5 things to do before quitting your day job

By Susan Schreter

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Are you thinking about starting a great new Web service, an adult day-care business, or a restaurant? Do you have an idea for a product that you want to develop into a successful enterprise?

If so, you are one of an estimated 10 million Americans who know exactly what they want to accomplish as entrepreneurs but haven't yet waved goodbye to the security of a steady paycheck.

What are you waiting for? After all, entrepreneurship offers creative freedom, work-life flexibility, and decision-making control. Even better, small-business owners statistically make more money and enjoy net worths that are three times their salaried counterparts. Talk about a winning career move!

All of these rewards, of course, are possible if startup entrepreneurs can make it to the point when they have enough customers to draw a salary—plus pay all monthly business expenses before running out of personal savings. This beat-the-clock challenge can overwhelm just about anyone.

Diving into an empty pool

A few years ago a woman called me who was about to abandon her startup consulting business. She had an MBA from a distinguished school, a high-powered executive level resume, and corporate contacts throughout North America and Europe.

Her big startup mistake was she "dove into an empty pool." She left her salaried position only with a vague notion of her business goals. She didn't leave her job to "start a business," she left her job to "research the viability of a business." See the important difference? During her first months in business she spent a lot of time trying out various service ideas that gained no traction with customers. And with each passing month, her savings and confidence dropped at a rapid rate.

By the time she figured out her plan she was in trouble. Not only had she squandered her time and savings, but her only business-salvaging choice was to raise capital from investors at a high cost. This is why so many startup businesses fold early: They start from a point of weakness.

From the moment entrepreneurs leave salaried positions, they are sitting on a fast melting ice block. Smart, risk-adverse entrepreneurs complete as many time-consuming administration and research projects as possible before cutting off the paycheck.

Here are five often overlooked ideas:

1. Select a smart business name that doesn’t violate existing trademarks.   I wince each time I hear startup entrepreneurs say they can't call on customers until they get their business and domain names, logos, Web sites, and marketing materials in place. (Can you hear the drip, drip, drip of the melting ice block?) Good name selection should involve a search for trademark conflicts. Entrepreneurs can limit their exposure by visiting the U.S. Trademark Electronic Search System, also known as “TESS.” All searches are free.
2. Get your financial house in order.   It is said that the best time to apply for credit is when you don't need it. Entrepreneurs tend to get a better deal if they tap the equity in their home or apply to increase credit card spending limits before they leave a salaried job. Also, pre-startup is the right time to improve poor credit ratings that will increase the costs of small business loans, equipment leases, credit card processing services for e-commerce operations, and more. Do it now!
3. Organize your company structure.   Will your startup be set up as a sole proprietorship, a limited liability company, a partnership, an S-corporation or a C-corporation? This is a fundamental question that, among other considerations, determines the taxes entrepreneurs will pay on business profits and personal income. Here's one time-saving hint for non-real estate-oriented businesses that are destined to raise money from investors. Skip the comparative research and organize as a C-corporation. (See this article for more information on business structures.)
4. Research health insurance.   Before you quit your job, revisit your employer's benefits literature. Under federal law, if you work for a company with more than 20 employees you may be able to stay in your company's health insurance plan for 18 months, provided you pay the entire cost of coverage. Is this a better deal than buying an independent policy? You need to know in order to prepare realistic business projections.
5. Consider tactical employment.   Would you rather learn about costly business problems on someone else's dime or would you rather experience the pain all by yourself? One way to avoid startup mistakes is to find what I call "tactical employment." These are temporary, part-time, or full-time jobs to improve tactical expertise.

   Here's an example. I was contacted by a lawyer who had a fast-food concept that he wanted to franchise. At first, he laughed at me when I suggested he work at a local McDonald's on weekends to get a real world understanding of the operations of a successful restaurant chain. After six months of burger flipping and on-the-job training, he rolled out an exceptional, knowledge-based business plan that impressed investors. Tactical employment can also help post-startup entrepreneurs earn some interim money and benefits while pushing their young companies to cash-flow break-even.

Are there any risks to moonlighting? Yes. Entrepreneurs who intend to compete with their current employers or develop potentially patentable technologies should understand their legal risks. In addition, moonlighting entrepreneurs should work at their business on their own time and completely off employer premises. Good things always come to entrepreneurs who make their start with integrity.

About the author   Susan Schreter is a Seattle-area investment banker and venture-funding expert serving startup entrepreneurs and fast-growth company executives. She also teaches business financing and entrepreneurship at business schools, angel forums, and microfinance organizations in the United States and internationally. Write to Susan at susan@takecommand.org.