Young-Entrepreneur

Note: This is a follow-up to my article "The Mistake of Generation Y Entrepreneurs." Essentially, it is the continuation of my email conversion with Greg, a fifteen year old from British Columbia interested in web marketing.

A $200,000 Mistake

What was the mistake? Essentially, it was not understanding contracts and getting a proper deal made while I still had leverage. What have I learned? Become a good negotiator, get things in writing up front, and learn how to structure deals.

In July of 2001 I was still 16 and just about to turn 17. My web site development company had been featured on the front page of my local newspaper the week before. I had received a call and met with a local business owner who had a product but had not produced any sales to that point. We talked about marketing, and decided that I would work as an independent contractor with the company.

At that point I knew little about contracts or equity, and was content to work for a set hourly wage plus a promise of a quarter ($.25) for every product sold. Nothing was in writing at that point. So I agreed to the oral terms and came in each day for six or seven hours and got the web site up and marketing systems going. As promised, I was paid the set hourly rate and the owner said he would write the contract up for the commissions sooner or later.

Before long, it was January. Finally, the owner and I worked up a contract. He signed it, as did myself, my parents, and a notary. I was relieved that I had finally gotten something in writing. However, by then the company that started with nothing only five months prior, was doing $35,000 in sales each month. At this point the company only had one employee and these sales were all on one product. It was clear that we had a great product and what I was doing was working tremendously well.

But by not getting that contract signed right away, before I began work, I had lost all my leverage and ability to negotiate. Back in August I could have made a deal with the owner to receive say, 40% of the net on any sales that I brought the company. There would be no risk to the owner as I would only be paid if I produced sales and the company was making a profit. Any rational person would take a deal to give $.40 to a person that gives them a $1.00.

However, by the time we finally got to negotiating my contract, I had no room to maneuver. I had already done the work that brought the company from $0 to $35,000 per month and had no power to negotiate a higher percentage commission than what I had agreed to back in August, which in the end worked out to be about 1% of the net profits on sales I brought the company.

When I left the company to go off to college in August 2002, the company had done about $700,000 in sales. On October 26, 2002, the company passed the $1 million mark. To date, the company has done approximately $1,500,000 in sales.

In August 2001 I lacked the experience to know to 1) get a contract signed right away, before any independent contracting work is done (and have it reviewed by a lawyer), and 2) negotiate so that one earns between 25% and 50% of the net profit on sales he or she brings the company. So far this has cost me about $350,000. I have learned my lesson, however. And if you are ever a marketing consultant for another company I hope you heed this advice.

What follows is a transcript of an email correspondence with Greg, a 15 year old from British Columbia, Canada who reminds me of myself at fifteen. Our initial email correspondence can be found in my article "The Mistake of Generation Y Entrepreneurs."

This set of emails illustrates some of the maxims and guidelines I had developed for working as an independent contractor with another company and structuring a deal so that you earn a percentage on each sale. Such a deal is a very good way for a young person, who knows what they are doing when it comes to web marketing, to earn quite a significant amount of money.

Greg's Initial Response to Letter in Previous Article

Ryan,

So basically, I shouldn't put all my effort into web marketing now, because my return will be very limited due to my age? Correct me if I am misunderstanding you. Also, I should take college courses in relation to web marketing/business so that when I wish to develop for myself, as in my ebiz, I would have all the know-how to really make it work? Also, to gain experience, I should do some work for people (in my community or whatever) so when I go to do it for myself, I won't make any of the mistakes that I might without that experience. Did I sum it up about how you meant it?

Greg

My Response to Greg

Greg,

Somewhat. I'd say definitely put effort into learning web marketing. But unless you really love it, do not put all your effort into it. I recommend college for the learning aspects, the formative development, and the building of contacts and relationships. If you can find an internship (or work as an independent contractor) doing web marketing go for it. The ability to use other people's money greatly reduces the learning curve. There is nothing wrong with making mistakes as long as you learn from them. Working in/with a business now will enable you to gain a lot of experience and if you see the opportunity jump on it and look for people willing to help you learn.

And yes, it will be easier when you are older. Do not let that deter you from proceeding now, however. Just make sure you get a chance to gain lots of varying experiences now and do not sacrifice these next few years in trying to make a lot of money. Invest the time in learning, developing your competitive spirit, and building relationships I'd say.

Now, if you think you'll be doing web marketing forever or do not wish to become a very wealthy person one day you may wish to disregard some of this advice.

Any thoughts on these things? It seems like I am saying things you do not want to hear.

Let me know.

Regards,
Ryan

Greg's Second Response

Not at all, my last email was just so I could be sure of what you were saying. I never thought about what you said, and now that I think about it, it makes sense completely. Good sense. I am sorry if I came across as not wanting to hear - after all, you have apparently been where I am, and I wish to learn from someone who has "been there, done that, and got the t-shirt". I appreciate you corresponding with me. I will look forward to hearing from you in the future. Also, if becoming a contractor or whatever is a good way to get experience, do you suggest that I have an hourly wage, or something like 5% of extra sales generated online, or how would I do it using other peoples money.

Sincerely,
Greg

Structuring a Percentage Deal & Using Other People's Money

Greg,

Yes, as my mom says... Been there, done than, got the t-shirt, and gave it to Oxfam (the British equivalent of Goodwill).

If you are able to get in with a company, look for a company just starting out with a good PRODUCT, not service. Work as an independent contractor (income will be reported to IRS through a 1099 at the end of the year) and ask for a contract that would provide you a small hourly wage plus a percentage of each sale that you contribute for that product (or products if more than one). If you can afford to work solely on the percentage, do it. You may not make very much money initially, but you will be earning while you are sleeping and if you do a good job, you have an unlimited upside. Before you get involved, however, do some due diligence on the company's product and make sure it is a good product that will (or is) sell(ing) well. Look for a product that customers much purchase repeatedly, not just once. Generally, look for a high quality consumer good that is unique, effective, and fulfills a need.

You can go through the Yellow Pages to look for companies in your area that may have such a product. Generally, however, the newest companies will not be in the phone book yet. I'd recommend joining the Chamber of Commerce ($50-$350) and making it known what you do, doing presentations on web marketing, writing pamphlets, and giving seminars. Print up some business cards and develop a web site for yourself. Be sure to talk to a lot of people at meetings and explain what you do. You can start out as a sole proprietor, and incorporate later if necessary. Another good way to start out is to go to local businesses and let them know you are providing computer help for say, $15/hour. This will be a great in. The key is to get started and to let the word of mouth roll from there. Of course, make sure you have enough time to do this and balance this with your schooling. As noted, in my last email, grades are important and getting into a good college is important.

Explain to the owner that they have no risk, as they will not have to pay you unless you bring in sales. BEFORE you start working, get the contract written, reviewed by a lawyer (about $100) and signed by you, your parents, and a notary (at your local bank).

Considering you have no track record, you probably will be only able to ask for about 5% of the GROSS sales revenue that comes through your efforts. Start out asking for 15% (explaining that the owner has no risk and you only earn if you bring in additional sales). You may have to negotiate from there. Understand the difference between NET sales and GROSS sales and structure a deal that places little or no risk on the owner. Make it so neither you, nor the owner has a downside, only an upside to the deal. I generally will ask for 50% of the net profit on sales I bring in, as I can show what I have done in the past. What the percentage on the gross profit is will depend on cost of goods sold and operational expenses. Be sure to have your percentage stated in gross if you expect the company may not be making a profit for a while.

You would use the owner's/company's money for advertising, purchasing software, buying courses, etc. Of course, you must be sure to get permission from the owner/company before you do. Once you prove yourself; once you show that they money spent on the things you recommend brings a positive return on investment (ROI), you should not have a problem.

Once you have your contract, use your knowledge of web marketing to produce sales. Get the web site for the company going, get a newsletter going, start a separate informational site with the main keywords in the domain itself and optimize the site for the search engines, get an affiliate program rolling, get in the CPC engines, start contacting related companies to do joint ventures, and you'll be on your way. Once the company has some cash flow, make sure they hire some good talent.

Further, if you have the opportunity to work in an established company (in a field you are interested in), you may wish to do an internship (work for free). Your pay will be the experience you gain and your ability to win a higher percentage of sales on any future commission/percentage deals you do.

- Ryan

I hope publishing these emails have been helpful, and that you now know how to structure a percentage based deal for an independent contractor going in to work on the marketing of a product. If the company has a good enough product, and you know what you are doing when it comes to marketing, you could have a very lucrative deal. Just be sure to get the contract done up front, negotiate well, and have an lawyer review your contract for you before you sign it. Further, always make sure a notary signs it and if you are under 18 (at least in the United States) ensure your parents or legal guardians also sign your contract.

The main lesson is that you should be sure you know how to structure deals, understand contracts, and get things in writing up front. No matter what you do, see if you can structure a percentage deal based on the number of sales you contribute or obtain an equity interest in the company you are working with.

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