As any entrepreneur knows starting a new business is a simultaneously horrifying, humbling, gratifying and exciting experience. These terms can also be used to describe the process of hiring a team to help you grow your startup. While every business owner wants to bring in the best talent and hardest working employees the financial realities of running a startup can often be a huge hindrance in attracting those team members and compensating them fairly. That’s why, as a startup owner, you may need to get creative when it comes to what and how you pay your team.
A Slice of the Pie
One of the most common ways for startups to attract talent without spending a ton in salaries upfront is to offer your employees some equity in the business. This will not only save you money at the time you need it most but also aligns your employees’ goals with yours more so than if they were merely collecting a paycheck. They know that their hard work will be rewarded in spades when their tiny piece of the pie grows larger and larger over time.
Truthfully it can be difficult to know how big of a stake to give each employee or whether you should even give it to everyone on your team or just “core” members (however you choose to define that). Whatever you decide just be thoughtful with how you distribute equity in your company. Also keep in mind that your employees will talk to each other so be prepared to defend your decisions honestly.
The way you choose to give you team members “a slice of the pie” can vary depending on the size of your business. For smaller companies that are self-funded, profit sharing can be a great motivator. Typically this involves working with a bank or other institution to create a plan under which a portion of your proceeds will be split among your employees and placed into a holding account for distribution. To help you through the process of setting up a plan the Department of Labor offers a checklist complete with tips and options.
As for larger companies with outside investors stock options are a more popular choice for incentivizing your team. Basically, stock options will entitle employees to purchase a stake in company at an agreed upon price at a future date. The concept is actually similar to a call option as it essentially gives the employee a coupon to use on company stock down the road.
One problem that you might run into when giving your team members stock options or a share of the profits is what do you do if they leave? Whether you’re using a profit sharing plan or stock options you’ll want to set up a system where employees must first be vested before receiving benefits. For stock options the typical vesting period is four years. Profit sharing vesting times can vary and can also be given out via cliff vesting (e.g. 0% vesting for the first two years and then 100% afterwards) or a graded vesting (e.g. 0% in year one, 20% vested in year two, 40% vested in year three, etc.).
Just as owning equity in a company motivates employees to work harder in order to make the business grow so do bonuses and raises. However, unlike holiday bonuses that may be arbitrary, it’s far better to create a bonus structure that is tied to achievement. Better yet, if you can find a way to base payment both on the accomplishments of the employee as well as the growth of the business as a whole, that can often be the best plan of attack.
Obviously, the milestones that you’ll reward will depend on the type of business you have. You can also decide whether these bonuses will be paid out quarterly, annually, or soon after certain achievements are met. Additionally, you may want to consider structuring your employee raises in a similar way.
For high growth startups you may need to take different measures to keep your employees happy. If your company lands a new round of funding you may want to add more stock options for your long term employees and a new vesting plan to make up for dilution of their previous shares. This can help keep your longer tenured employees motivated as you grow bigger and hire additional personnel.
Startups can offer a number of benefits that larger and more established companies simply cannot. In fact a startup might be the perfect fit for those who have just graduated college with a degree in their chosen field. Not only does working for a startup give new grads the ability to “get in on the ground floor” but also allows them to learn on the job and gain valuable experience that classrooms don’t offer. As a business owner you should be prepared and willing to help new team members learn the ropes. When orchestrated correctly it can be a win-win — you get fresh talent willing to help grow your company, while they get some real life experience under their belt that will surely help them in their future ventures.
If you are hiring several fresh graduates you may also want to get creative with some of the other benefits your offer. For example student debt has become such an issue that some businesses are now offering student debt repayment contributions as a perk. Also consider benefits that will actually make the lives of your employees better or easier. Maybe that means allowing them to work from home a certain number of days (when possible), offering a stocked kitchen in the office to save them money on meals, providing gas stipends or transit cards for your commuting employees, or simply loosening the hours of the work day so that employees can work at the times that are best for them. Whether you use all or none of these ideas just keep an open mind and think about what you can offer potential team members that is of little cost to you but is of large value to them.
Lastly, when most job seekers think of “benefit,” they likely think of things like health insurance and a 401(k). However, if you’re employing less than 49 full time employees, you are exempted from the Affordable Health Care Act’s mandate to offer an employee health care plan. This doesn’t mean that you can’t still offer health care coverage to your team. Keep in mind in some cases it may actually be cheaper for them to purchase plans individually, so you may want to do some research before deciding to sign up for a group plan.
Now that you’ve compensated your team how are you going to pay yourself? Surprisingly this may actually be a tough question to answer for many startup owners. On the one hand, the profit your business does make might be better being reinvested so it can continue to grow, but on the other hand, you do need to be able to eat and pay rent/mortgage. Additionally, like any employee, business owners want to be paid what they’re worth.
If your company is not yet profitable or barely profitable paying yourself a salary that merely covers your drop-dead expenses may be necessary. In fact it’s actually when your business does start to make money that the salary issue really becomes a question. Comparably is a good place to start when calculating what your salary should be. Look at what owners in similar positions typically make as well as what your salary might be if you were just an employee of a company with your set of skills and experience. Other factors you may consider are what you were getting paid before leaving your last job and perhaps even what your employees are making — don’t overpay yourself if you’re still underpaying them.
It takes a special kind of person to want to work for a startup. Someone willing to take risks, work hard, and push themselves — much like the entrepreneurs that they will be working for. As a business owner your goal should be to find these types of employees and make working for you worth their while. Although it may take some creativity on your part, in the end, it will be to everyone’s benefit.