Note: This article by Lisa Liu was originally published by Forbes on Aug 18, 2021.
There is no doubt that we are in the midst of a rising trend in entrepreneurship. Even before the pandemic, independent workers contributed nearly $1 trillion to the U.S. economy (roughly about 5% of the GDP). These independent workers aren’t just driving or making deliveries. In the middle of the pandemic, 50% of independent workers provided skilled services such as consulting, marketing, IT services and even computer programming.
Many of these are newly-minted entrepreneurs, born out of the pandemic. In April 2021, there were over 490,000 new business applications submitted, up 111% from April 2020. Many of these businesses were started by women, who lost nearly 5.1 million jobs, and many others who were working from home who found themselves adding educator, childcare worker, eldercare worker and nurse roles on top of their paid employment. Women needed more flexibility and control over their lives so the realities of the pandemic pushed many to start their own businesses.
These new businesses may have been born out of necessity but they can still thrive as their founders move toward the life they’ve always wanted — more flexibility, more control and creating opportunities for themselves. As parts of the country consider reopening, the benefits of being your own boss become more apparent — no 9-to-5 grind, no endless commute, no oppressive micromanager.
The flip side of the control and freedom of owning your own business, however, is that you are responsible for everything. The potential liability is no longer your employer’s; you now bear the full responsibility so you must take the right steps to protect yourself, your business and your hard-earned (future) wealth. Many new businesses make cheap mistakes they can’t afford to make. Let’s take a closer look at a few examples.
1. Side Hustle Mindset
The difference between a side hustle and a legitimate business is mindset. A client came to me to help her draft a “short” services agreement for her pharmaceutical consulting “side hustle” after she left a big pharma company, intending to pursue the side hustle for a year or two before resuming her corporate path.
By showing her that shifting from a side hustle mindset to the possibility of making this a “forever thing” wasn’t that big of a leap — a light bulb went off in her head. She realized she could replace her annual salary working half the time for half of the year. Three years later, she is tens of millions in revenue and 25 employees strong. Your mindset can move mountains.
2. Cheaping Out On Professional Help
The most common complaint I hear about from clients is that they couldn’t afford lawyers when they first started. They invested big bucks upfront on the sizzle of websites, branding, marketing, customer acquisition and technology. When it came time to legal matters, they thought they would DIY with cut-and-paste Googled documents or use one-size-fits-all online solutions not customized for the customer. In the end, hiring a good professional can save companies tens or hundreds of thousands of dollars. Cheaping out on professional help can cost exponentially more.
A technology company client of mine used a cut-and-paste services agreement for a customer contract worth a couple of million dollars. A few months later, their CFO reached out to me — that same customer now had accrued over $600,000 in outstanding invoices and had gone silent. Fixing that mistake cost them more than $250,000 in legal fees.
3. Forgetting The Cost Of Legal Trouble Isn’t Just Monetary
Many of my new startup clients are willing to chance legal risk, putting it off for a future date. Trouble is, dealing with legal conflict (even before a claim is filed) costs way more than just money. You will spend a lot of expensive time rehashing what happened and time thinking about what to do in the future so it doesn’t happen again. Your employees will be distracted from their everyday work to deal with the conflict. And worst of all, you will spend a lot of sleepless nights worrying if your business will come out the other side intact.
One of my favorite clients hired me as her third lawyer when she was going through a business divorce with her former best friend and business partner of a decade. Ten years into it, they were no longer on the same page about whether the other was contributing enough to the business and the relationship deteriorated quickly from there. They had a partnership agreement but her previous lawyers never spoke to them about the pitfalls of a 50-50 partnership and how to plan around them. Their business divorce was painfully long and even though we were able to work something out monetarily, it was costly in all the ways that you can’t recover from.
It broke their relationship, it broke their childrens’ relationships and the impact on their team was tremendous — board members left, employees left and the distraction caused their profits to tumble. Perhaps the most impactful of all, the mental stress on both partners took its toll on them physically.
The lessons here are simple but valuable:
1. To go from a side hustle to a legitimate business, embrace the entrepreneurial mindset. If you want to be a legitimate entrepreneur, first commit to your business’ success mentally.
2. Invest in proactive preventive strategies with good professionals to help you build the proper legal foundation for your business so that you don’t spend your hard-earned money on litigation.
3. When it comes to critical decisions in your business, remember to not only factor in the impact to your pocketbook but the impact there might be on your time, your employees, your relationships, your stress and even your physical health.