Why have so many entrepreneurs previously been freelancers?
Many entrepreneurs have a background as freelancers. There are no official statistics on this available, but those who have listened to most of the episodes of my podcast Techskaparna (a podcast in Swedish, which loosely translates to “tech creators”) have probably noticed that many who have been guests on the podcast have freelanced at some point. Of the tech entrepreneurs who have participated so far, half (as far as I know) have a background as freelancers. In episode 4 of Techskaparna with Ted Valentin and Jonatan Heyman, they also explicitly recommend combining freelancing and entrepreneurship. Many tech entrepreneurs have simply freelanced at some point in their careers before transitioning to being full-time entrepreneurs.
In this article, I will try to explain why this is so and outline the pros and cons of being both a freelancer and an entrepreneur. That is, freelancing before and maybe at the same time as you try to build companies, products, startups, your own projects, be an indie hacker, lifestyle entrepreneur or whatever you call it - to have and try to realize your entrepreneurial ambition.
Here I list the pros and cons of combining freelancing with entrepreneurship.
Advantages:
- Better knowledge in how to run a business, do book keeping and the like
-
Financial:
- More cost effective
- Better personal finances
- Higher SGI (sjukpenninggrundande inkomst - something we have in Sweden)
- Self-financed start-up capital
- Less dependence on venture capital
- Flexible time management
- You can customize your freelance assignments based on interest
- Fewer mental and legal barriers
- More secure
Disadvantages:
- Not everyone can freelance
- It can be more or less difficult to get assignments depending on your skills and seniority
- It may take longer time to get started with the entrepreneurial company because freelancing on the side offers security and not the same stress
- It can entail a bit of a double workload if you run two companies at the same time - your freelance consulting company (here after referred to as consulting company) and your entrepreneurial company - when it comes to, for example, bookkeeping
Financially strained
Before we get into the pros and cons in detail, I want to illustrate one of the key differences between trying to build an entrepreneurial company as a freelancer versus doing it when you're not a freelancer. In episode 18 of Techskaparna, we get to meet Johannes Midtbö from Populum, for example. He was NOT freelancing on the side, but really made a hard transition from permanent employee to full-time entrepreneur. He did not take in any venture capital, but bootstrapped (self-financed) the start of his company. He took out a loan on his apartment and worked without pay for a few years. It must have been tough especially since he was used to a, probably, really good salary from Accenture where he worked before. It's an incredibly cool and inspiring journey and I can really recommend you to listen to that episode if you haven't. I really admire Johannes and everyone else who succeeds with such an incredibly challenging start-up journey.
It is interesting to compare Johannes with, for example, episode 19 of Techskaparna and Jacob Eriksson from Boxbollen. Jacob started freelancing right after school and he earned a good salary as a freelancer. He told me that he could earn one thousand to two thousand swedish kronor an hour (like 100-200 USD an hour). In this way, he saved up a lot of money in his own consulting company at the same time as he paid himself a really good salary and started a new company - Boxbollen. He then started to freelance less and less as his other company Boxbollen grew. Finally, he stopped freelancing altogether and went 100% in on Boxbollen, but had still saved a lot of money in his own consulting company (so not Boxbollen's company, but his consulting company). Therefore, he didn't have to take out a salary from Boxbollen just yet, but paid his own salary that he had earned from previous freelance assignments from his consulting company. In this way, he was able to get started incredibly cheaply and easily with Boxbollen and gradually scale back other commitments until what he was really passionate about took off and without having to sacrifice his lifestyle financially.
These two different journeys illustrate an important point - it doesn't have to be AT ALL as financially challenging and you might not have to sacrifice as much in your lifestyle if you're trying to get a startup off the ground while still having the opportunity to freelance before and/or during. There are many other benefits as well, which we will go into in more detail, but the economy, as illustrated so clearly by the examples from Techskaparna episodes 18 and 19, is an important part. Now let's go into more of the benefits in more detail.
Benefits
Knowledge in how to run a business
As a freelancer, you usually already have a limited company running (your consulting company) when you start your new entrepreneurial company. Your first business offers freelance consulting assignments and sells your time for money, while your second might be building some more scalable product or service. You can even do it in the same company if you would like - there is nothing to prevent multiple company descriptions and several SNI codes (Swedish categorization of companies) on one and the same limited company at the Swedish Companies Registration Office (Bolagsverket, in Swedish). SNI stands for the standard for Swedish business classification and thus categorizes your company depending on its activities. In any case, the point is that freelancing thus reduces the threshold to running a business in general and, in the long run, in particular to entrepreneurship as well. It is definitely easier to start your second company or business than your first. You have learned and got started with everything from bookkeeping, running a business, invoices, VAT, costs and income and so on. You know how this works in a company even before you start your entrepreneurial company. Otherwise, it becomes a bit of a double learning curve - you have to quickly learn both how to build a product and how to start a business. If you've already started a business before, it's really less of a headache to get your entrepreneurial company to also take off, believe me.
Why two separate companies?
If you have, or are going to bring in, more partners or founders in your entrepreneurial company, it can be convenient to have a separate company for it so that you can easily distinguish it from your consulting company. However, you can still finance your entrepreneurial company from your consulting company via, for example, so-called "unconditional shareholder contributions" (as it is called in Swedish). It is extremely easy to finance costs in your entrepreneurial company via your consulting company (which you can also, via a flexible arrangement, advantageously OWN via your own consulting company, instead of owning it as a private person, but now we are going into far too many details). I'll write a separate article about that, but the point I want to make is that it's probably more convenient to have two separate companies for your two separate businesses - one for the freelance consulting assignments and one for the entrepreneurial activity.
More cost effective
When you're trying to build a business and a product, it often takes time and money to get started and get it up and running. As a permanent employee of someone else (that is, not a freelancer), you only receive one salary each month, which is taxed several times before it finally reaches your pocket. As a freelancer, on the other hand, you often earn so well that you only take a small part as salary and you keep a large part of UNTAXED RESERVES in your company. Buying something in the company, compared to doing it with your taxed private money from your salary, is estimated to be 60% cheaper. It works that way because you avoid a lot of double taxation. So the money you have left over in your consulting company, you can profitably invest in your entrepreneurial project. It's like a kind of leverage. Think for yourself how incredibly expensive it will be if you have to, with your taxed salary as a private individual, buy goods and services for your startup. You will need to finance the purchases of these right up until you start to receive an inflow of money from your customers (working capital) and break even or take in risk capital, which can be quite a long time ahead.
Better personal finances
As an individual with entrepreneurial ambitions, and if you are not super young and "starting in your parents' garage", you have costs associated with your lifestyle. Therefore, just keeping you and your co-founders afloat financially while you try to build your company can be quite an expensive story. An important milestone, which I always ask my interviewees in the Techskaparna podcast about, is "when did you get your first customer and how did it feel". Depending on your product and your setup, it may take a long time before you are able to onboard your first customer. The next milestone, which could be to be able to pay yourself a small salary and, after that, the next milestone to pay yourself an okay market-adjusted salary, is even further in the future. Your personal finances and lifestyle may have to hold back during the start-up, but may not have to hold back as much (or even at all) if you manage to combine freelancing with entrepreneurship, just like Jacob did with Boxbollen. As I pointed out in the previous paragraph, you can relatively easily and quickly accumulate untaxed reserves in your consulting company, which you can, for example, use to pay yourself a salary with.
Important financial milestones in your entrepreneurial journey could be:
- Onboarding the first paying customer
- Be able to pay (a little) salary to yourself and other co-founders
- Be able to pay yourself and any co-founders a decent market-adjusted salary
- Go break even with your expenses versus income and be cash flow positive for the first time
- Be able to bring in your first employees
- ... and so on
Higher SGI (sickness benefit qualifying income)
In addition to the fact that your personal finances may be strained in general during the start-up of your entrepreneurial company (as I pointed out in the previous paragraph), I also want to mention a purely practical factor in the whole thing. There is also a big difference between living on private and already taxed savings and living on money that you have saved in your limited company and take out as salary continuously. The Swedish government has designed it so that it is advantageous to collect wages continuously as a private individual. That lays the foundation for your so-called SGI - sickness benefit qualifying income. If you are permanently employed at someone else's company and resign, and do not have your own company from which you can draw a salary while you try to start up your entrepreneurial company, you have to live on your saved money, which is therefore not paid out as a salary. You can portion them out from your savings account every month or as needed, which Johannes who was in episode 18 of the podcast, probably did.
That arrangement probably works well, but it would have been more advantageous to be able to withdraw the savings as salary instead via your own company. Then you get the benefits provided by the salary structure and postpone paying tax on the money and also optimize the tax you have to pay on the money as well. Both the state and private companies would like to see a continuous salary and therefore the state has constructed it in this way. With the same amount of money, you pay less tax on a lower salary over a longer period of time than on a higher one over a shorter period of time, quite simply. If you are going to apply for a loan (mortgage, private loan or similar) somewhere as a private person, the first thing they check is whether you have a stable salary and employment. If you are to receive a state pension, compensation in case of long-term illness or parental leave, the governmental institution in Sweden (called Försäkringskassan) checks whether you have drawn a salary and otherwise your compensation will be very low. In many ways, it is thus more advantageous to have a savings buffer in a company that you can take out as a salary than to live on private savings, if you have the opportunity to do so.
Some advantages of being able to withdraw your saved money as salary from a company instead of from a private savings account:
- Purely in terms of tax optimization
- If you are going to apply for a loan in the near term (they can ask for your salary statement as far back as one or even two years in your application)
-
You get (applicable in Sweden):
- Higher state pension
- Higher compensation in case of long-term illness
- Higher compensation during parental leave
- ... and more
Self-financed start-up capital
When it comes to start-up capital, you first need SEK 25,000 in share capital to start up a limited company in Sweden. Then you may also need to buy products and services for the company in order to be able to build your own product (that is, financing your start-up). Because before you can dream of being able to TAKE SOMETHING OUT of your company, you usually need to PUT IN quite a lot. Money that covers your possible development costs, marketing, different types of input materials, buying computers and domains and more. All that probably needs to be paid for before the first customer, and consequently the first income, comes into the company. If you save money in your consulting company at the same time you are freelancing, you can use it both as a salary and to finance your start-up capital for your entrepreneurial company.
Less dependence on venture capital
One approach to finance your entrepreneurial journey is to try to bring in venture capital. An important point I am trying to convey is that taking in risk capital is not a must and that it also works great without it. The easiest way to succeed in starting and getting your entrepreneurial company off the ground without venture capital is probably to do it by freelancing at the same time. In addition - the earlier you take in risk capital, the larger share of your future company you will have to be willing to give up. The reason why this is so is because your company's valuation will probably (and ideally) increase as you progress further in building your business. The investors see you as a greater risk the earlier in the journey it is and thus want a premium for that in the form of more shares of the company. The later and the further you have come, before you possibly bring in investors, the more of the pie you get to keep for yourself, which is still an extremely important aspect and motivation for an entrepreneur - to get to own a large share, or preferably 100% , of their own creation. I think you should have some kind of proof of concept before you invest your own money and even more so before you ask someone else to invest their money as well. However, getting proof of concept can take time and cost money.
In addition, it can of course be difficult to raise risk capital, and not least in these times of economic uncertainty. Many aspiring entrepreneurs spend more time looking for money than building their product, which I personally think is a bit unfortunate and counterproductive. "Seeking money" has almost become a sport in itself and in some companies maybe a new co-partner's main task, instead of building the company and contributing purely productively, but that's my opinion. Many aspiring entrepreneurial companies become completely dependent on venture capital and may never have formulated a reasonable plan for how they are going to make money at all. However, a company's main task is to make money, I believe. That may sound obvious, but has been quite controversial lately due to the financial boom and a seemingly never ending supply of money during a longer period of time. A funny anecdote on that theme from when we launched our company Flowby (which is a digital queuing system) two years ago is that we almost had more investors than customers who contacted us. That might be a sign of an abundance of venture capital in the market. However, we chose the self-funded path and the path as "lifestyle entrepreneurs", which may be the exact opposite of the venture capital chasers we see in Silicon Valley and as illustrated for example in the series "Snabba cash" (a Swedish TV series called ‘fast cash’) and in general in the media. If I sum it up like this: personally, I like building products and hate making Powerpoints. In the pursuit of "the perfect pitch deck," aspiring entrepreneurs can lose both themselves and the focus on their product in the seeking of capital. Anyway, if you have built up a financial buffer in your consulting company instead, you don't have to expose yourself to this circus or rely on other people's money early on or even at all, which is a positive aspect of freelancing on the road to realizing your entrepreneurial dreams.
Flexible time management
In addition to the more financial aspects that I have mentioned up until now, I would also like to mention time planning. Because just like Jacob, with freelance assignments, you can cut down on the time you spend on the assignment to a large extent yourself. Personally, I take on freelance assignments in periods. I often do a full-time freelance assignment for six months, then take six months off and focus on building my own products. Jacob, however, gradually scaled back the freelance assignment, which is of course also doable - you choose! The point is that as a permanent employee it is often an ON/OFF button and you are expected to stay much longer on the job and have a longer notice period than on the freelance assignment. It is simply less smooth. If I need money, I will take on a short freelance or speaking engagement. It's difficult as a private person and if you don't have your own company you can't even invoice for your possible services or know how to. Freelancing provides the opportunity for a flexible work rate that you don't have otherwise.
Benefits of time management when combining freelancing with entrepreneurship:
- You can plan your time to a greater extent yourself and if you need money, you can take on a shorter assignment
- You can scale back on the freelance assignment gradually or take on assignments in periods
- It is faster to end a freelance assignment than an employment (shorter notice period)
- ... and more
You can customize assignments according to interest
On the topic of running a business, I would also like to mention that in addition to learning it in general, there are also several freelancers that I have heard of who choose to take on assignments at companies they are interested in and where they learn more about how to build similar products. For example, a B2B SaaS company (ie a company that sells services to other companies through a subscription service). The freelancer takes on an assignment at such a company because that person is interested in exactly how that business works and may want to build their own B2B SaaS company. So this is also a positive aspect which freelancing makes possible, but which is all the more difficult to succeed with as employed - to adapt the assignment/job to your interest.
Fewer mental and legal barriers
Last, but not least, I also want to mention your possible mental obstacles (or so-called brain ghosts) that increase the perceived thresholds you have to start up your entrepreneurial company. In addition to the mental ones, we also have possible legal obstacles for you as a permanent employee as well. Many employers do not want to see that you start a company in parallel with your employment, while it does not affect you as a freelancer (or your client has nothing to say when it comes to that matter and many other things). I have spoken to many permanent employees who do not dare to tell their employer that they are trying to start an entrepreneurial company in parallel. Employment contracts also often contain non-competition clauses that can in various ways prevent you from starting your entrepreneurial company and running it at the same time as you are employed by another company. Even if it does not prevent you legally, you may experience an uncertainty as a result of the mere existence of the non-competition clause, which can become as big of an obstacle either way. This is super sad, but I'll also have to mention that there is actually also a right in Sweden, that not many people know about, that protects the individual in this regard, and that is that you as a permanent employee have the RIGHT to "take full time off from your work for at most six months in order to conduct business activities by yourself or through a legal entity. However, the employee's activities may not compete with employer’s business.", as it says.
You can therefore take unpaid leave from your employment to work in your own company. Regardless of whether you do it or not, it is inevitable that the employer may see it as a bit of a betrayal - after all, they want you, if you do a good job, to stay as long as possible and try to climb in their company instead. Many people I've spoken to say they almost feel a little unfaithful and have to hide their entrepreneurial ambitions because they also want to keep their career options open if the entrepreneurship does not go as planned. The good thing about freelancing is that there are no such worries at all - you have already renounced the so-called "climbing the corporate career ladder" path. There is no such concept in freelancing and no boss you have to keep happy - you are your own boss! There is only money in and money out and deliveries of products and services. Your mental attitude and your thinking, as a freelancer, immediately becomes more transactional and you look soberly at what work, business and the exchange of goods and services really are. You have a kind of entrepreneurial understanding - understanding of business, something that you are shielded from and not exposed to as an employee. In short, your mental and legal barriers will be easier, or even vanish completely, if you are a freelancer when trying to start your entrepreneurial company than if you were employed by somebody else.
More secure
While we're still talking about mental barriers, I should also mention security. As we all know, on the one hand it can feel less secure to start an entrepreneurial company and on the other hand it can feel super safe to hold a permanent employment. Freelancing, however, is something in between. It can feel less secure than being employed by someone else (at least initially, although I argue that it is more secure in the long term than permanent employment, but if we're only talking about feelings and in the beginning) freelancing can feel less secure than an employment, but at the same time I dare to promise that it probably feels more secure than just running an entrepreneurial company. How much one values the feeling of security varies from individual to individual and some may think it is very important. For me personally, who is extremely risk-averse, this argument has not mattered, but for many others it might. If you want a soft start and a feeling of a semi-secure setup between your super secure permanent employment and until you manage to get your entrepreneurial company off the ground, then freelancing is clearly something for you.
Disadvantages
In the article so far I've covered the benefits, but of course there are negative aspects of trying to combine freelancing with realizing one's entrepreneurial ambitions as well.
Disadvantages:
- Not everyone can freelance
- It can be more or less difficult to get assignments depending on your skills and seniority
- It may take longer time to get started with the entrepreneurial company because freelancing on the side offers security and not the same stress
- It can entail a bit of a double workload if you run two companies at the same time - your freelance consulting company (here after referred to as consulting company) and your entrepreneurial company - when it comes to, for example, bookkeeping
Not everyone can freelance. It depends on supply and demand and how attractive your skills are on the labor market - both in terms of quality (concrete knowledge) and quantity (how long you've been doing it). If there is a high demand and a small supply, there can usually be freelance assignments and the most common is to freelance in tech and as a developer. Other negative aspects of freelancing are also that it is safe, so you may not feel the same knife to the throat with getting started with your entrepreneurial company. That stress can be double-edged to the extent that it can be positive for the development of the company, but perhaps negative for your health. So freelancing at the same time can definitely slow down the progress of the entrepreneurial company a bit. In addition to that, it can be a negative factor with the workload that it entails having two companies up and running at the same time. Particularly if you do all your bookkeeping yourself, it will of course be more work with two compared to one company.
In conclusion
In conclusion, I believe that the positive aspects outweigh the negatives and that it is a fantastic opportunity to combine freelancing with entrepreneurship and that more people should take advantage of this. Freelance only needs to differ in the mere setup between employment as a consultant and self-employment - you invoice yourself from your own company instead of having someone else paying you a monthly salary from theirs, but it can also be a segway to realizing your entrepreneurial ambitions for all the reasons I have mentioned in this article. That's probably why so many entrepreneurs have been freelancers in the past - precisely because of all the advantages I've mentioned. It's perfectly fine NOT to choose the freelance route as well, but I just want to illustrate that it exists and explain why so many choose to take it. Then it's completely up to you. Many who listen to my podcast have, like myself, entrepreneurial ambitions or are curious about the entrepreneurial life and therefore I wanted to go deep and explain the freelance setup once and for all. If you are curious about the freelance path, I can recommend you to read my article The freelancer's guide - how to become a freelancer in 17 steps and sign up for a pre-order of my upcoming book (which will be published in both Swedish and English).
Good luck with all your projects and ambitions out there regardless of which way you choose to go and if you have any questions you can ask them in my forum - Entrepreneurship, Freelance and Tech - there I will answer everything and you can write in both English and Swedish. Don't forget to subscribe to the Techskaparna podcast and, where possible, rate it too. It is available where podcasts live. Please give me feedback and tell me what other articles and podcast episodes you would like to see me create. Thank you for reading this article!
Here is also a podcast episode I made on this topic in Swedish: Techskaparna episode 23 - SPECIAL - Freelancing, business and entrepreneurship
If you have feedback or input, please email me at anna@annaleijon.com
/Anna Leijon
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