Posted by Early Growth
September 25, 2014 | 8-minute read (1524 words)
No matter how great your startup idea, ultimately consistent execution (including hiring and retaining the right people), is the biggest determinant of long-term business success. Our expert panelists: Karen Reinhold, Shareholder at Hopkins Carley, Tom Byrne, Vice President at Wells Fargo Insurance, Amanda Christoff, Managing Director at Premier Inc., and Sirk Roh, COO of EGFS, shared what you need to do now to make your startup a talent magnet. Here are some pointers.
Competition for top talent is really fierce. You can’t afford to take a scattershot approach to hiring the right human capital. The key is to first identify, then prioritize your needs as part of putting together an effective startup hiring strategy that covers sourcing, attracting talent, and sealing the deal. In other words, come up with a hiring plan.
As part of that plan, make sure you educate yourself on the current marketplace dynamics so that you’re competitive with other players. It's a candidate’s market, so understand current salary ranges and how much equity to offer. And don’t forget about perks! The more you know about what constitutes an attractive packages for candidates, the more likely you are to be able to make the right offer.
When it comes to sourcing talent, employee referrals are the gold standard (though there are some potential legal risks to “poaching” talent so be sure you understand non-solicitation agreements, and whether your potential hires have signed one...). Sure it’s easy to search for candidates on LinkedIn or to tweet your openings (social media is good for passive candidates, so you should be doing that), but focus your efforts on what will yield the most bang for your buck.
If you use a recruiter, partner with a firm that understands your company culture and the dynamics of your hiring plan. Ask around for referrals to the best recruiters and remember the emphasis is on partnering, not farming out the search.
Depending on your hiring volume, consider including some contract hires and/or a recruiter who specializes in finding contract workers.
And outsource when and where it makes sense.
Who you hire first really depends on your product status. A stellar office manager, aka jack or jill-of-all trades, is often the first strategic hire. And you should definitely hire one once you get your first round of funding. But if your product’s ready to go, then an effective salesperson should be one of your first hires.
As you prepare to implement your startup hiring plan, be ready to make your case to candidates. They’ll want to understand your growth trajectory, your mission and values, and where and how they would fit on your team. The more you can meaningfully demonstrate your unique value proposition and what you can offer candidates that competitors don't, backed up with meaningful compensation packages (and perks) the better off you’ll be.
The main guideline here is to make sure both employee and company incentives are long-term and aligned. Vesting is a powerful tool to achieve this.
Deciding who to give shares to (co-founders and key early executives) versus options is important. Advisors should get common stock with a shorter vesting period, 2 years, with a six month cliff, versus employee shares. But when it comes to preferred shares, only advisors who are also investors in your company should get these.
For salespeople, structure compensation as a base plus a significant incentive for meeting targets. Structure stock option grants to vest over time (4 years is typical) at an affordable, yet reasonable strike price.
Think carefully about and negotiate with your investors on the size of the options pool. It needs to be large enough to make attractive grants to employees, but small enough to allow you to retain a meaningful equity stake.
Depending on your stage, you might plan to offer restricted shares. If you do, be aware that unlike options, restricted shares are outright stock, which means there are tax considerations to granting them.
That leads to the issue of 409a valuations. Named after the section of the U.S. tax code that mandates them, 409a valuations are used to determine a fair/appropriate strike price for pre-IPO common stock. You need to have one done prior to granting employee stock options, any time your business’ valuation changes materially, and at a minimum, on an annual basis after that. Read more about 409a valuations.
A final tip: plan rigorously on the front-end, taking a holistic perspective as well as a view of the individual pieces.
What should you consider when it comes to benefits? Your main decision initially is whether to go with a Professional Employer Organization (PEO) — a one-stop outsourced shop for payroll, benefits, workers comp, HR, COBRA — or to purchase your benefits on the open market. A PEO can save you money at first: namely, when you’re in the 2-3 person startup phase. But as your business matures, say when you hit the 50 employee mark, have gone through multiple investment rounds, and are gearing up for an IPO or a sale, a PEO will be a relatively more expensive (to the tune of $6000/year) option.
And exiting one takes work and time — lots of it. Plan on the process taking 6-9 months: during which you will need to hire an HR Director/Manager, find a payroll vendor, a benefits provider, and design your plan. You’ll also need to coordinate your systems and infrastructure, so that you achieve a seamless transition date.
Being proactive about your benefits decisions, planning ahead, and vetting new vendors in advance (talk to payroll providers and employee benefits consultants, and get referrals from your network) can help you make the best decisions for your business. Lastly, be sure to choose insurance providers who can scale with you.
The key takeaway is that you can creatively mitigate certain types of legal risks by thoughtfully structuring agreements at the front end that protect you and your startup if and when things go sour. Create a checklist for legal risk issues. You don't need to spend tons of money, but do pay to find a good lawyer who can walk you through the steps to take to put a plan and timetables in place to mitigate major risks.
Restrictive covenants (non-solicitation agreements) — Make sure that during the on-boarding process someone is accountable for documenting who is covered by these and what those agreements entail so that you don’t unknowingly breach them. Be especially careful when you’re bringing on key/senior hires.
Compensation agreements — These can be deemed Illegal and unenforceable when they involve deferments of salary and/or bonus plans with ill-defined terms and conditions. Clearly define the arrangement, including when an employee is allowed to receive it, think through and spell out all the attached conditions/contingencies (for example, will earned compensation be forfeited if an employee is terminated?).
Exempt versus non-exempt — This isn’t as clear cut as being hourly or salaried. Certain categories of employees must be categorized as non-exempt because of the duties they perform. This means you have to pay them time and a half for overtime, and give them meal and rest breaks. Violating these requirements is one way to find yourself in a class action suit.
Employees versus contractors — Similarly, be very careful how you designate staffers. Make this clear in your employment agreements and know that any workers you exercise control over in terms of what will be done and how it gets done, need to be classified as employees for tax purposes.
Confidential information — Put agreements in place, at the very beginning, covering all the people you give access to: from 3rd parties doing limited amounts of work, to independent contractors, to employees. Develop a standard agreement covering your proprietary information and centralize accountability for it. One of the biggest, most common, and potentially damaging mistakes we see startups make is leaving this to too late in the game.
Also institute these 5 key employee policies:
What are your top tips for attracting killer talent to your startup? Share your strategies in the comments comments section below or contact Early Growth Financial Services for help assessing your financial health and setting milestones.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Deborah is a Chartered Financial Analyst (CFA) charterholder with more than a decade of experience as an investment analyst and portfolio manager in New York, London, and Paris.
- Anti harassment (your business has absolute liability for anything your managers do)
- Equal employment opportunity and non-discrimination
- Meal period and rest break for non-exempt employees
- Employee device policy (that addresses your startup’s proprietary information and gives you rights to search these)
- Company social media use