If you work for an employer — like 93 to 97 percent of American workers — you get your pay from a salary or wage. If you work for yourself — free-lancer, contractor — your pay depends on the deal you strike with the client. That deal can take three forms:
HOURLY: You get paid for how much time you put into the work.
Advantages: You know in advance what your hourly income will be. If the job is bigger than expected, you’ll get paid more. Your rate is secure.
Drawbacks: You don’t now how much money you’ll make on the entire job, since the total number of hours is uncertain. And your rate is the upper limit on how much you can make per hour of effort. Also, your client doesn’t know how much the job will cost until it’s over, which can cause said client to balk at your bill.
When to use: Take your pay by the hour if the work is open-ended.
BY THE JOB: You get paid for results.
Advantages: You know ahead of time how much revenue you’ll receive. If the job takes less effort than expected, you’ll still receive the same amount. Your total payout is secure. Also, your client knows how much the project will cost ahead of time.
Drawbacks: You don’t know for sure what your pay rate will be, as the job could take much longer than you hoped. Worse, after expenses, you could lose money.
When to use: Take your pay by the job if you have a good idea of what your total hours and expenses are likely to be.
BY PERCENTAGE: You get paid a portion of your client’s revenue or equity.
Advantages: There’s no fixed limit on how much you can earn. If revenues — or stock value — go through the roof, so will your take-home. A lot of billionaires get started this way.
Drawbacks: You could earn nothing if the client’s business fails. Also, your equity participation can get seriously diluted, especially if you’re working for a start-up that goes for a second round of funding and renegotiates the cap table. And most start-ups don’t get very far, so don’t hold your breath.
When to use: Take your pay as a percentage of revenues and/or equity if the client’s company looks to blast off like a rocket and/or if the client is having serious cashflow problems right now but should get nicely into the black in the near future. (Bear in mind that most established businesses won’t do this kind of deal.)
…Of course, you can mix and match these pay methods to suit, taking a portion in up-front money and the rest as stock options or a piece of the company or a slice of revenues, then adding hourly consulting fees if the client has a last-minute need for extra help.
In any case, your final bill can be hell to collect. Not every person you do business with — no matter how charming — is honest. The last bill is the easiest to welch on, as they often don’t expect to need your services anymore, and they know that most small contractors will give up the chase. Also, a client may sail into tight straits, and your bill gets tossed overboard.
That said, most people on salary never get rich, and the biggest opportunities find their way to independent contractors. So go ahead, make a bid.