Hiring for Startups

Originally published on Workplace Review at Cornell.

Revenue per Employee, Not Number of Employees

One of the weird things you’ll find as you build your startup is that everyone wants to know how many employees you have. It’s a metric that a lot of people will use to judge how legitimate your startup is; they get really impressed if you say you have a large number of employees, and they think you’re a joke if you say you have a small number of employees.

As a founder, it’s easy to fall into this trap of believing that the more people you hire, the better you’re doing. However, in reality, the best startups do more with less. Having too many employees can cause a higher Burn rate, added organizational complexity, and slower decision-making, among many other things.

A better metric is a startup’s Revenue per Employee: Total Annual Revenue / Total Number of Employees. Every hire is an investment into your company, and you should be making sure that you’re getting a return on that investment.

Early-stage

In the early-stage, the goal for hiring is to not do it unless you desperately need to. One reason for this is that your product needs to evolve constantly, and that’s usually easier with fewer people. More employees add inertia – it gets exponentially more difficult to change course with more people on the team.

Furthermore, hiring people doesn’t just cost their salary. You must provide equipment, desk space, health insurance, and other things for every employee you hire, all of which cost extra money. A good rule of thumb is that an employee will cost 25-50% more than their salary alone, and these numbers really add up.

Another dangerous trap naive founders fall into is hiring before Product/Market Fit. They often tell themselves, “I need to hire more developers to build feature x,” or “I need to hire more salespeople since my sales are low.” But more employees will not help you get to Product/Market Fit faster. Usually, the fundamental problem is that your product is not appealing enough, so you should focus on addressing that in the way only founders can.

Growth-stage

In the growth-stage, the goal is to not hire too fast. These hires really matter, as they will go on to define your company’s DNA. Hiring slowly not only ensures that you get the very best people for your startup, but it also builds a team where everyone believes in the mission almost as much as you do.

Airbnb took six months and hundreds of interviews before hiring their first employee. Brian Chesky, the CEO of Airbnb, used to ask interviewees whether they would still accept the job even if they were given a medical diagnosis that they only had 10 years left to live. It may seem like a ridiculous thing to ask, but as a result, Airbnb has developed a culture of incredibly dedicated and loyal employees who band together even when the company faces a crisis.

If you compromise by hiring someone mediocre, you will always regret it. A mediocre employee at a large company will cause some problems, but it won’t kill the company. On the other hand, a mediocre employee at a startup will often, in fact, kill a startup. So, ask yourself this question before hiring anyone: “will I bet the future of my company on this single hire?” And that’s a high standard to clear.

Employee Equity

Employee equity is one of the most common things founders screw up on. As a rough approximation, you should strive to offer your first 10 employees roughly 10% of the company. They’ll have to earn it over a four-year vesting period anyway, and if they’re successful, they would have increased the company’s value way more than that.

For some reason, founders are usually very stingy with employee equity and very generous with investor equity. This is entirely backwards. Employees will only add more value as time goes by, and they are really the ones that build the company.

I believe in negotiating with investors to reduce the amount of equity they get and then being super generous with the option pool for your early employees. In general, the startups that have done this well have been the most successful ones.

Two Things to Look For

Mark Zuckerberg once said that he tries to hire people that: 1. He would be comfortable hanging with socially, and 2. He would be comfortable reporting to if the roles were reversed.

This seems to be an excellent framework to me. You don’t have to be friends with everyone, but you should at least like working with those you hire and deeply respect them.

In summary, it is very important to keep your company as small as it can be at every stage – hiring people should be your last resort in the early-stage, and when you do hire in the growth-stage, find those who won’t just make your following employees better but will force you to be better too.