Ask HN: Are Startups Exploiting Freelancers?

[sbntn]

As a freelancer I've had many small clients delay payments, it's part and parcel. However, over the past few years I've been involved with a few startups and am now owed over $100K. Each startup led me on for far too long, and now it seems none have the ability to cover the costs owed. I'm stuck and at a massive loss.

Just wondering if anyone out there has a similar story?

[patio11]

Once is chance, twice is coincidence, third time is enemy action ^H^H^H an opportunity to improve your business practices.

1) You appear to have been working for startups with no money. There is a word for devs who work for startups with no money. It is "technical cofounder." If a startup does not have sufficient money in the bank to pay you, tell them you're happy to continue the conversation after they have raised money.

2) Startups with money in the bank are frequently amenable to e.g. 25% deposits for first-time clients. You can even offer them a trade: 25% deposit means they get scheduling predictability, otherwise the engagement happens subject to your availability, and -- since we're all businessmen here -- we're all clear that in case of conflicting desires about scheduling the client willing to pay a deposit wins.

3) Your computer just developed a really strange bug where elaborate excuses in emails regarding payment cause it to shut down and not be able to boot until your bank says the check cleared.

[jxf]

I'm a little curious about how the bill got to $100k. Were the payments going unmade for months while you continued to do work for them?

I usually asked for biweekly direct deposits when I was contracting with startups, and I made sure to add that to my contract as a clause. If the money stopped, so did the work. But I never had anyone pay very late, and if they did it was quickly remedied with a phone call.

Now, as the cofounder of a startup (http://uphex.com) who uses freelancers regularly, I make sure that my freelancer collaborators know I'm serious about paying on time. I carefully lay out how and when we pay invoices, and usually pay far in advance of when we need to, in order to build up trust. To date, it's worked very well.

[rebelidealist]

CONTRACTS...

even you don't have contract...THREATEN TO SUE THE SHIT OUT OF THEM. Emails are proof. Tell them your uncle graduated from Harvard Law.

always take 50% deposit before you start.

i've been consulting for over 4 years. sometimes you need to take out the hammer. Never be the victim, fight until you get your money back.

If all else fails blog about what happened with proof. Use their real names. SEO the shit out of that blog post.

[patio11]

SEO the shit out of that blog post.

This strategy will not redound in your favor with regards to securing mutually fulfilling relationships with good prospects, because it screams a) I'm a chump consultant, b) I will be difficult to work with, and c) there is a huge downside risk of employing me if we run into utterly routine speedbumps. (Freelancers may not perceive "not being paid in a timely fashion" as a speedbump, but that is what it will read like to clients.)

[tptacek]

1000x this; this is what I think about every time I see one of those HN front-page posts where a designer has replaced someone's website with a complaint about non-payment.†

Anyone on HN who hasn't consulted/freelanced for a year probably does not understand that 6-9 month payment delays aren't even unusual.

This is, by the way, all the more reason not to count on returns from consulting sold to startups with less than a year's runway in the bank.

† We occasionally buy design services. We pay _promptly_ (professional services courtesy). But I would never work with someone who had outed a customer for non-payment that way.

[rebelidealist]

Wow, I cannot believe how you guys are so accepting of MONTHS of delays in payment.

It happens often, but it is a serious unprofessional offense that not be taken lightly.

Your and your coworkers life are disrupted by cash flow issues. It is an insult to you and your coworker's hard work.

Moreover, this is detrimental to our entire high tech consulting industry. We cannot make this acceptable behavior for clients. They need to see there are real consequences for delayed or nonpayment.

[tptacek]

One good reason to accept MONTHS of delays and "serious unprofessional offenses" like this is that the delays are often part of the cost of working with the best, most lucrative clients.

If you want to constrain your consulting business to clients who will look you in the eyes, shake your hands, give you their word that you'll be paid 14 days after invoicing, and then keep that word, that's fine, but it's not a revenue-maximizing strategy, nor is it necessarily the strategy that will leave you with the most hair and the lowest blood pressure.

Not losing your shit over hiccups that are a natural part of the lifecycle of a serious customer is part of the distinction between a 1-2 person freelance-company-in-website-only and a 20-50 person consulting company. There's romance in working at the 1-2 person freelance shop, but I'd like to retire someday, so I choose not to freak out over accounts receivable.

[rebelidealist]

Letting the client fuck you over by not paying is being a chump consultant?

Would clients delay payment for their attorney? How are tech consultants any different?

The demand for tech consultant is more than supply. You don't need any clients that are scared of working with you because you call out another client for not payment. There are plenty of work in the sea to put up with this.

[napoleond]

> Would clients delay payment for their attorney?

Yes, routinely! That's what Thomas and Patrick are getting at. For better or worse (and trust me, I've felt the "worse" side of it lately+) companies will, for a plethora of boring and stupid reasons, not always get their payables out on time. It's completely normal. They're not trying to screw you. It just happens. You can choose not to work with those companies, or to expend your energy toward making sure your clients always pay you right away, but that's a poor use of your time as a consultant.

What you should do instead is: (a) charge more and (b) consider adding interest on late payments. Lawyers and accountants do that, and then they don't really care if you're late paying because they've been charging you favourable (to them) interest.

+ I'm in the process of spinning down the consultant thing and getting a "normal" job again for a while, largely because of cash flow errors. It was one of several hard lessons learned, but that's partly why I bothered to comment: it's not realistic to expect good clients to change the way they do business for you, so you need to understand, accept, and plan for the reality of stuff like delayed payment.

[tptacek]

I don't know if the "late payments" thing works for anyone else, but speaking from my own limited experience: it's better to take any given business concern out of your client's hide in increased rate than to add any complexity to contracts.

To a one, the most lucrative clients all have contracts reviewed by house counsel, and many have purchasing departments trained to do nothing but review contracts. Anything remotely complicated you put in a contract is (a) going to get stripped out and (b) potentially going to add weeks to the amount of time it takes to get a master agreement in place; more than once, a few weeks delay in legal was all it took for the window of opportunity for a contract to pass.

At any rate: you are exactly right. Have you ever seen a thread where Patrick, me, or some other established consultant harangued HN about raising their rates, and about not setting rates based on some double-digit-percentage uplift of what their last full-time job was? This is why.

[napoleond]

It might be a regional thing; every independent professional I've ever hired has done something like "Net 30; 1.5% interest per month on late invoices" so businesses here are used to it. I've never tried it myself (benefit is marginal compared to just raising rates, as you say, plus it's a PITA to actually enforce) but I don't think it would have presented any problems in legal. YMMV, obviously :)

[tptacek]

Yes, clients will delay payments for their attorneys. I accidentally did that to mine after we sold our chump consultancy. For like, 5 months! Guess how upset my attorney was?

For that matter: guess what my chump consultancy does? You can click my profile and find my company pretty easily. How safe does it sound to stiff us on payments? And yet it happens all the time, to everyone, because that's how business works. It's why big consultancies have people in charge of invoicing, rev rec, and receivables.

[wikwocket]

Using contracts and threatening action upon bad faith payment delays are great ideas and very useful.

But blogging about non-payers is a terrible idea. It will do nothing to help you. And if the case does go to arbitration or court, it will actually work against you, potentially even opening the door for damages done to the other party.

[msantos]

whatever you do, do not do this => http://1.bp.blogspot.com/-Fs2YDn-8y5g/Uh1cc2QtYJI/AAAAAAAACD... (IMO that's incredibly unprofessional)

[fsk]

For one contract, I did a couple hours of work and never got paid. It isn't worth the hassle to try and collect, so I just wrote it off as a loss and a learning experience.

Even with a written contract, as an individual freelancer it probably isn't worth your time and money to lawyer up and try to collect.

There's only one way to make sure the bill never gets too big. Once the amount owed reaches a certain amount, refuse to do any more work until you get paid. Ideally, you're working on an arrangement where you get paid every 2 weeks. Then, the most you can lose per client is 3-4 weeks' salary.

[chrisBob]

One contractor I worked with recently (hardware design) billed every month or $4k which ever came first. This works well, and keeps everyone aware of how costs are adding up.

[tptacek]

Not in our experience.

[danielkyulee]

You should be getting paid on a continual basis. 100k worth of work for no pay is ridiculous.

I have never heard of a startup exploiting a freelancer this way, but wouldnt be surprised if this happens.

I can imagine unethical startups trying to exploit a developer who is too trusting. Don't be that developer. Make sure to have a contract, and make sure to be paid for it biweekly, or monthly.

And if they don't agree to that, then well, you probably shouldnt be working there in the first place.

[czbond]

Startups are a dicey bunch, cash flow is always "in flux". With that said, tightly covering your development with staged hours AND/OR deliverables and stopping development completely when payments are missed can help alleviate some loss.

[sbntn]

Agreed, it's a long story but I have definitely learnt a lot and do business very differently now.

[alinajaf]

Bill weekly, offer a 10% discount for 100% pre-payment or you take at least 50% of the initial engagement up front. That cuts out clients for whom you've either a) not demonstrated enough value to or b) weren't going to pay you anyway.

[noname123]

Why not charge a higher rate to startup's to price in the risk of non-payment and reduce the rate to corporations who are more reliable?

[rahimnathwani]

Answer: Adverse selection.

If you charge 2x your normal rate for some class of clients (e.g. startups) with no other changes in how you source or engage with clients, then you may end up with only those startup clients who were not going to pay you anyway. The guys who would have paid you will baulk at the 2x fee. Those who accept don't care that the fee is 2x, as they weren't going to pay anyway.

There's no substitute to doing due diligence and limiting the risk (e.g. through contracts and short payment cycles, as others have said).

[minimaxir]

That is why you have good contracts in place.

[sbntn]

There are contracts but no money. There's nothing to retrieve.. yet. So I'm stuck waiting for them to make money or raise.

[BSousa]

For the future, use escrow. It just looks like you are working for companies that have no money to pay you (and prob. never will). If a company isn't willing to use escrow, run. They either don't have the money or are planning on not paying you anyway. It doesn't have to be for the whole thing, but at least until you have a relationship with them, use it. Start ups in SV (generalising) are run by kids with little head now a days that think they are the kings of the world, and don't care about screwing you over because that is what they learned from Jobs or Zuckerberg or whatever.

[andyakb]

Will serious companies actually post the money to an escrow? I dont have any experience with this directly, but cant imagine any company with say >100 employees would respond favorably to this request

[BSousa]

Those companies also usually pay part in advance. If you read a bit about other freelancers process (even here in HN there is a lot of advice) most will ask for some kind of advance.

[yaur]

One of the major advantages of working through an agency is that they have processes in place to asses credit risk and handle collections.

This isn't limited to startups though. I've seen a medium sized company stonewall on payments until the freelancer in question was willing to settle for 20%-30% of the agreed upon price simply to recover something for the time they invested in the project. This was a negotiating tactic for them and when it didn't work they would pay whatever interest rate was agreed upon in the contract, which was often nothing.