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.

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.

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.