How to Structure Deals with Freelancers

July 11th, 2017

structure freelance engagements

By Michael Solomon, 10x Management Co-Founder

As architects of freelance engagements on behalf of our clients and customers, we at 10x Management have made a list to help you distinguish between the good and the great setup for your company.

Look at More Than Budget

Good engagements are set up by reviewing a candidate’s rates and choosing the best fit.

Great engagements are set up by performing preliminary research on a number of candidates and weighing them given their skills, experience and references.

Knowing someone’s hourly rate vs someone else’s give you absolutely no useful comparative information without knowing the output from the time spent. Someone who charges $200 per hour is the same as someone who charges $100/hour if they work twice as fast.

The ability to innovate working solutions can require a level of vision, creativity and skill that may not be possible by cheaper candidates, no matter how long they work.

Here is a summary of the typical payment models:

Fixed Bid: Great if you have a clear project scope and the project is unlikely to change.

Pro: Better visibility of costs up-front.

Con: Problems may arise if the project scope is not properly defined and things change.

Time-Based Compensation (Hourly, Daily, retainer, etc.): Great if the project scope is not clearly defined and you foresee changes with the project as it gets underway.

Pros: Forces you to be diligent in defining the work; requires being judicious in your review process; makes the project scope more flexible.

Cons: Tracking hours; if the scope is not clear, hours can run up.

Deferred Compensation: Great if cashflow is a problem but funding is imminent; will align worker’s incentives with completing the project.

Pro: less cash up front.

Con: pay more for a risk premium to entice freelancer to commit.

Equity: Will align worker’s incentive with long-term success of company; instills loyalty; engages the worker as an investor.

Pros: Less cash up front; aligns freelancer’s incentives with company success.

Cons: Pay more as a risk premium to entice freelancer’s commitment; issue more stock.

Set Clear Expectations

Good engagements are set up so that general expectations are dictated from the start.

Great engagements provide a very clear scope of work with a precise account of what will be accomplished in terms of deliverables: specifically defined submissions of work for a definite price and duration.

A deliverable can be anything distinctly recognizable as work: a piece of code, report, app, flowchart, document, server upgrade, brand name, brief, strategy outline, design spec, wireframe, or any other building block of a project.

The Difference Between Good and Great

In setting up a freelance engagement, specificity is massively important. Great engagements include – in writing – the expected frequency of communication and a proposal of exactly what will be delivered, how, and when.

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