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Friday, October 26, 2007

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Rainey Paderborn

The theory does make a lot of sense, because it's that way irl too. At least in the field production for adverts and corporate videos.

Irl clients take 30/60/90 days to pay the agencies, which have their own internal red tape that needs to be followed before the contracts (aka suppliers) can be paid. I'm not suprised that the best content creators feel the way they do, because in world they get paid immediately. And maybe they don't have the rl experience of dealing with corporate clients.

Imho, a contract between the two parties in which all the terms are spelled out would be best. Since L$ can be exchanged for USD$, a contract would protect everyone--except if you don't want the IRS to know about SL income...

Tenshi Vielle

"Trouble is, if payments come late or not at all, the irked Resident tells his colleagues, and the real world marketing company or metaverse developer who hired them suddenly find themselves unable to find qualified talent. "

Well gee golly, don't you think they should fork up the cash, then?

Dusan Writer

As a someone who has hired within SL, the process of managing the relationship is so different from "RL" process that it takes a keen understanding of the in world culture to figure it all out. I can understand companies having trouble, especially if the in world talent prefers to remain anonymous (how often is this happening, I wonder, for RL contracts? My suspicion is more rather than less).

While most businesses would never want to hire some anonymous contractor from who knows where, in SL it's standard practice to not push someone for RL information (and against the TOS - could I be banned if someone I press someone I want to hire for RL info)?

I suppose what I'm saying is that the business process is different. Not THAT much different from RL - contractors and freelancers generally understand that paperwork is needed, formal invoices, tax numbers sometimes, and back-up. They also understand that payments are often based on the billing cycles with the end clients.

My experience in SL has been that the issue of anonymity, using a platform where contractors may be from entirely different jurisdictions, combined with the fact that some talent has little RL experience in the sub-contracting field puts the onus on everyone to realize that extra levels of communication are needed - much like other things in SL.

For the person doing the hiring, or for me at least, it has meant setting up an entirely separate accounting structure based on advice from an accountant who looked at me, at first, with total bafflement when I asked him when a Linden becomes a dollar - if I transfer $10,000 USDs INTO SL is THAT the expense, or is it the expense "in world"? In any case, I needed to align the finance folks to understanding that we would be paying from a virtual currency stockpile - hardly an easy thing for them to wrap their heads around.

Also for the person doing the hiring it means a certain sensitivity to the SL culture. My suspicion, again, is that like many of the failures of transition from RL to SL, companies don't take the time to get to understand what communication protocols work - they think RL processes can just be grafted into a space where concepts of identity, trust, and reputation are treated far differently than other venues.

So - lack of understanding that communication is different, need to graft strange "virtual" accounting onto RL procedures, and lack of understanding of some SL talent (because this might be their first time being a "freelancer") of what it sometimes takes to get paid and that this is simply part of doing business (read any book on how to survive as a freelancer and the general rule is - don't get pissed off, protect yourself, and accept the ebbs and flows as part of doing business).

Elle Pollack

Rainey, if you're at the point where you're taking substantial (US tax law says anything over $600) payments from RL sources, you should a: be taking it in RL money and b: paying taxes on it. That means quarterly "estimated tax" payments plus the "self employment tax" (equivilant to the social security tax on regular wages), less decutions for business expenses (you can deduct the full amount of things like computer hardware and software, your internet bill, SL subscription, etc.) It's a pain in the neck, but way less painful than being fined (or worse) by the IRS. (Obligitory disclaimer: IANAL or tex expert, yadda yadda, grains of salt, you know the drill. I'm still learning all this myself.)

Gwyneth Llewelyn

Speaking from the Dark Side (i.e. the Bad Companies Out There), I sadly only have condescending comments and remarks to make. My apologies for "preaching"...

In any "brand new market", entrepreneurs are as "early adopters" as consumers. New company models arise spontaneously. The early Internet startups in the mid-1990s all of the sudden started replacing written letters with emails, and touting it as a "revolution in communication". Entering business with a whole new set of tools, ideas, models, and corporate culture is a daunting task, one prone to high levels of risk, and not necessarily "easy".

One can estimate that about two thousand Metaverse Development Companies have "started from scratch" doing business — RL business, that is — in Second Life. Many are innovating their corporate culture, replacing meatspace meetings with in-world coordination of their teams. We're not replacing paper with digital contracts — we rely on honour-bound systems backed up by chat logs. We replace payments using paper-based checks with international money transfers, PayPal, and — why not? — Linden dollars.

All these are "hip and cool", but they also present a huge challenge to corporate accounting. Still, it's not impossible to deal with those — if you have enough business experience.

The problem often is that people do not, in fact, have that business experience — and more often than not, their experience comes from unrelated business areas. A freelancer that has worked for ten years selling consultancy, programming, or graphical design does not have any solid "business experience" when dealing with the megacorps of the Fortune 500. Sure, some things are similar — but most are not. The hugest difference is that customers, well, do really take ages in paying.

When working "on your own" or on a small team, doing jobs for a few hundred US dollars, a "payment delay" comes once in a while, and you prepare for it — it's easy and you don't need to rely on your accounting to predict the cashflow. One payment more or less every month — that's something you can deal with, so long as it doesn't get out of hand.

Dealing with customers that won't pay tens of thousands of US dollars for several months is a completely different story. Specially if all your customers are used to work that way (mind you, most ar — although not all). Juggling between fast-payers (who might only hire you for little money) and long-term payers (who will demand an insanely huge amount of work, but make you wait half a year on payment) is something that the typical 1-2 person startup is not prepared to deal with. They're used to do their work, and get a payment "quickly" afterwards. If the Fortune 500 does not pay immediately, are they crooks?

Hardly. Things are just different at that level. It takes a solid grasp on doing business with those guys, having financial leverage (translation: a good standing with your bank), and preparing for eventualities all the time. Still, it's not easy. The first lesson I learned from the first start-up I created over a decade ago is that "revenue is not cash flow" — and companies are ruined by a lack of cash flow, not by a lack of customers or a lack of revenues.

This mostly means that you have to take into account that you'll have to pay your whole workforce out of your pocket for several months (even years!) when transacting in business deals with the megacorps. It also means a long-term commitment to working in SL — you can't simply think on the short term, the next couple of months, and round up your money after that and buy a new home or a nice car. You have to plan ahead for 2-3 years — taking into account that during that whole period you'll have huge costs that you'll need to pay out of your pocket until your customers' check finally arrives. It also means that your own employees or outsourced workforce will be, on average, making 5 to 10 times as much as you are — since they will require immediate payment or move out and work on their own or work for another company that has a faster turnaround time for payments.

Dealing with all of that requires, first and foremost, business experience. If you're lucky enough to get some VC funding or a solid partner that puts the money up front, you'll be much better off. For the most part of us, however, these are just wishful thinking and day-dreaming: you need to cover the risks of long-term payment from your own company, and most often, from your own pocket. For a long time. Until it pays off. If ever. That's your risk!

Becoming "your own boss", like so many business management books say, does not mean "freedom" (in the sense that you can do whatever you please). A lot of people "own" you — starting with your bank, then your workforce (who relies on you to get them paid!), your customers, your shareholders (if any), and a lot of other entities (like the IRS) who will be hawking at you constantly. Like the old saying goes, There Ain't No Such Thing As a Free Lunch. Running your own company will give you more ulcers than pleasure and "freedom" :)

However, given enough experience — and this sadly also means: having gone through companies that went bankrupt or failed, so that you learn (the hard way!) why things don't work — all these will be "part of the daily business" and you'll start get used to it. And prepare in advance for the vicissitudes of business.

I can give you a good example on how things can fail thoroughly even in spite of having thought everything in advance. In our company, we relied on PayPal to make payments very quickly. In some cases, workers would get paid just minutes after the invoice reached us. That made everybody happy, in spite of the high PayPal fees (you trade off a faster payment turnaround for higher rates). But then the unexpected happened: you hit PayPal's limits. And PayPal has more limitations than, say, LSL. They start demanding documentation like crazy. They discard credit cards. They work differently in Europe (no way to "upload" money to PayPal via your bank account) than in the US. In fact, PayPal is the only company I've ever worked with that starts to get nasty with their customers when they use it too much. They seem to prefer having millions of low-payment customers that thousands of customers doing routine transfers of several thousands of US$ per month.

All of a sudden, the payment workflow grounded to a halt. Money was spread around a few bank accounts, but it wasn't possible to get it into PayPal. People waited and waited for us to fix things — but PayPal does not have any customer support (since then, I found out that their European customer support is slightly better than the US-based one, at least they answer emails...), so you're on your own. Complaining louder just means your account can be cancelled at any time. Like Linden Lab, PayPal has a ToS allowing them to close any account at will, no questions asked, and keep your money "in escrow" (more often than not, keeping it forever). Sure, most people will never encounter any problems with PayPal, since they transact small amounts of money per month. As a company, however, you're doomed.

That was a terribly bad business decision. In exchange for half a year of fast payments and happy workers who got immediately paid, we got from PayPal six months of a thorough nightmare where we had no way to pay people — although we had the money to pay them. The levels of despair and frustration rose as we figured out alternative methods of payment, and ultimately had to completely remodel the whole way the company operates just to be able to make payments faster!

Half a year after PayPal almost ruined our reputation with our workforce, the lesson we took was simple: no matter how well you plan ahead, working with new, unproven technologies, where you have no experience on how well they behave "in the real world", is too risky — and people will suffer for that.

Today, all we could hope was some understanding from the faithful ones that understood the issues (either because they trust us, or because they have gone through some horrible nightmares with PayPal and had the same problems happening to them), and that a better payment model will lead to much less waiting (a few days instead of several weeks), at the cost of small inconveniences.

Still, there are lessons to be learned all the time, and some are solid business practices that anyone should implement very quickly at the beginning. Sitting down with your accountants and explain your business model is the first one; you'll quickly see that the hours spent with them will be worth the trouble. Implementing adamant measures in the way people invoice you is important — remember, people want to get paid, and they're willing to do the invoicing properly if you tell them in advance what documentation they have to provide you. Being open and transparent with your workforce — an old cliché — is always a plus. There are always several legal ways of dealing with invoicing and payment, and, yes, a clever accountant will even sort things out if you are doing payments in L$ to people that wish to remain anonymous. We might get taxed directly by our revenue services on L$ transactions some day, but instead of figuring methods of evading taxes, it pays off to incorporate the "unusual" aspects of SL transactions into your company's accounting model before things start becoming seriously wrong. And it's definitely possible to do so. Yes, even emails and notecards can, ultimately, be used as "proof of work" — if you do things right. But "doing them right" is a challenge for the aspiring entrepreneur that has just created their first company in RL...

More interesting reading on Daniel Terdiman's new book on Entrepreneurs in SL: http://www.vgvc.net/?p=56

Aaron

There is no good excuse for not paying contractors on time. For companies that have outside funding, it seems that this should be easy to do. For smaller startups with insufficient cash reserves, one solution is to calculate contractor costs for the project and *insist* that the client pay this amount up front before work begins. Of course, this is easier said than done. And it means that one has to be willing to walk away from potentially huge projects with the knowledge that a more well-funded competitor will pick up the work.

But there are plenty of jobs out there. This strategy might mean that one does not grow big fast enough to grab for the gold VC ring. However, in the long run it seems like the only way to grow a business while retaining the respect and loyalty of the contractors with whom you work.

Eggy Lippmann

Aaron, that's very nice and idealistic but you do not have the bargaining power to overturn established procedures. My gf's college takes 10 months to pay for anything. It is fairly common for large corporations and governmental institutions to take several months to pay the "upfront fee" ;)

Asp Grelling

The terms of contract are binding on both sides and late payments are breach of contract. Companies must sort out their payment and invoicing procedures before placing an order or be sure that the terms can be met. They should have methods for receiving and processing invoices and making payments. Stated simply, if a company does not have procedures for business in SL then they are not ready for SL.
Word travels quickly in SL and a bad reference has many times the impact of a good reference.
There is plenty of work from companies who will do full payment or 50% of payment up front and who have a track record of paying on time. As Lordfly pointed out why deal with someone who has a reputation for late payment when there is plenty of work in SL.

Aaron

Eggy: Well, I said it was easier said than done. :)

Not sure if "idealistic" is the right word, but your point is well taken. Some organizations are willing to pay part of the development costs up front, and many (perhaps even most) are not. However, I've talked with colleagues in related industries (e.g. web development, custom software development), and they agree that it is possible to secure partial payment up front. They also testify that it requires testicles/ovaries of steel to insist on up-front payment when it means possibly losing the project, but they claim that it can be done.

Personally, I'm still trying to figure all of this out, and am not claiming any moral high ground. Anyone who says it's "easy," probably hasn't tried to launch their own business. This is a common problem with start-ups, and one of the many harsh economic-reality lessons that accompany entrepreneurship. (The trick is making sure that the contractors don't have to take the hit for the lessons learned by the entrepreneur.)

Ultimately, if the client is not willing to pay the money up front and the organization lacks the liquid capital to fund the contractors, it is irresponsible of the agency to shift financial pain onto the shoulder of the contractors without warning them up front. At the very least, it seems that the agency should explain the situation to contractors at the outset, and arrange some sort of compensation strategy to make up for delayed payments. (And, yes, *that* is idealistic but it also seems ethical.)

One colleague recommended the use of invoice factoring to fund contractors. Does anyone on this thread have experience with such an approach?

Gwyneth Llewelyn

Aaron, you have good business ethics, by all means. What you describe is definitely what should be the "ideal" business world, and one that all businesses should strive to reach.

In the real world (and yes, SL is "as real" a marketplace as, say, the web) the pure and simple fact is that companies are quite reluctant to part with their money. Every contract is a risk. If you're not willing to accept that risk, stay out of the business.

Breaking up payments in several invoices is often a compromise. Alas, some customers will never go for it. One of my partners was utterly shocked when I once suggested to a Fortune 500 company to charge them setup fees. This is deemed "offensive"; like saying in their faces that you don't trust them (granted, they take over 2 months to pay). It's just "not done".

Remember, as Eggy said, that the "customer is always right" — this means that the work (and the payment thereof) will be done under their terms, most of the time. They have, after all, more to lose. The contractor only loses money and time; the customer might lose the whole chance, the window of opportunity, of being in Second Life "at the right time", and going over the mess of contracting someone else. In many cases, this means that SL, overall, as a marketplace for RL companies, becomes less attractive. Strangely enough, all metaverse development companies are indirectly responsible to handle the market with great care, since if they get too many disgruntled customers, they will tell their own partners that SL is not mature for business. One happy customer will tell about their experience to five others. One unhappy one will tell at least fifty!

The Web and software development markets are pretty mature, and they're indeed used to demand upfront payment for their work. There is also plenty of competition, and billions of customers. Overall this means that as a customer, you can shop for a company that doesn't require an upfront payment; as a company offering web/development services, a customer that refuses to pay upfront is very likely going to be a hard case anyway. Better to lose it and focus on the next contract. Doing business in Second Life, however, is a very immature market. Customers don't know what to expect. Almost all of them will be dealing with contractors the first time in their lives. They will be way more careful and mistrustful — even if they have an open mind to be in SL in the first place! Can you blame them? I totally understand them. The truth is that we still don't know what happens in 2010 — but we know that the Web will be around by 2010, and there will still be computers in 2010 requiring software applications. We can even roughly predict that the same will apply to 2020. But Second Life? Well, it's totally unknown. So, a careful approach to making business with content creators is definitely pretty reasonable.

As the business relationship develops, you might be able to negotiate better terms of payment. But don't count too much on it; instead, prepare always for the worst.

Suing for damages is often more expensive (besides the bad press) than simply dropping the issue, swallow your pride, and go to the next customer, hoping that one is a bit more honest. Customers know this very well, and that's their leverage they'll have on the contractors.

Factoring is only a choice when you're dealing with a revenue stream of millions per month. Most banks charge such a premium for low-level transactions (ie. dozens of thousands of dollars per month) that even they will refuse to sign an invoice factoring agreement. My experience is that banks will flatly refuse.

Last but not least, nothing of the above should be the worry of the teams working for you. They should be completely shielded from the difficulties of doing business in SL. In fact, many of them prefer to work with the MDCs exactly because of that — they provide the equivalent of "factoring" for their work, as a matter of fact (besides dealing with all the non-creative, administrative, and boring issues). Openness is important — ie. giving advance notice that the customer is delaying payment *again* — but I would tend to believe that more important than that is actually paying them in a reasonable time frame without any excuses.

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