Statistically speaking a startup is a dismal endeavor. According to a 2013 Forbes Article by Eric Wagner 80% of entrepreneurs starting a business fail within the first 18 months. According to data researched by Statistic Brain, 50% of startups fail after operating for four years. Finally information published by Tutsplus, 66% of small businesses will fail within 10 years.
So if we are about playing odds how in the world do you pick a startup? By nature startups at best are anywhere from a three pointer to half court shot. The distance between shot and the rim depends on shooter skill.
Even legendary three point shooter Larry Bird only held a 37.6 percentage on three-point shots.
Larry Bird is in the hall of fame. Most startup business owners will never be in a hall of fame. So we have a dilemma. If you want to enter startup space how do you do so but consistently earn money win or loss?
The Professional Entrepreneur looks to add a missing component to startup processes. For that purpose Professional Entrepreneurs are paid regardless of success.
The missing component Professional Entrepreneurs offer depends on industry. All startups lack capital. There will always be compensation for those that attract money. You need to be licensed in securities to receive commissions for raising capital. Do not sell securities for a commission. You will get fined and ordered to repay back your commission if the SEC discovers this fact. Many “Novice Consultants” sign “Fee Agreements” for money raised. Principals sign these agreements because they are legally unenforceable.
Short cuts result in you not being paid. Don’t take short cuts.
In order to obtain compensation you must work under hourly arrangements. The key is to “bill in arrears” so hours accrue.
Assisting a person under “hours deferred” is a great way to build your revenue accrual. If you are professionally competent to see people not far away from investment offer your services under a flexible billing arrangement. Assist to close deals. Insert yourself in negotiations. If you take lead on negotiations it is likely you will obtain credit for closing the deal. Your client will pay your hours with near certainty and offer retainer.
Startups lack infrastructure (corporate bylaws, operating agreements, procedures, employee manuals, et cetera). Startups lack staff (IT Professionals, Attorneys, CPAs, et cetera). Startups lack planning documents (business plans, project charters, Gannt Charts, Risk Analysis). Startups lack a lot of things. All these things cost money.
Performing work for tasks deferred creates payable liabilities for the company. Liabilities must be paid when capital is raised. Create a situation where you are the “liability”. In this manner when capital comes in you are the first to be paid. A business must always pay its debts. You become an unsecured creditor by virtue of your work. Remember a very important fact.
Do not be tempted to take shareholder positions. Do not be a membership interest unit holder. Be an option holder.
There are very strict rules about how much a shareholder or member can take in a Regulation D Capital Raise. Regulation D is a US Securities & Exchange Commission rule derived from the 1933 Securities Act. Most Rules that people raise money under are Rule 506. Lesser known rules are Rule 501 and Rule 502. Each one of these rules restricts how much a shareholder can take from raised money.
The most popular one limits you to $50,000 USD period. That is Regulation D Rule 506. That means as an owner you must work on a salary no greater than $4,166.67 a month. If you think forming a startup is your path to great pay…think again. The most likely startups to succeed consist of owners who do not take any personal compensation.
A general sign a startup will fail is when the founder must take day to day living expenses from raised capital.
As an owner the reward is the profit not salary. The sacrifice of no salary comes with the reward of million dollar earnings. Getting by on other people’s money is a sign of unsuccessful people. There is nothing wrong with rendering service. For that service money is owed. I run a service business. I charge people for work. I bill hourly. It is simple. I typically defer my compensation in time periods of 90–180 days. I do this so business owners can see measurable results “before” they pay me. If I do bad work they will dispute my pay. As a Professional Entrepreneur I encourage others to do the same. Always tie yourself to performance.
All of my losses came from ignoring the living expense rule. Do not become sucked into any startup idea where the founder requires money to live. No matter how promising the person is the inability to cover day to day bills creates faulty decision processes. Very few people make clear headed decisions when financially stressed.
To save yourself from a lifetime of turmoil create liability in the form of payables. Obtain an option agreement (Warrant Agreement for Corporations). If the company gains traction, makes sales, and becomes profitable exercise your option to purchase. If you did a good job at the beginning your purchase will be at discount to present value. You will always make a profit under this arrangement. As a Professional Entrepreneur should never be a shareholder in a startup. I cannot limit myself to $4,166.67 a month. Don’t limit yourself either.
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com