawyers talk about problems( ie a tenant paying his/her rent late) then its' just lawyers talking, but if a tenant broaches this subject with the landlord then suddenly it's confrontational as the landlord is now wondering if the tenant is asking this because they plan on not paying,etc.

You should have a lawyer look at most contracts you sign.

ErrantX8• 17 years ago

Thanks. In terms of trust, well, I trust him enough to go ahead (certainly I know he wont deliberately screw me) but perhaps would like to have some form of legal entity or fallback in case things go sour.

I dont forsee it at all but it's not a partnership that I would happily walk into w/o any agreement - if that makes sense (there are some friends I would do so with).

Thanks for the advice.

davidw• 17 years ago

You might do some searching, as this topic has come up before...

ErrantX8• 17 years ago

my searchyc foo is poor. I found some useful stuff (and much of it is common sense anyway) but I was really looking for experience in remote consultancy etc. :)

mseebach4• 17 years ago

The easiest way to handle this when you don't have any investments, no professional liability or other complications, is simply that you set each your own individual sole proprietorship. Your friend, as he handles the administration, bills the client, and you bill him. Your agreement should likely be that you get paid when he does.

This way, if things turns sour, you only stand to lose what your friend owe you - there's no legal entity that you share and might need legal help to dissolve. If you don't trust your friend to make such a setup (even if this particular setup isn't the right one), you shouldn't go into business with him.

Regarding the rate, don't undersell yourself. There's an expectation as to what a professional developer costs (probably way closer to £70/hr than £25/hr), and if you don't meet that expectation (in either direction) you'll experience some friction. You can give a one-off discount, e.g. as a voucher handed out as marketing. Underbidding is for punks with ASP.net for dummies and "Hello world" under their belt, bidding at the actual price is what professionals do. State your rate at what you think you're worth, and be prepared to give a discount if you feel it's the right thing to do. That way the client also feels like he got something.

eru• 17 years ago

That seems clean. (I have no experience in legal matters, but the suggestion sounds elegant and simple. Though you might have to look out for taxes, when you do business as two separate entities.)

ErrantX8• 17 years ago

Hi this interests me - LLP seemed a good approach but your comments make sense. Mind if I ask some more.

Are you suggesting sole proprieterships and then have a contract between myself an him. My main issue is I want some way to tie us together (actually mostly so I have "deadlines" I have to meet) and to make sure the 50/50 agreement is protected somewhat. Im certain he wont screw me (I've known him for 3 years - he's a bit pompous and a sometimes difficult to work with but definitely not someone to take advantage at all) but I wouldnt walk in with no guarantee. :)

Thanks for thoughts on the rates - I had some nagging doubts on that side of things. The £25/hr is more from fixed prices we figured we would have for the first few jobs (which are specced out) and their budget is fairly low. But your right about underselling in the future - is it better to bill hourly (and give an initial hours estimate) or agree a fixed cost in advance do you think (Im thinking former)?

Thanks for the great feedback :)

tedshroyer• 17 years ago

My advice is to bill hourly whenever you can because the client won't express everything they want done initially. This is because they don't know everything they want until they have part of it. Just think about doing a job for yourself and how many times you realize how much more you need to do after part of it is finished.

mseebach4• 17 years ago

I suppose that when you set up the agreement with the client, you agree a roadmap with certain milestones for the various stages of the project. These are both yours and your partners deadlines.

There IS no guarantee. Simple as that. Your guarantee is that you (and him - this also goes for the client) get paid often enough, that if its turns sour for whatever reason, and you can't get the money, you can walk away. This is also a good motivation to follow an agile methodology, where you deliver value early and often.

CyberFonic• 17 years ago

Having read the all the suggestions, this is the one I'd recommend. Partnerships are more bother than they are worth. There are a lot of IF's: If he brings in the business. If he does a "good" design. If he manages the client and responds to his calls. If he pays you on time. If he brings in clients that pay at the top end of the scale. Then he might be worth 50%.

My impression is that your friend is trying to profit from your hard work. I don't see the amount of time as being 50/50. So you need to factor in whether his contribution is worth the 50%. In my experience you'd pay 5% for an introduction. 15% - 25% for the invoicing, collecting, account management. So really depends whether the design work is worth 35% or more.

Another arrangement is that you get back to him and say, that if he makes the introduction, you take on the client and pay him a commission of 15% and bill the design work to the client and keep 15% for admin costs.

A partnership or company is the last thing that I would suggest. Too many things can go wrong over time. Believe me, it took me 4 failed companies before I realised that it's impossible to reconcile expectations, especially when people have jobs, social life and other ever-changing issues in their lives.

Good Luck!

lp456• 17 years ago

5% for an introduction? If I'm understanding this correctly he's selling and designing. The sale alone is worth 25%. Now I'm not saying 50% makes sense but 5% is incredibly low for a sale of anything (even if your cashmart).

Agree on all other points.

jamiequint2• 17 years ago

When I did Facebook app development consulting I did both the client sourcing and acquisition and the development/consulting. From my personal experience, 50% is not a high percentage for the amount of time spent on this work. Between managing Ad Words campaigns, talking to potential clients on the phone, spec-ing out projects, and making proposals, I'd say the time to get to the development stage far exceeded time actually developing.

Also, you don't simply get a client once they are introduced, it almost never works that way. I would have to talk to clients for hours on the phone, most of who (as far as I can tell) had no actual interest in proceeding with the project, but wanted to ask a lot of questions anyway. The sales process is worth far more than 5%.

I'd say this agreement is very fair.

ErrantX8• 17 years ago

the split of work isnt 50/50 but I dont think the money split is unfair.

or rather the amount I will be getting is fair for my time - he is getting a LOT for his time but it is him with the emotional investment - I can walk away he wants this to be his career.

At the end of the day the split isnt my biggest concern so long as I get paid a fair amount for my efforts (probably what I would be paid were he just contracting work to me anyway). The main benefit of doing it "together" (under some kind of agreement) is that in the future if it becomes a full company I will be leaving (as I have a career) we have agreed that part of our signed agreement will include a pay off for me (probably in the region of a percentage of the first 2 years income - he said 50%.[lets split 50/50 all the way]... which seems very high :P)

Anyway - thanks for the comments. Im sold on this approach over an LLP so I'll pitch it to him in our meeting next week :D

msb2• 17 years ago

I agree regarding the rate. If you have professional experience there is no reason to start off at so low just because you are new to consulting. The voucher or one time discount is also a good idea. I have found it very difficult to increase rates on customers over the years. It is important to make clear that if you do discount that it is not permanent.

Derrek• 17 years ago

I second that. Plus, people often subconsciously associate higher rates with better service.

caseysoftware• 17 years ago

50/50 splits always make me nervous.

When the site goes down at 2am, who gets called?

Once the design is finished, will he be doing anything?

Does this deal apply equally to clients that don't need design work?

Does this deal apply to clients he doesn't refer?

Does he get 50% of the deal or 50% of the company?

Regardless, a 50% "finder's fee" is ridiculously high..

ErrantX8• 17 years ago

Wicked questions: as this is in the intial stage that's the sort of thing Im looking for to ask.

The idea is 50/50 on any money regardless (after costs - i.e. my travel costs) - I guess that is very vague and your right... I do need to nail that down into an agreement.

He does have some technical knowledge so will be working on HTML aspects (but has no real knowledge of backend programming meaning Im needed for that). The work will be fair - I've already spoken about that. Yes he might be doing a bit less but (as I mention below) I cant find the clients. He is also in the same city as said clients so he would be the one meeting in person for the most part.

50/50 for the finders fee is quite high but I dont think it's fair to call it that as I couldnt get the contracts w/o him onboard and I wouldnt have the time to make the contacts

This is pretty much his gig - he could probably contract me the work for a lot less but Im not so happy with such an arrangement. 50/50 sounds like an OK deal to me. We have agreed a hrly limit for my work....

In terms of "after completion" work - this is something we agreed to discuss. I think our initial idea was some form of optional agreement with the client to charge a fixed rate for maintenance and whoever does the work gets the money.

What would you consider a fair split?

msb2• 17 years ago

As others have said, it really needs to be per project. There may be some projects where frustration and resentment can creep in. For example, when the work is all design/static content or heavy programming.

Perhaps the best way to do this is treat it like a company. Your friend gets a reasonable finder's fee or percent of sales for bringing in the business. Someone else might have a better number but I would think 5-8%. When writing project estimates, you each add the hours it will take to complete your respective tasks. Track your hours in detail (I like to use Klok, but there may be better) and when the project is complete get paid accordingly. If you both come in under, then perhaps consider splitting the 'profits' 50/50.

I think this type of structure accommodates the variation of skill requirements in web projects and will also ensure that you both are getting what you deserve.

pmjordan• 17 years ago

Agreed. Handle it on each project individually. Some will be more code-heavy than others. You need to plan out each project to budget it anyway, so you should be able to see how much work falls to you and how much to the other parties involved.

jamiequint2• 17 years ago

I'm kind of restating from a comment I already made above, but I think that its very wrong to state that a 50% finders fee is very high.

From my personal experience with consulting (particularly Facebook app consulting) I found that week-to-week I consistently spent more than 50% of my time getting from potential leads to actual sale and spec'd product than I ever did actually developing.

bhousel• 17 years ago

I would definitely recommend that you pick someone up front to be a Project Manager. Your friend might be this, as you described his role as "finding clients" and "some admin etc", but it's really a bit more than that - you might want to bring in a third founder with experience in running projects.

I'll echo what others here are saying - don't split things 50/50 (or by any percentage, really). Everyone on the project should have a bill rate.

I'm a consultant on a few projects that are structured this way, and it seems to really work well.

pbhjpbhj2• 17 years ago

And then one of you messes up on their part and either the billed hours total is more than the revenue or the client refuses to pay so much (depending how you're charging) ... what now?

Also billed hours means that there's an incentive to work slowly to get a greater share out of the business.

lionhearted• 17 years ago

Hey Errant - not sure if you're still following this thread, but you got a hell of a lot of some bad advice.

Most people are really "mine mine mine!" oriented, they're telling you be careful of the split, watch out for getting filched, etc. That's all well and good to some extent, it sucks to be burned. But you're doing services work - there's not too much you stand to lose later.

I'd recommend you don't mess things up going for a slightly uneven split, or overkilling the details. Like mseebach recommended, going sole proprietor is good for low liability. After that, don't kill the goose that doesn't exist yet. Getting experience in business and consulting while making cash is a good thing. If you make 10,000 GBP over the next year doing this on the side, and technically you maybe could've should've gotten 12,000 GBP - who cares? Trying to get a 35/65 split, or overhashing details means the project won't get off the ground. If it's a stellar deal for your partner - even better, he'll be motivated to get you a lot of work. If it turns out to be a bad deal for you, you can move on later.

My advice would be different if you'd be building significant assets or investing money. But you're doing services - just get going. I'm guessing a lot of the people who say, "Charge more! Get more of the split!" aren't really big winners in life. No disrespect to them, but we're talking about grabbing at pennies here. Just getting into business is the most important part - be as amicable and easygoing about it as possible. Yeah, there's a good chance it'll end poorly someday, as most partnerships do. But hopefully you'll get good experiences, make some cash, and most importantly, learn a heck of a lot in the process. Don't sweat the pennies, getting into action is where you get paid now, and learn what you need to get paid even more later.

ErrantX8• 17 years ago

Thanks - as you say the split is something Im not worried about. The income generated will be about £1500 a month for me (based on the current work lined up - should be sustainable) which is about a third of my current salary. The idea is this will be my savings money so it's not "on the line" in terms of need. I have nothing invested (and am very easy going anyway) so I cant see the downsides.

I could probably get a 60/40 split but the other guy would be a bit miffed (it's his baby and he is all enthusiastic). The money I get seems pretty fair for my time (even if it seems extremely generous to him) so.... :D

I think the impression I got is he is looking for this to be the start of his "something big". Essentially I am helping him get that off the ground - the deal is if it is "big" and turns into an actual company employing more programmers I will be leaving with a pay off for my initial "investment of time" (that figure is still to be agreed on - but will be) as I have a career to pursue anyway.

I cant see the downside to a couple of years doing this for income on the side - it's all good experience :D

Thanks for your comments! You've made me confident I am doign the right thing :D

Ask HN: consultancy, how to?

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