Compensating Tiny Teams

Tiny startup teams of less than ten offer unique compensation opportunities and challenges, so creativity and open communication are called for!

Most startups take years to develop. Personally, my rule of thumb for a new venture is to plan on it taking five or more years. And potential additions with the strong experience and unique expertise that you seek out to build a high-performing startup team almost always need some compensation.   They will need cash and healthcare benefits to pay their living expenses so they can give you the wholehearted effort for the extended time required to achieve greatness. Despite the startup mythos, working long-term for equity alone is an option only for those who have other sources of the funds necessary for day-to-day living (a working spouse, supportive parents, wealth from a successful prior venture, substantial savings).  The vast majority of talented people will only have enough resources to go a few months without any income.

Therefore, as a startup founder and leader, you need to figure out a way to provide an adequate compensation package to enable the stars you will recruit to your team to go the distance with you and avoid the high cost of turning over experienced team members who have exhausted their capacity to self-fund. So, let’s get real about the challenge of compensating the tiny team that is willing to take the risk and invest years of their lives to boldly step out into the world to make a difference.

Here are some of the philosophies and tactics that have served me well as I recruited rock star teams through five startup adventures:

1. If someone is going to take the risk of living the dream of a startup, they should have some shared stake in the potential upside. That means everyone – and I mean everyone – who is employed by my startups gets some sort of common stock opportunity, usually stock options or restricted stock. The amount varies by the level of the hire, when in the life cycle of the startup someone joins, and part-time gets less than full-time, but to ensure everyone is aligned with the investors’ goal of getting to an exit, I make sure everyone has the potential of a payday when a successful exit happens. If someone is able and willing to take a substantially below-market salary, I seek to give them a nice bump-up on the equity side from what they would have otherwise gotten to acknowledge their investment in keeping our cash needs down.
   
   
2. Because there is that upside potential, I will ask people to accept a level of cash compensation (salary or hourly wage) that is enough for them and their dependents to live on sustainably. What that means varies. Single and just starting out, newly married, mid-life with a young family, older and approaching retirement – the issues and priorities for each individual are unique. Ultimately, I do not want to have employees who feel the need to take on a second job because I want their energy and mindshare to be directed toward solving the day-to-day problems the startup is facing. Especially at the earliest stages, figuring out what is reasonable and workable for each individual depends on a process of open communication where we talk about their individual needs and the needs of the business and try to find a workable solution. Unlike big companies with unlimited HR budgets and benchmarking, this is often a one-on-one conversation as I try to understand each person’s individual needs. I also try to keep a sense of fairness, the cost of recruiting someone with particular skills, and market compensation rates in the back of my mind so that I do not create a situation where someone will really struggle to stay committed long-term.
   
   
3. Healthcare is essential, and it is most often employer-provided in the United States. Yet when you are less than a handful of people, your company is not big enough to qualify for a group healthcare plan. Sometimes you get lucky and some of your team have healthcare coverage from a spouse. However, if not, then my early-days solution is to work with an employee to secure a reasonable individual plan for that family and have the startup pay the grossed-up for taxes cost of that plan. Eventually, when you grow enough to offer a healthcare plan, you can wind down those individual plans and get everyone on the same program. Do watch for groups you can join to qualify to offer group healthcare sooner, as it will often offer better coverage at a lower cost.
   
   
4. Retirement savings is often an issue for more experienced hires, and some may come from larger employers who provide a 401(k) match. Again, like health insurance, you must achieve a certain size before qualifying for even the most cost-effective 401(k) retirement plan. If this is an issue, I have sometimes adjusted salary upwards to reflect a prior employer’s match and encouraged the employee to invest in an individual retirement account until we reach the point where offering a 401(k) is possible and practical.
   
   
5. Initially, I do not offer many of the broader set of employee benefits like life insurance, disability insurance, health savings accounts, and so on. I focus on the core basics for a tiny team, although some of those things will become possible – and essential for recruiting- as your team grows to 20 and beyond. If you are really in a business that requires massive team growth, that will change the calculus on when to offer what benefits.
   
   
6. Last but not least, do always, always, always be mindful of employment laws, including laws about exempt and nonexempt employees, because even though you have a tiny team, employment laws still apply. Do not forget that you must display mandatory posters, pay for unemployment insurance, check that each employee is authorized to work in the United States, pay withholding taxes, and all the other pesky details of being an employer.

To navigate recruitment and compensation at the earliest stages, you need to determine each person’s goals and needs. To know what the concerns are, you have to ask. You have to be able to have an open discussion to find a balance between the needs of the business and the needs of the individuals and to be able to educate and talk fluently about different compensation options and tradeoffs. Sometimes you may even have to address the concerns of spouses who may be more risk-averse than the potential employee you are trying to attract. The balance and blend of compensation may vary, and as a small company, you can take advantage of being more flexible and creative. You don’t have to establish strict and uniform policies, but you do have to think about some semblance of fairness. 

In the end, remember that it is your team that is going to build the value of your startup. Recruiting and retaining great team members requires making sure you focus on opportunities that can either be made cashflow positive very quickly (enabling bootstrapping and stretching financially by the starting team) or opportunities that are sufficiently attractive that you can raise the money required to build the essential team needed to realize that potential. Be prepared to defend your compensation rationale because investors will ask and push for the team to take lower compensation, so you will have to find the right alignment and balance there. I have chosen to walk away from some investors who I felt were unreasonable in their expectations of the people who were putting their lives on the line instead of just their money. Savvy investors know that the right team wins and bad turnover is terribly costly, so there are strong business justifications and value inflection points to be navigated through together.