Unemployed? Why Not Start a Software Company?

R.S.D. asks: "I see all these Ask Slashdot articles about unemployment these days. Why don't a few of you guys get together and start a software company? Out there in the world, there is still a lot of software that needs to be written, and people are still pumping lots of money into software (and biotech). In fact, the software sector is still described as the enduring leader in raising venture capital, though apparently in Silicon Valley more money is going out of the maturing software industry and into things that are still high-tech like biopharm and nano. Is anyone else trying this? If so, how's it going? If not, why not?" This is easier suggested, than implemented. For those who have gone this route, what suggestions would you give to those who may follow?

"Every time I see a group of 5-10 self-described 'great but unlucky' IT workers looking for a job, and how their previous company had to lay them off because their former employer had this 'stupid idea' it was to move all the jobs to Elbonia, I have to ask myself -- why don't these guys get together and start a software company. If you don't make these 'mistakes' of outsourcing development to Elbonia, couldn't you compete pretty well?

Best of all if you ever did need to grow, in this job market, you can get highly educated and experience software engineers even more inexpensively than China or India -- I've heard some internships are unpayed these days.:-)

Yes, I am taking my own advice, and trying this, even though I was not unemployed."

Comments

Business plan

[Space cowboy]

Don't expect to get anywhere without one. It may be crap. Hey, it *will* be crap. You'll look back and laugh (or cry), but it's important to have a standard yardstick to measure yourself.

Beware of angel-investors (people who know you and are willing to give you cash to start up). Unless you have a better experience than most (myself included), you'll fall out, and it'll get messy. I wasted 3 years.

Do a *realistic* assessment of your income and needs. Before you jump ship or give up something else, make sure you can support yourself. Sounds stupid, but it's amazing how little costs can add up. It's easy to fall afoul of the law with tax returns and VAT as well (for us Europeans)...

Get people on board who can run a company - not as paid (or maybe nominally paid) - someone who's outside the business most of the time, and isn't fixated on the next quarter, because you will be, and you'll need a longer-term plan as well as the short-term survival strategy. Make them a non-exec director.

That's about all. The business plan *is* the most important, believe it or not... Most banks will help you through it for free (hoping to get your business). At the very least they'll give some sound advice. It's their job to fund businesses that work....

We've been going for 2.5 years now, and learnt the hard way (the aforementioned 3 years) that there's more to doing this than meets the eye...

On the other hand, if you can handle the extra pressure of being both boss and worker, it's a far nicer lifestyle than being a cog in the engine :-)

Simon.

doing just that

[jrexilius]

although I am not unemployed. An earlier poster touched on the key point: paying rent. And I mean my own rent. A software company doesnt need an office. Here are my business expenses:

1) server colocated in datacenter with back-up dial-in line $300/mo + $2000/server
2) SSL cert, web site marketing costs, etc. $500/yr
3) answering service, mail box, fax service $600/yr
4) cell phone & DSL at home $100/mo
5) incorporation, filings, fees, business liability insurance, registered agaent $2000/yr
6) business checking account $500/open
7) software, $0. all open source

So the company costs me an upfront ~$5000 and $400/month after that for a grand total of ~$10k for the first year.

Personal expenses:
rent/mortgage, utilities, taxes, maintenance, etc.
car payment, gas, insurance, parking, maintenance
debt (credit cards, student loans, etc.)
food, clothes, fun money, living
insurance (health, dental, death, disability, etc.) (~$200/mo for individual health)
savings & retirement etc.

My personal expenses after cutting out A LOT of fat are $4000/month for a grand total of $48,000 for the first year. after taxes.

I have 12 hours a day 6 days a week for 50 weeks a year, burstable to 18/7 for short stretches. When you are responsible for everything you cant burn yourself out.

So you look at your resources, your overhead, do the math and figure out if its feasible.

This is completely ignoring the fact that most engineers make for very poor salesmen, financial planners, marketers, and strategists. Which are as essential to a business as good technology or product.

What sort of company ?

[psycho_tinman]

Earlier posters have already pointed out that you need either a business plan or a product to get a company started (not to mention some source of funding).

Another type of company that I've contemplated starting is a specialist in an area. For example, any sort of networking project, or any sort of database administration work... Guns for hire, in other words. You go in, do a specialized install, get a maintenance contract, and you're done. Some system administrators may require training courses in specialized server software.. you handle those.

Basically, you have two ways to go. You can either be a product oriented company, and try to push as many of your product out into the marketplace, or you can be service oriented, and take it project by project. Each has a set of pros and cons..

Product oriented means you need deep pockets at the start, and a lot of faith. You may be coding without a client for ages, while you build a product that works. These companies are a lot more stable in rough times, once they get a few clients, but breaking even is a huge task, because they have so much invested in a product (which may sink in the marketplace).

Service or contract or even project oriented companies are easier to start up. Here, funding is less of a problem but you need solid contacts to give you projects at the start. Your margins are driven solely by how well you can deliver and close out the individual project.

In either case, you're looking at a lot more work than you would encounter being a wage slave. It takes a lot of different skills (you need to be savvy with business, have a head for numbers, worry about your presentation, and like Napoleon asked of his generals, "you need luck"). Once I sat down and figured out all this (and had friends tell me pieces), I realized that I might be able to handle the technical aspect, but definitely wouldn't have a clue handling a business. So, for now.. my plans are on hold.

Personally, I think people who start companies and have an entrepreneurial streak generally have a pretty good idea and aren't doing it just because they can't find a job..

Re:The challenge of financing

[XorNand]

Don't incorporate! There is no reason you need to endure that expense and headache. Plus you're double-taxed: first on corporate income and then when you draw personal income from the corp. Look into forming a Limited Liability Company. Buy a $50 book, fill out a form half the length of 1040EZ and pay the state registeration fee ($50 in Michigan, $125 in Ohio YMMV).

Don't let all the business or legal jargon scare you, it's easy and legally-binding. You'll have to draw up your own Articles of Organization, but once again, it's easy. It's pretty cool because you get to establish your bylaws and you can write it in plain English, not legal speak. There's plenty of examples on the 'net and in books.

Re:The challenge of financing

[Safety Cap]

So why do you NEED lots of finance?

Think about what you will need:

1. Customer Service/Tech Support
   • No large company will buy software that doesn't come with support. That means you'll have to have someone man the phone. That means you have to have an office with at least a phone.
2. Sales
   • You'll need a web page at a minimum, and a place for your sales force to live when they're not on the road, meeting rooms, etc.
   • Don't forget phones for your sales force - mobile/office/whatever. Business rates for phones are more than the $30/month you pay for that extra line in your parent's house, Timmy.
3. Distribution/packaging
   • How are you going to deliver your software? Shrinkwrap, via internet (see the part about the web page), as a bundled solution? All those things need cash to get going. Don't THINK you'll get your stuff into CompUSA without having some way of delivering CDs
4. HR/Payroll/Accounting
   • Someone's gotta keep track of the pay for your employees and send them their W-2s at the end of the year for taxes. There's that whole paying-taxes-quarterly-thing that the government seems to be real sticklers about, too.
5. Lawyers
   • If you make it a habit of signing contracts without vetting them through a lawyer, eventually you will lose big $$$, or even kill the business. They will also make sure that your employment agreements and business deals are on the level.
6. Office space/equipment
   • Gotta have development, test, and production servers, if you want to do it right (and ultimately, save money)
   • You'll need a network that gets backed up properly (i.e., every day and tapes stored off-site in a secure location---not under the mattress in your parents' house, Timmy!) because you're storing your CVS db there, right?
   • You'll need legitimate copies of purchased software, so if you're doing .NET, you'll need a real copy of Visual Studio for every developer.
   • Printers eat paper and toner.
   • So do copiers
   • So do fax machines
7. Receptionist
   • Think prospective clients are going to be impressed by your sloppy self greeting them at the door? Better at least buy a suit or some nice khakis and a clean golf shirt.

Unemployed? Make money through Gnome!

[tellurian]

Make money through the Gnome Bounty Hunt:

http://www.gnome.org/bounties/

Re:The challenge of financing

[Radius9]

A limited liability corporation is still being incorporated, its just a different form of corporation. Other than what you need to do to become incorporated, and some rules on shareholders, it is in essence the same as an S-Corp. An S-Corp lets you apply you're corporation's profits and losses onto your personal income taxes, as will an LLC, making your corporation somewhat easier to manage. On the other hand, a C-Corp is a corporation that has to pay quarterly estimated tax, and I believe that is the corporation you are talking about. Where you are mistaken however is that you are double taxed. The only place you are double taxed is dividends, i.e. profits paid out to shareholders (which in the case of 1 person, is just you). If I start a C-Corp, and the corporation earns $300,000, and I get paid $250,000 as an employee, then I am personally taxed on that $250,000, and the corporation is taxed on the $50,000 it has left over after paying me, hence no double tax. If I take that $50,000, and want to pay it out as dividends, then the corporation pays taxes on it (after which, lets say $40,000 is left over), pays out $40,000 to me, and then I pay taxes on that $40,000 of income. What you can do however, is you can do something like pay it out as a bonus, in which case it becomes a write off for the corporation, and you're the only one to pay the tax on the $50,000 (instead of $40k, because the corporation didn't pay taxes on it). The other thing you can do is shift expenses that are business related from yourself to the corporation. Things like your travel expenses, computer equipment, a percentage of the rent, business lunches, etc. The advantage of having a corporation (and this includes S-Corps, C-Corps, as well as LLC's) is that corporations have a greater leniency on certain things that they can write off. For example, if you go on a business lunch, and it is not out of town, you can only write off 50% of the amount. If the corporation has a policy of paying for business lunches, it can write off 100% of the amount, whether it is in town or not.

Just a little disclaimer however, I am not an accountant, just a business owner. If you are seriously looking into incorporating, speak to an accountant first. Although I highly recommend all contractors incorporating, there are numerous things that you have to keep in mind, and there is overhead, so its best to go into it with eyes open, or you are liable to get screwed for not following the rules.

Re:The challenge of financing

[lost sheep]

He's right, the double-taxation only applies to dividends. One giant basic need for incorporation: it protects the owners from lawsuits and creates a separate entity that is the business. What this means: Say you have an employee that works for you, there is a fire, they die. Their spouse sues your company for $2,000,000 and wins, but the company only has coverage for $1,000,000 and only $500,000 in the bank. If you're incorporated: The company goes bankrupt, that sucks. If you're not incorporated: The owners are required by law to come up with the money; the company goes bankrupt along with the owners, that is sucking in a most extreme form. Additionally, if you ever want to do things like bring in investors, bring in partners, ESOPS (aka stock options for employees), do certain kinds of business with governments and other businesses, and have any sort of business exit strategy (except the strategy of leaving it all to your kids) you need to be incorporated. So take some advice, visit an accountant and attorney have them draft the articles of incorporation in whatever state you want them to be in (Deleware is the most popular!).

Re:Why should you need financing?

[EvilTwinSkippy]

I'm using a slightly different approach. My wife and I are developing a hosting business on the side. She goes out to people's houses to tutor them on the Internet while she's home with the baby. She makes pretty good money at it to. I get called in to do rocket science type stuff, like wire a small network or set up a website.

Along the way she occasionally runs into someone who runs a business and needs hosting. We have been snapping up a few small $5-$10/month clients, and also host a few non-profits who needed some server-side scripting stuff at around $30. At this point our DSL line into the house is paying for itself.

My plan is to keep adding small mom and pop enterprises until it starts to rival what I'm making during at my day job.

The key is that we have that social in. We aren't Sach's, and we aren't Walmart. We are that nice young couple who Estelle recommended to use who teaches computers, and hosts internet sites, and they are oh so good at explaining to the tech support line about what isn't working with the computer.

We have yet to advertise. Our customers tell all their friends about us.

It all started with sending my wife over to give the former CEO of our organization a few computer lessons. Next thing we know, she told a few friends who after she dropped by told a few friends...

Re:The challenge of financing

[odin53]

Some of what you say is incorrect. An LLC (a Limited Liability Company) is, by definition, not a corporation. The two business forms are very, very different. This means also that LLCs are very different from an S corporation, because S corps and C corps are exactly the same kind of business entity -- a corporation. The "S" and "C" designation is entirely a tax code thing; you don't "incorporate a C/S corp", you incorporate a corporation. You declare that you are an S corp to the IRS.

You're right that business owners who are choosing between the LLC form and the corporation should always consult an accountant, and consulting a lawyer would be good too. Aside from the tax advantages and disadvantages, there are many advantages and disadvantages to the LLC as a legal structure.