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How do I be a contractor?

July 16, 2008

Kevin, my former coworker, contacted me regarding his start up. We will all be set up as independent contractors to do the work. The base rate he threw out there was $65/hr. Doing pretend calculations, that is: $65/hr*10 hrs a week*4 weeks… $2600/month! Holy crap!! Wait wait, not so fast!

First, taxes. As contractors, we are responsible for paying a “self employment tax,” essentially paying our employers share of Social Security and Medicare. There goes 15.3% just for that, not to mention federal and state taxes.

Second, equity. Rather than getting paid all in cash, part of our pay would be in equity. The percentage is negotiable. If the company fails, we may never see that money at all. If the company soars, I could be a mutli-trillionaire. Hehe.

He thew out $20/hr cash rate as an example, which might equal 10% equity after a year. (He will type something up that better explains how this is split.) If around $20/hr is accurate, I’m looking at closer to $500/month in pure “i can put it in the bank” cash.

I want to research what my rate should be (I have no idea where–salary.com is not the answer), though I do trust Kevin. He’s a good guy, but I have to look out for myself. Any tips from anyone who has done contracting on how to set your rate? Any tips on how cash vs. equity should be split?

Unfortunately we probably won”t be up and running until August. We can get started sooner, log our hours, and get paid later, but there is no money yet, so he doesn’t mind if we wait.

I’ll be working under a guy who is seriously brilliant, incredibly friendly and easy to work with. My dad is always telling me how important it is to work with talented mentors, particularly when I’m young in my career. Not only will I learn cool technical things from a more experienced person, I have a feeling I’ll be exposed to a lot of business/start-up things as well.

I’m not anxious to have my free time sucked away, but… it should be worth it! Right?

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6 Comments leave one →
  1. July 16, 2008 1:06 pm

    No advice for you on the contractor rate. BUT yes, if you want to do this, then do it now while you are young. While you have the extra time and less responsibility. 🙂

  2. July 16, 2008 1:14 pm

    It definitely sounds like a really great opportunity, especially considering that you’re still young!! I’m not sure where you could look for rates though…I’ll keep an eye and ear out. I have a friend I think might have a clue…

  3. July 16, 2008 2:12 pm

    The rate seems reasonable to me, considering your experience level. I know that [big company]’s contractors make over $100/hr, but they are usually people with lots of experience and unique skills.

    It will definitely be worth it, and I cannot tell you how envious I am that you get this kind of opportunity!

  4. July 16, 2008 2:55 pm

    @S – Thanks for the encouragement! It is going to be really busy the next year or two!

    @QL – let me know if you hear anything

    @PA It sounds reasonable to me too, but I really think a wide range of numbers might sound reasonable. Also, start ups typically pay less than big companies… Hmm… I just have no idea, but it seems reasonable. I feel really lucky because this feel into my lap basically. I would have never pursued this on my own.

  5. July 16, 2008 4:14 pm

    All the contractors who I have dealt with have told me the rule of thumb was double your regular hourly wage (because you have to pay your own health care, get no bonuses/benefits, as you say have to pay FICA, etc.) My guess would be that $65/hr. would be in the ball park if not a little low. Now, even though you get (presumably) full benefits at your current full time job since (presumably) there is chance you sign on full time at the new place, I would ask for double your current to cover that possibility.

    Also, your current employer has no problem with you taking side job in related industry?

    As for equity, I am biased because I have been disappointed in the past (although ~7-8 years ago during the crash), but I would just take cash. Don’t make any plans for it to be worth anything. But, it is probably is not a bad idea to take a small amount, because you never know, and it is probably cheap. Technically you should give up in salary exactly what you would pay for the equity (though of course it is not easy to figure that out). Think of it as a high risk investment.

  6. July 16, 2008 4:43 pm

    @FB – Double is about right, almost to the dollar. Thanks for the tip.

    Re: side job in related industry. I’ve looked into official policy. Without going into much detail on what either my full time job or the new venture is doing, the products lines, and even the technical expertise doesn’t overlap. it explicitly says it is fine if I don’t work for a supplier, customer, competitor, partner or subcontractor and don’t involve similar technical areas or products.

    To give an example of the relationship, it is like I use calculus to make SUVs for my regular job (not true), and the new job requires me to use geometry to make apples (that would be weird). The base skill set (math) is related, but it is a broad skill set, and other than that, they aren’t really in the same industry.

    Thanks for the tips on equity.

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