The Rules for Entrepreneurs

Venture Files founder and former curator, Steven Fisher, wrote a series last year that remains one of the best of its time. Even though he has moved on and is working with Network Solutions, I think it’s as important now (if not more so) than it was last year at this time. This is a consolidated (and updated) version of that series.

Pay Yourself First

Over the last 9 years and two startups I have learned many things and screwed up royally in some cases. This series is about providing you best practices of lessons learned and avoiding the mistakes I have already made.

In the past, I have had good years and bad years. When you have employees, they expect to be paid and when you mess with payroll (and payroll taxes, but that is a post for another time) you create such a negative culture that nothing will get done.

With that said, when you are starting your business regardless if it is a service or product company, you will have startup costs and probably forgo paying yourself for 6-12 months to keep growing the business. That is fine and to be expected. What you should not do (and what I did) is keep adding staff and sacrifice your own salary in the name of growth. If you keep going like that and have a bad quarter you will have nothing saved for a rainy day and if the business fails you will probably be in immense debt and got nothing out of the business.

Granted, the balance between growth and cash flow is a tenuous one but it is one thing you should never defer to someone else in beginning. Plus, there is a difference between creating a lifestyle business and an enterprise. A lifestyle business is really making enough money for yourself and having some contractors or 1-2 people that gives you a good salary but is more about freedom. An enterprise is a business that scales and gets big over time but you will be working intense amounts in the beginning but will need to hire those smarter than you with the intention that you are looking for an exit and will have time for freedom when you cash out.

So when you are growing the business you should work the first 6-12 months paying off the initial capital expenses and getting about 6 months of cashflow for yourself before you hire anyone else. Once you have that done, start paying yourself something, even if it is small and will ramp up over six months, pay yourself first. This will get you in the habit of being committed to making the business pay for itself and you so you are not worrying about living month to month and let you find some resources to help you deliver while you continue to sell and grow the business.

Once you are looking at hiring someone use these two rules as a starting basis:

– Have six months of payroll for that person in the bank on top of your salary

– Have 90 days of projects or sales committed for that person to deliver so they not only have something to do but are earning their keep.

You may have to be conservative at first in your growth but in the end you will scale better and create a business that is focused on delivery and customer service without putting you and your employees on a cash flow roller coaster.

6 Replies to “The Rules for Entrepreneurs”

  1. Sage advice Aaron.

    That was certainly a great article to read and keep in mind as I start looking that direction as graduation gets closer for me.

    Even as a consultant these are issues worth considering.

  2. Aaron and Steve — Great piece. The timeline suggestions i.e. 6 months payroll + 90 days of sales pipelines are critical yet concise enough I think for startups to focus on. It’s easy to get mentally swamped on next steps when aiming for growth; so the clarity in those two points appeals a lot. Hoping you’re well…

  3. This post is excellent. I have done some of the mistakes you talk about above, and it feels like hell when you know you could’ve done something better. Thanks for sharing this.

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  4. Great advice. When a startup owner takes money out of the company, the guilt of ‘what I could have done with that’ sets in. But if we as a business owner are too (literally & figuratively) hungry to think straight about our plan, we’ll miss valuable opportunities. There is a middle path where a harmony can exist in both pro and perso lives.

  5. I am currently that business owner with several contractors. It would be SOO nice to have employees, but I don’t feel financially comfortable yet to do so. Contract labor is always very cost effective – even if you pay more per hour – it often times costs you less in the long run. But, with the way things are going – in the next 2-3 months I will be forced to hire full time staff.

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