We are currently thinking we could start a business, offer consulting/contracting services, take reduced salaries (compared to what we currently make), and keep all the remaining money in a business account to give us runway for the startup. We would use the accumulated business money to pay reduced salaries and handle expenses when we transition fully to the startup.
We both have domain expertise that would allow us to land customers (for contracting/consulting) for 1-2 years to bankroll the business account. The issue is our domain expertise is in a field that we both want to get out of, and hence the desire to create a startup.
In an ideal world, we would both quit our current job now, and start working on the startup tech. However, it does seem less risky to build up some savings first, and then work the startup.
Has anyone done something similar? Does this even seem like a good idea?
From poking around a bit, it looks like an S-Corp might be a good structure for this approach - any thoughts on that? We will certainly meet with a lawyer and CPA as needed to iron out details, but I do like the idea of reading about the basics before meeting with them.
Any comments are appreciated!
The great news w/ this approach: If your solution is a true painkiller, then you will have an easier time convincing each next prospect to sign up.
Ideally, you get to a point where you're making $10K MRR ASAP and growing WoW by atleast 20%.
Do NOT consult. It's a distraction and eats into the time you should be spending building your product or selling your solution.
My cofounder and I went through this process illustrated above before we quit our jobs. The one big mistake we made though was to quit our jobs after only signing one customer. If we could go back, we would have had atleast 5 signed contracts before quitting.
The people I've seen find success with this model took their proceeds from consulting and paid someone else (affordably) to build their product. It might not have been exactly how they would have done it, but it got done.
I've also seen people be very focused and take a couple months, burn some savings, and get a product up and running, and then pick up gigs to keep themselves afloat. Don't underestimate the cognitive overload when you are trying to keep a client or two happy and you are trying to build your own product and get it marked at the same time.
If you have a good working relationship with a business partner or two, it can make all the difference. Likewise, if any of your are married or in long-term relationships, do not overlook the importance of maintaining those as starting companies and/or basically holding two full-time jobs while you bootstrap can put a lot of strain on things.
Consulting work is a business all to itself. Tacking a startup on top of that just complicates matters. Got a family? Well, you won’t see them much.
If I were in the same situation, I’d keep my day job and spend my spare time working on the product. This approach would cover living expenses, compartmentalize my tasks, and allow me to put all of my non-job hours into the product.
Like you, we tried to start our company the “right” way. That too was a mistake. If I had it to do over again, I’d skip the lawyers and accountants and just try to make a product people wanted to buy.
If you can achieve product-market fit, funding and all of the business stuff can get sorted out reasonably easily.
You say your domain expertise is in a field you want to get out of - does your startup not have anything to do with this field? Are you technical or non technical cofounders?
To expand on that for a bit, any thoughts on keeping my current job, but working part time?
I’m on my wife’s health insurance, and I could definitely swing this financially. I think my employer would be open to it as well.
If you can start small (don't hire) and find product market fit before you scale, you should have no problem doing this on the side.
- stay with your job (like others have said) as long as you can. I probably could have done this longer.
- control your cash burn, not just current but also the time horizon of the commitment. I have found that contract-based work can be very efficient for engineering work, IF you are good at specifying the technical job details.
- Before you get into a situation where you are spending more than you make (either because you kept your job but are spending more than your job pays, or because you left your job to do this before there is enough revenue to pay yourself living expenses), decide (with your partner if you have one) on some specific levels of your savings at which you will a) seek outside funding and b) close up shop and go back to finding a job. This will not only give you concrete goals to work towards (I need to get that customer to keep my bank account above $x!) but also help ensure that you don't blow yourself and your relationships up chasing a moving target.
- pitch to some institutional investors. "But I said self-funded!!". I get it. But recognize that: a) the process of distilling a 10-15 slide pitch is very, very helpful in refining and focusing your business plan, b) investors will have useful feedback, c) the experience is helpful (even if to understand how often very silly the investor courting process is), and d) having deep familiarity with any concerns that prospective investors have will help you to either address them, if you decide to do so, or alternatively, regardless of whether you agree with the concerns, to have thought ahead of time about how you will speak to them when other people have those same concerns such as prospective key employees and certain customers (especially large ones who may be about to sign a big check)
- find 1-2 other cofounders (who are not your relatives or spouse). you will have a ton of work to do, especially if you keep your day job, and you will want others to lean on, not just for the work but also emotionally (do not underestimate how physically and emotionally draining this is going to be). At least as importantly, just like pitching to investors, in the process of recruiting co-founders you will receive valuable feedback that will help you to refine the business
- Being fundable is a worthwhile option to keep open. For this purpose:
a) get a lawyer at least for certain key items. Ideally, a lawyer with prior experience at a startup-focused firm (Wilson Sonsini, etc) who has left and started their own practice. You'll probably pay 350-550/hr, but the person will be experienced and in my experience, this kind of lawyer will not excessively bill. I would advise against using any medium or large law firm at this stage unless you are ready to pay way, way more. Key items below.
b) make sure your IP is clean. Many states enforce employer's right to own the work you do outside of work hours. It is uncommon that your normal job will have absolutely nothing to do with your side project, which muddies the water even further. you should *definitely* review your employer handbook, policies etc, and research this topic. Keep in mind: you're not trying to be right in the case of a lawsuit, you are trying to avoid any possibility of any lawsuit. If there is any legal dispute with your employer, then regardless of whether you legally win, you automatically lose from a business perspective. Note: in many cases, it can be beneficial to be open with your employer about this side project. To decide, ask others in your firm who have gone thru this kind of experience (if you can find any such folks)
c) get the right corporate structure. An LLC can give you significant tax benefits when you are bootstrapping. A C-corp will be needed if you ever want to raise VC. I can imagine no reason to use an S-corp-- but that's what you want to ask your lawyer