The employer generally gets the employees he deserves.
—Sir Walter Raleigh1
Founders may give birth to a company, but rarely can they scale it to any significant size by their efforts alone. Almost directly after the actual launch, if not before, you will need to start bringing in additional people to make things happen in a timely fashion. For most companies the cost of people looms as one of the largest—second only to the cost of goods sold—and in many companies it is the biggest. Remembering that people drive success, you will find that building out your team beyond the founders is one of the most important things you can do for the company’s future. In this chapter we will discuss how to decide about what you need, where to find those people, and how to interview and hire them. Whole books have been written on this subject. With only a chapter, the best we can do is provide a framework, define the key questions, and suggest resources to fill the gaps.
You can’t hide a mediocre player in a start-up. In the cash-limited start-up environment, each person adds significant cost, and so everyone has to contribute. In thinking about adding people, never take on costs you don’t need, especially recurring fixed costs. Remember: companies fail when they run out of cash. Although raising a lot of money is an obvious solution, it’s seldom a realistic option. Further, this may seem counterintuitive, but many investors believe that a company launching with as little money as possible actually has a higher chance of succeeding than one with cash to burn. The cash-limited company has to be careful about who it hires and what they will be doing. It can’t assume money will solve its problems, and so it has to learn to do a lot with a little. Therefore, the first question to ask any time you consider hiring is, “Do we really need to incur this cost?” Of course, don’t be so careful that you hinder growth. It’s tempting to try to do too much with a little only to find that little actually gets done. Like everything in business, hiring is a judgment call based on messy, incomplete, and incoherent information. You can’t wait around for perfect clarity or direction. In the end, only action makes a difference. Bring in outside help but only when you absolutely need it, not when you just want it.
The employer-employee relationship is governed by a host of laws and regulations that will influence your operations management and generate future obligations for the company. In short, hiring someone as an employee means taking on serious long-term obligations. It also means making a commitment to a full person when often there may not be a full person’s worth of work to do in that function in an average week. Also, there are many support functions in a small company that don’t need to be performed in-house at all: bookkeeping, legal, auditing, payroll, and benefits administration, for example.
Fortunately, you don’t have to give up your flexibility and assume the risks and burdens of full-time employees to get the people-based resources you need. For work that should be done in-house, you can retain someone as a consultant or independent contractor to maintain flexibility and limit long-term commitments.
Independent contractor arrangements are bounded rather than open-ended. Usually the company determines the hours needed. There are no benefits to administer. The terms of the contract rather than the legal regulations that come with an employment relationship govern the company-contractor relationship. This increases your flexibility dramatically because you can negotiate the terms to meet your needs. When you create the contract, you should always include a provision giving you the option to terminate the contract at any time with a reasonable period of notice. This maintains your flexibility in the future so that you can react to changes in circumstances or people needs. Finally, a contracting arrangement can be a good way to bring someone into the company eventually as an employee. It’s the ultimate date before you marry. The arrangement allows you to get to know and work closely with a person before you commit to anything long-term. Table 10-1 shows different independent contracting arrangements:
Table 10-1 Independent Contracting Arrangements
The downside to an independent contractor relationship is that since contractors don’t have a stake in the company, they may not think as passionately as an employee would about its long-term future. They may do only what’s necessary to get the specific job done or, worse, fill their hours without necessarily looking to improve the quality or process. Also, if you’ve contracted with someone for part-time work only, you might not be able to have that person when you need him or her; the contractor might be out working for someone else.
Under whatever arrangement you are thinking of hiring someone, you need to pay close attention to the relevant laws and regulations. There are significant and somewhat complicated employment and tax law distinctions between an employee and an independent contractor. Misunderstanding this distinction or misapplying the independent contractor label can result in serious consequences down the road. There are a number of tests to determine whether you are avoiding obligations and liabilities by incorrectly—i.e., illegally—treating people as independent contractors when the law would deem them employees. The full expanse of this issue is beyond the scope of this book, but there are plenty of resources available to help you keep your employee arrangements within the law. To start, check out the IRS Web site (www.irs.gov) and Bagley and Dauchy’s The Entrepreneur’s Guide to Business Law.2
Remember what we said in Chapter 8: Your people needs change over time. Some people can change and adapt as a company evolves. Some can learn to fill new functions and make the transition from creativity and a broad spectrum of responsibilities to more specialized roles or higher-level management. Others can’t. Tim Lewis, an advisor to a Dartmouth company, uses Tuckman’s four phases of group development to describe the evolution that companies and people experience: forming, storming, performing, and norming.3 When a company is just starting to come together in the chaos and uncertainty of the launch, it’s forming. In this environment, you need a freewheeling creative person who has endless energy and needs little structure or process to get things done. As the company moves into serious product creation, enters the consumer space, and begins generating revenue, it’s storming the market. Here you need a fanatical salesperson and production leader to help you build the product, sell the customer, and grab the largest possible market share. Next, as the company carves out its market and hits its stride as a recognized and growing company, it’s performing. In this context, you need consistent operations managers who will help you grow well, meet customers’ needs, and exceed their expectations. Eventually, if the company grows big and complex enough to need process and procedure to function, it has to start norming. As the focus of this book is primarily on forming and storming, we emphasize people who are right for those first two developmental stages.
In short, each stage of company development requires a different sort of person. Your people needs will change over time. Some people can remake themselves to remain important contributors across all these phases, but make no mistake, it is a remaking. It may or may not be a tragedy that people needs change this much as you grow, but it is the reality. This means that sometimes people from the previous stages can become liabilities to future growth. Therefore, when you talk to potential employees, you should always try to understand their potential to develop and grow with the company or their comfort with the notion that they may want to move on if the company grows past a certain size. Some candidates may be experienced and wise enough to understand how companies evolve and be comfortable with the phases they love or don’t love. Many probably will not. Either way, you want employment relationships that are successful over time for both the company and the person. You should discuss the terms of a successful relationship with potential employees the first time you meet them. You don’t want to waste your time or theirs on something that won’t fit now or won’t last long as you grow.
You also want to keep those successful employment relationships as long as possible. We can’t emphasize enough that in building a team, wise founders should always think about both the present and the future. This means finding not only the best possible people for today’s needs but also those who have the potential to remain good contributors in the future as things change. Perhaps most important, building for the present and the future means managing expectations and commitments to plan for—and accommodate—the inevitable transitions in people and positions as those changes come. To do this effectively, you must communicate to your cofounders and employees a clear picture of the present and future needs, explaining the structures of compensation and contracts that will make transitions within and out of the company as positive as possible for everyone.
Just like the founders, the first people you hire will help shape every aspect of the company from performance expectations and its chance of success to the interpersonal dynamics of the office, the company culture, and the image you present to the outside world.
It’s hard to find something you aren’t looking for. Although this may not apply to everything in life, it certainly pertains to looking for employees, especially employees for an early-stage company. Before you begin thinking about the first round of interviewees, spend some time creating a clear picture of the role you want to fill and the person you want to fill it. Then make sure everyone involved in the search sees the same picture. To get this clear picture, you need to think about three different dimensions of the position:
1. What are the needs the position fills? Think about the gaps in your resource base.
2. Does the actual position you are describing fill those needs? You’ve got to tie your description of the position clearly to your needs.
3. What kind of person would best fill those needs? This is not about filling a position; it’s about filling a need. Think about the person who will best be able to do well what needs to be done.
We recommend creating two written documents to help you answer these questions and go through the process of hiring good employees:
An external document. This is a general position description that will help you communicate what you need to others. Keep in mind that you will most likely share this description with everyone involved in the search process, perhaps even with the candidates. It should contain the position title, the purpose, its accountabilities and responsibilities, the reporting structure, and the required and desired background and experience.
An internal document. This should be two lists: a detailed list of characteristics and qualifications defining the ideal individual and a list of the lower limits of what you will consider. Creating a document like this stimulates innovative thinking about the different kinds of people who might be good for the position and the places where you might find those people. The first list describes the ideal characteristics, background, and experience a perfect candidate would possess. The second list notes the minimum traits and experience a candidate must have to be considered for the position. Of course, you’ll probably never find the ideal person, but the lists will enable you to see what’s there and what’s missing in each candidate as well as help you compare and decide between candidates. This is a private document; you won’t show it to many, if any, outsiders, and you’ll certainly never show it to candidates. Smart candidates can be good at telling you what they think you want to hear.
What traits will you want to see in a candidate? A good list is provided in Table 10-2, which is based on the discussion of entrepreneurial and administrative traits in Chapter 1.
Table 10-2 Entrepreneurial and Administrative Traits Compared
As you’ve probably guessed, we’re interested in the entrepreneurial traits for early employees. They work, and the administrative traits don’t do well in an early-stage environment. But beyond these basic entrepreneurial traits, you’ll want to consider a number of other highly valuable characteristics, actions, and reactions for your list:
1. The basics. Almost certainly you want your first employees to
a. Be intelligent and enthusiastic
b. Love hard work and have fun doing it
c. Possess distinctive skill sets and/or demonstrate technical competence
d. Have experience and a history of accomplishment
2. Culture fit. You want new employees to be a good culture fit. You want them to understand, appreciate, and buy into your corporate culture as well as demonstrate the ability to work well in a team.
3. Goal-oriented. We have always found that overtly goal-oriented people do best in a start-up environment. Normally, the specific nature of their personal goals doesn’t much matter so long as they aren’t antithetical to successful job performance. What matters is that they show a pattern of clearly defining goals for themselves and mapping out plans to accomplish them. If they naturally create this pattern for themselves instead of having to be told what to do all the time, they probably will do it for you too.
4. Impact. Entrepreneurial personalities generally are motivated much more by a desire to achieve things than by the need to accumulate power or status or be part of a group and enjoy being social. Indeed, you can hear few more positive things in an interview than “I’m frustrated where I am. I want what I do to have more impact.”
5. High-energy. Although a high-energy person can also be high-maintenance, having hyperenthusiastic, creative people in a launch team, people who make the right things happen, pays dividends time and again. You might say this type of employee has an impulse to action.
6. Flexibility. Inflexibility can kill a small team, especially if it is mixed with high energy, and the two often go together. Rigidity is dangerous because it not only impairs a start-up’s ability to incorporate new information and change direction rapidly but also causes serious interpersonal problems. If you find high energy combined with flexibility, you have the makings of a superstar.
7. Communication and cooperation. Good communication and interpersonal skills are essential in a start-up. It’s especially important that the technical specialists and the business generalists be able to communicate well with one another. One of the most important principles in team dynamics is that cooperation and communication can cure almost all ills.
8. The unknown. You want to know that your future employees can handle stress and change well. They’ll get plenty of it in a start-up. Indeed, people who thrive on challenges and the unknown are a great asset to an early-stage venture. But remember that if you grow big enough to create structure and process, they’ll probably become dissatisfied and want to leave. This is another reason to put mechanisms in place to ease transitions from one developmental stage to the next.
9. Success. Look for a history of accomplishment. If a candidate excelled in a past position or assignment, it’s likely that he or she will do it again for you. In most settings, people will achieve at the level they set for themselves, and so you want a track record of aiming high and hitting the target.
10. Goals. It’s wise to know and understand a potential employee’s career and life aspirations. Goals tell you a lot about who a person is and who he or she wants to be. Look for these things to fit with your vision of the company’s future.
11. Work history. Look carefully at the companies for which your candidate has worked. Many founders think they want employees with big company backgrounds because they’ll bring experience with them. Yes, these candidates normally bring technical discipline, specialization, and process. Although these are all valuable, in the start-up and small company environment you’ll need integrative innovative thinking, flexibility, and a willingness to do whatever needs to be done. Sometimes candidates from big companies don’t have these types of work habits. They are used to structure and think in terms of process and politics. What you want is someone who already has transitioned into a small company and been successful there.
12. Motivation. Make sure you understand why a candidate wants to work for your company. You’ll probably see two types of people (excluding people terminated for cause). The first group has left their big company semi-involuntarily, through a buyout package, or because of dissatisfaction with their pace of advancement. They think they want something new, exciting, and challenging but don’t understand how different the start-up world is from the one they left. The second group abandons the big company in good standing because they are dissatisfied and frustrated with the structure and politics. They want to do more, faster without all the bureaucracy. This is your target group; they are telling you they want to have impact.
We find that successful candidates normally have good grades from a good school (a filter for intelligence and effective work habits), have two to five years of experience at a big well-run company, and are dissatisfied. They are ready to move faster, to do more. If they have more big company experience, candidates often struggle with the transition to a fast-moving entrepreneurial environment, with making lots of decisions quickly even when all the facts aren’t known, with being versatile enough to handle lots of different things at once, and with being willing to roll up their sleeves and do things they used to have underlings to do for them. If they have less experience, they may lack technical excellence, discipline and focus, knowledge of the importance of getting the details right, and an appreciation for orderly process.
It’s said that A people hire A people and B people hire C people. The truth is that whether or not you’re an A person, you want to hire A people. Most successful CEOs will tell you that dangerous employees avoid hiring anyone better than themselves for fear of being passed over. As a founder, nothing should be more exciting than hiring someone better than you! This means your company is growing beyond its founders. Hiring above yourself is a prerequisite to success no matter how high an A you are.
Finding the right person is a difficult process. Be patient. Clearly define the position, the gap you need to fill, and the person you would love to see fill it. Hiring the wrong person is expensive and draining. But remember that in the end you have to do something. The perfect can become the enemy of the good.
Great teams are made from great people. You want to find the best people of course, but you need to maintain a realistic picture of the odds you will consistently be able to do this throughout the process of hiring. Most traits follow a normal distribution in a population. This means that a few people have a high degree of any particular trait, a few more have almost none of it, and the great majority have some amount in between (Figure 10-1). Translation: The odds of hiring a superstar are not good. For one thing, superstars are very rare, and for another, though you may have a compelling idea, you are still a start-up with no money and little more than blood, toil, tears, and sweat to offer. It’s exceedingly painful to find the perfect person and discover that you are unable to interest him or her in your opportunity. Your job as you hire is to cheat the odds. Do everything possible to make your opportunity attractive and compelling and then sell it to the right people.
Figure 10-1 The quality of candidates is normally distributed such that great people are rare.
The sources you use to find and attract good people can help you cheat the odds and get the word out that you have a great opportunity for the right person. Start with your personal connections. Work through your networks and referrals from people you know. Though hardly the largest candidate pool, this is almost always the best source for good people because your contacts have already done a good deal of filtering and selling. Since most of your connections probably know you and your venture well, they’re already proactively promoting your opportunity and screening people for fit. Of course, you still need to be careful about people helping out friends and those who don’t know what you’re doing, but referrals generally reduce hiring risk and produce promising candidates.
Everyone you know can give referrals: people already in the company, directors and advisors, service providers, customers, investors, family and friends, and even neighbors and vendors. An alma mater’s career development office can be a great source if you develop a relationship there. Even trade associations and clubs can be a source, although they often lack the personal knowledge that makes referrals so valuable. Another source, often overlooked, frequently produces the highest hiring success of all: people who come to you. A friend of ours, the late Bob Koski, founding CEO of Sun Hydraulics, a very successful engineering and manufacturing company, consistently found that his best early hires were the ones who came and pressed him for a job. Bob said that every person he hired from this source turned out great, whereas personal referrals worked out about 50 percent of the time.
Advertising and job postings are one of the most common ways to draw candidates. You should never miss a chance to think creatively about where to publish. Go beyond the usual suspects: Craigslist, Monster.com, and so on. Hunters don’t just wander around anywhere in the bush looking for game; they go where the game is. Think about where your desired candidates are looking—trade journals, specialty Web sites—and be visible there. The most successful posting is a clear and concise description of the company and the position. These descriptions should both make the position exciting and help potential applicants self-screen. The external description we mentioned early is a great place to start, but you’ll often want to reduce it to a compelling sound bite. If you can’t describe the whole job in a few sentences or bullets, it’s probably too complicated to advertise. Job postings can be useful for technical and functional positions, but for more complicated, higher-level openings, they are generally ineffective.
You also can outsource recruitment to professional search consultants. The type of the open position—functional, technical, or high-level management—and the amount of money you can afford for fees will dictate the consultants you want to consider. For functional and technical positions, you can find firms that charge a reasonable fixed rate by the hour or work on a contingency basis. As you get into higher-level positions, search firms usually work on a retainer and require a percentage of the final pay package, which can get expensive fast. But when your network can’t bring you the candidates you need, this may be the only realistic option, especially for highly specialized technical and upper-level management positions. Use your networks to inform your choice of firm as work quality varies significantly. You want to know what you’re getting.
Especially when advertising, steel yourself for the added step of disciplined screening. Applications usually come in more volume than you anticipate. Once your opening is public, you will quickly see how valuable prescreened referrals from your friends are. You can’t interview everybody. It’s important to have a good regimen for screening applications so that you interview only promising candidates. The résumé is the first level of filter. People think résumés are really important and feel the need to tell their whole career story. Actually, résumés don’t give you much of the information you need to decide about hiring a candidate. Their primary value is to you help you screen down to a short list of promising candidates. In résumés, look for the following:
Matches to your basic screening criteria and job description
Indicators of promising future performance: relevant accomplishments, experiences
Education and work history; progression of increasing responsibility
Basic personal attributes: organization, grammar, mistakes
Obvious negative screening markers
Key gaps, particularly timeline gaps
With this screen, you can usually separate résumés into three piles: the obvious rejects, the candidates you definitely want to interview, and those about which you are unsure. If the definitely interview stack is large enough, sometimes you won’t even have to look in the unsure pile. The next step is often a phone interview to determine if you want to bring in a candidate for an in-person interview.
The in-person interview should be an intense, complex exercise for you, the company, and the candidate. In a good interview, a number of things happen concurrently:
You and the candidate get to know each other. Your job is to find out about all 12 things in the list earlier in this chapter. The candidate should be looking to know more about you and the company. A word of warning: Exercise caution if candidates sell so hard that they don’t try to find out about you or the company. Always ask them if they have any questions, preferably at the beginning of the interview, before they have a chance to read you for what they think you want to hear. The questions they ask often give you insight and information you’d miss if you just grilled them. Some candidates will have done a lot of research, will pull it out, and will ask from a prepared list. Some will not expect the question but extemporaneously come up with something insightful from what they’ve observed or learned from past research. Think what you’d learn if a candidate just looked at you blankly and didn’t have any questions. That happens more often than you would guess.
Be realistic: Candidates are coming to the interview to sell themselves. Who would want a candidate who didn’t? It’s natural that they will feed you carefully shaped and filtered information. Therefore, you need to look beyond face value in their answers and try to probe beneath the pat story. Getting beyond a simple question-and-answer discussion and into a free-flowing conversation helps tremendously.
Not only are candidates selling you on themselves in the interview, often you have to sell them on your opportunity too. The best candidates almost always have other options, and if you want them, you have to make the case that you are the best option. That will not happen by itself. Although it’s hard to both scrutinize the candidate and sell your opportunity, it’s not impossible. Telling a candidate all the great things about your company and the opportunity doesn’t automatically mean you are saying to the candidate that he or she is right for the job. Then again, there are times when you have to quit being noncommittal and shift to overt selling. One of the most important questions to run through your mind constantly from the first encounter with any candidate is, Am I buying at this moment or selling? Like everything else, hiring is judgment call in a world of messy, incomplete, and incoherent information.
You and your team should think about how to structure the screening and interview process. Do you want to interview multiple rounds? An extended process can yield important information, but it also can drag everything out, and the more attractive candidates probably have other options. You want more than one person to interview a candidate in more than one setting. Gregg often asked a handful of future coworkers to take a candidate to lunch and be completely open about the company, their positions, and how they felt about things, both positive and negative. This was healthy for the candidate, and the coworkers were often amazingly perceptive in reading the candidate.
When you sit down for the actual formal interview, here are some questions that can yield important insights into a candidate:
What are your long-term goals? At first, candidates normally say something about their career and professional goals, generally a stock answer that tells you nothing and reflects little thought. But if you press beyond career and ask about life goals, you can learn you a lot.
What are your short-term goals? Same situation. Press to their personal goals. Candidates with a pattern of personal goal setting and thoughtful planning generally prove to be effective performers.
What are your extracurricular activities? Activities or hobbies outside the office? Family time? An exercise regimen? How disciplined? Community service or church?
What do you read? This is normally an unexpected question, and so it can yield some important insights. You want to know if the candidate is disciplined enough to keep up with relevant technical and business issues. Further, what a candidate reads for pleasure and enrichment tells you volumes about him or her as a person. Footnote: Gregg never ceased to be surprised by how often he would find candidates not telling the truth about a book they claimed to have read when he had read that book; sometimes this can reveal things about a candidate that no other questions do.
Will you plan second interviews or multiple rounds? How will you and your management team make the hiring decisions? Which members of your team will participate, and on what timeline? If you want to impress candidates with your company’s energy and decisiveness, think about checking their references in advance, deciding everything in-house that day, and sending them home with an offer.
Finally, always check references on any candidate you don’t personally know well, even if referred by someone you trust. It says on the back of the one-dollar bill, “In God we trust,” and Jean Shepherd’s corollary adds, “All others pay cash.”4 That reference you trust might be telling you the truth or might be doing the candidate a favor. The best references are people who know or have worked with the candidate and are not listed on the job application. You can’t always find these references or get them to talk to you, but when you can, the information is doubly valuable. Even the most promising candidates can have hidden surprises. Gregg recalls one referral candidate who was so promising that the hiring committee wanted to send him home with an offer. On a whim Gregg told the staff to check references anyway. The first reference listed on the application was surprised by the call: “Don’t you know his history? He was convicted of throwing acid in a judge’s face.” The story checked out. Always call references.
Making a candidate an offer is a complicated business. You have to pay attention to customary practices, market conditions, and all the complexities of employment law and regulations. In addition, making an offer requires you to structure the salary and compensation package, and negotiate and close with prospective employees. You probably don’t know all the ins and outs of all this, and you probably shouldn’t. You’ll need help to get it right, this is something you want to get right the first time. Otherwise you might find yourself locked into, employment terms you don’t want later on. Some of the best help can come from your directors and, to some extent, your advisors if you thought ahead and chose some with relevant experience. Also, with structuring and closing, good human resources (HR) consultants and employment attorneys are helpful until you have resources in-house. Cutting corners on professional help in this area can be tempting, but it can be costly in the long run. Here are the main elements in structuring an offer:
Salary. It’s highly unlikely that you, your directors, or any of your advisors know the market well enough to define prevailing salary ranges. For almost any salaried position, you can look for market information on survey Web sites such as www.salary.com and www.radford.com. In setting salaries, there are two important things to keep in mind:
The salary is only part of a total compensation package. The entire package includes benefits, signing and/or recurring bonuses (if any), commissions, profit sharing, and incentive compensation plans such as stock options. Taken together, these elements constitute your company’s total cost and the employee’s total value. Many salary surveys try to include information on all these elements, but it’s almost impossible to compare incentives such as stock options. In the ideal case, both you and the employee fully value the entire package and agree that it’s competitive, fair, and comparable to the market.
Salary levels generally correlate with the size of a company: The older and larger the company, the higher the salary. Theoretically, larger ownership shares in small, early-stage companies make up for this cash gap. Candidates and employees have varying perceptions of what these can be worth, but taking risk into account, only the lucky ones do really well with ownership shares versus cash. This is yet another reason it’s hard to attract top management talent to start-ups.
Bonuses. There are two different kinds of bonuses used to attract and reward employees:
A signing bonus can incentivize employees to sign with you or help ease compensation cuts they might take to join your venture. You also might have to provide a moving/relocation bonus to cover employee transition costs.
Since fixed, guaranteed salaries seldom motivate performance, some companies use a variable bonus tied to outcomes to reward accomplishment. Sometimes this works, but frequently these recurring bonuses become just another form of expected annuity, detached from performance. In an early-stage company, the more you can tie compensation to growth in the company’s value, the more you will align everyone’s incentives.
Benefits packages. For benefits such as vacation time, sick time, and health plans, you should norm to companies of your size in your industry. Affiliation and trade groups often have useful group buying plans for standard benefits. For any nonstandard benefits, you probably should engage an HR consultant to help you. The cost of benefits is significant and often is overlooked or underbudgeted by inexperienced entrepreneurs, especially when they are doing their first financial forecasts in their planning. Mike Gonnerman, the author of Ask Mike,5 advises:
The employer’s share of FICA and Medicare alone now costs an employer 7.65% of payroll, plus unemployment, workman’s comp, and other payroll-related charges. Some of these costs have cutoff points (for instance, you’ll pay FICA only on the first $106,800 of an employee’s earnings, but Medicare is unlimited). Then there’s health insurance, perhaps a dental plan, disability, retirement fund matching, and other benefits that you’ll probably have to offer to attract quality employees. Health insurance—a big cost that’s bound to keep growing—also varies widely depending on the plan, employee contribution, family coverage, etc. And when you need to hire temps or extra people to cover key employees who are on vacation or away for extended training, that’s another real out-of-pocket cost that should be included in your calculations. For most companies, the benefits percentage is also much higher for lower-paid employees. If you spend $600 a month for insurance for an employee who earns $24,000 a year, for example, that’s a hefty 30% of the employee’s payroll just for basic health coverage.
Retirement plans. Start-ups and early-stage companies tend to defer retirement benefits until they grow to at least a dozen or two dozen employees. Below that, plans can be more trouble, distraction, and cost than they’re worth. If you feel you need a plan, consultants or outsource organizations can help.
Severance packages. State laws vary on minimum severance requirements for full-time employees as well as the amount you have to pay. This can be one of the more difficult negotiations with prospective employees, especially higher-level managers. It’s not unusual for a leadership-level candidate to ask for a year’s salary as a lump-sum severance payment. This is unappealing for two reasons:
A severance package increases the cost of transition, adding the price of firing to the cost of hiring a replacement.
When a candidate insists on a big severance package or argues about the definition of termination for cause, he or she can begin to look riskier than you thought. You can reasonably assume that the more a prospective employee pushes for a large package, the more likely it is that he or she someday will need it. Avoid big severance packages whenever possible. That said, it’s only fair to agree to a reasonable number of weeks to compensate a candidate for taking a chance on you. You should make severance pay conditional on signing a termination agreement. This agreement can contain important confidentiality provisions, releases from possible future claims, and even reasonable noncompetition provisions. (Note: If you plan as a rule to provide only statutory severance, the more frequently you give beyond this, the more likely a court may be later to award someone more severance on the grounds that this was your common practice.)
Stock options. Stock incentive plans, usually in the form of options, are one of the main compensation elements founders use to attract people to early-stage companies. It’s easy to err by giving too much too early or by giving so little that you fail to attract the best people, so take care with this and use an experienced attorney. Mistakes with options can be hard to fix later. Plans don’t need to be complicated, but they do need to be appropriate and effective. Unfortunately, you won’t find any good survey resources for stock options. There are some general equity percentage standards for the various employee levels, though, and your directors and advisors can advise you from their operating experience. Grant equity incentives judiciously. Although employees may undervalue stock incentives relative to cash now, options can be expensive in the long run. Finally, pay attention to the tax issues. They can be terribly costly if you aren’t careful.
Until you are big enough to have resources in-house, use good employment attorneys and HR consultants for drafting template agreements, closing, and managing HR administration. Develop a system of good hiring practices and record keeping. Do it early and follow it. If you do, you’ll always have good data on employees, compensation, vesting schedules, and so on. Further, investors do a lot of due diligence in employee records to check that things are appropriate and in order. You don’t want them to find unresolved problems or gaps in your records.
As we may have said too many times already, remember that your people needs will change over time. We’re being repetitive, because as much as most founders seem to understand it, they consistently ignore it, and ignoring it inevitably leads to problems. The kind and caliber of people you can attract at the start of a venture are usually different from what you can attract later on. As you grow, people with more experience and stature will join your organization and some of your pioneers may leave. Your compensation system should be structured to accommodate those changes. It needs to reward good work and discourage wasted time while allowing people to join and leave without undue disruption to the corporate structure. This means a flexible, fair, and transparent system with good vesting policies and clear employee agreements.
Finally, in all this, remember what counts most. Compensation is a cost-benefit issue. Cost is critical to an early-stage company, especially cash cost, but so is performance. Although you shouldn’t have to bribe people to be productive, especially in a cash-poor start-up, you should pay people fairly. Fairness, like beauty, is mostly in the eye of the beholder, but fortunately, unlike beauty, the market provides a guide. You should be glad if your employees earn well above the market if they help make the company a success. If your compensation structures are sound, that’s just what will happen.
Most of all, remember that it’s usually not just about the money. At heart, most people want to do something that’s intrinsically valuable and meaningful. Survey after survey on job satisfaction has shown that although employers think employees rank pay and job security highest, employees actually rank those things far lower. Instead, employees say that meaning, significance, working environment, and, above all, being appreciated most significantly shape their motivation and happiness at work. Some of the most valuable things you can do are share credit for successes, compliment and publicly recognize good work, and just say thank you.
If you are efficient and prepared, you and your attorney will work ahead of time to have ready a boilerplate package of employment documents.6 Fortunately, these documents are fairly standard and shouldn’t take a lot of legal time and money to create. Also, most of them can be cloned and reused as needed without having to go back to the attorney. Just make sure as you create those initial documents that the attorney gives you a good education on the basics, a primer on the important employment law that applies to advertising, interviewing, closing, managing, and terminating. You probably should keep a good checklist for reference as you recruit and sign employees. Pilots never take off in an airplane without clearing their checklist. Neither should you.
Further, use written agreements only to clarify and resolve vague issues, memorialize verbal intentions, and protect against changes in people and conditions. Written agreements are not a guarantee against disputes or a substitute for consensus, good intentions, or continued alignment of interests and benefits. Written agreements are not magic; they cannot force a person to like you, perform at the level you need, or even honor the agreement. In the end, a written agreement is only a license to sue, and you don’t want to have to sue (or defend against a suit) to protect your interests.
Employment law, regulations, tort law, and taxation are hugely complex issues, and they all apply to you the moment you start the process of hiring your first employee. Your attorneys, HR consultants, and tax experts will help you do things right and keep out of trouble, but your own understanding of important areas is your first line of defense. You cannot assign to outside service providers the responsibility to act prudently and know the issues. Know which areas can affect you:
Employees versus independent contractors. Employees’ rights and benefits are heavily regulated and protected. Independent contractors are exempt from many requirements, especially those related to benefits and overtime. Tax and state authorities scrutinize classification of workers as independent contractors, so be knowledgeable about the criteria and how to meet them. There is more on this in Chapter 13.
Legislation and legal liabilities. There are substantial workplace protections in the federal Civil Rights Acts of 1964 and 1991—antidiscrimination, sexual harassment, age discrimination—the Americans with Disabilities Act, and the Family and Medical Leave Act. See Chapter 13.
Fair labor standards. The federal Fair Labor Standards Act governs minimum wages, overtime pay, and the use of child labor.
Worker’s compensation. State statutes require companies to insure income loss and medical expenses from work-related injuries.
Occupational health and safety. The federal Occupational Health and Safety Act and related state statutes require that a place of employment be free from recognized hazards and designate agencies to inspect and enforce compliance.
Recruiting and hiring practices. Case law and legislation deeply affect advertising for employees; interviewing and offering, particularly as to antidiscrimination; invasion of privacy; and immigration law.
Workplace privacy. Surveillance of employees, especially their Internet and e-mail behavior, is regulated. Gathering, use, and custody of health information are strictly restricted by law.
Terminations and discharges. There is extensive case law and regulation around termination practices and severance policies. Employment completely at will is largely a thing of the past. Procedures for termination can make the difference between lingering problems and clean separations.
Not to belabor the obvious, but once you hire people, you have to manage them. Although repeat start-up founders and first-time entrepreneurs with previous management experience will have little trouble with this transition, first-timers often underestimate its demands. People management is different from entrepreneurial pioneering. You now have to get other people to do things instead of doing them yourself (Figure 10-2). This means thinking much more about making decisions and planning, organizing, controlling, and measuring performance. If you can do this successfully and make this transition, you have gone through one of the most important and difficult personal conversions a founder ever has to make, and make no mistake—many never do.
Figure 10-2 As the company grows, the founding CEO may shift from hands-on activity to managing the work of others.
Peg Blout, Mascoma Corporation
Since 1997 Peg Blout has led human resource and administrative functions in demanding, high-growth, rapidly changing organizations. She is currently the senior director of human resources for Mascoma Corporation, a leading venture-backed cellulosic ethanol technology company. Previously she held senior human resources roles at the drug development company Momenta Pharmaceuticals, growing the company from 5 employees to over 200 through three rounds of venture capital funding, an initial public offering, and a new drug application. At Momenta, Peg led all areas of human resources, including strategy, recruiting, employment law and labor relations, policies and procedures, employee development, and tactical HR support. Before Momenta she filled similar roles at Sage Hill Venture Capital Partners and Lexicon, Inc. a consulting company that grew from 22 to 70 employees before being acquired in 1999. Peg offers these reflections on hiring people:
Often hiring managers are clear about what technical skills are required. But it is just as important, if not more so, to focus also on character and behavior. The behaviors of an employee can literally make or break a company. The HR leader should always plays a key role in identifying what qualities are needed in a candidate in terms of both character and behavior. Before you hire someone, you need to be able to articulate answers to these questions:
What is the culture of the organization?
Is work ethic important?
What about integrity?
Will the new hires be working independently or on a team?
How important is flexibility?
How well will they fit the existing culture?
Remember, recruiting has two views: how the organization sees a candidate and how the candidates see the organization. When hiring, be sure candidates see accurately what the company is and wants to be.
Hire to complement strengths already present in the organization.
Don’t wait too long to build a robust and efficient system for recruiting. Identify who in the organization should be involved and engage them early and often.
Hire slowly; fire quickly.
We pick up the rest of this story on managing people in Chapter 21. But for now, remember that managing people is not just about management: It’s about leadership. Your job as the founder, until you hire a CEO, is to lead the organization strategically, culturally, operationally, and emotionally. Cooperation and communication solve most problems. It’s your job to take the lead in modeling both.
How will you balance the need for people to do the work and the overhead they will cost you? How will you make those decisions?
How will you manage people as you bring them on? If you don’t have the management experience, where will it come from?
What growth rates are appropriate? Who will help you make those choices?
1. Sir Walter Raleigh (1552?–1618) was an English aristocrat, an adventurer and explorer, writer, poet, spy, and entrepreneur. In 1584 he planned the Colony and Dominion of Virginia, which ended with the failure of the Roanoke Island Colony (1586–1587), the first English colony in the New World.
2. Bagley, Constance E., and Craig E. Dauchy, The Entrepreneur’s Guide to Business Law (Mason, OH: Thomson/West, 2008): 267–271.
3. Tuckman, Bruce, “Developmental Sequence in Small Groups,” Psychological Bulletin 63, no.6 (1965): 384–399.
4. Shepherd, Jean, In God We Trust: All Others Pay Cash (New York: Doubleday, 1966).
5. See http://www.gonnerman.com/book.htm (accessed September 30, 2010).
6. Chapter 13 covers the most common employee contract documents, including ownership of invented intellectual property, confidentiality, and noncompetition.