Using Retained Recruiters

Small startups rarely have the resources to retain a professional recruiter to help find the right talent. However, as a successful startup secures significant venture financing, the Board of Directors sometimes decides that bringing in a professional retained recruiter is the right strategy for finding the right executive talent for the next growth phase.  This is often a first foray down the professional recruiter path for many founders.

Types of Recruiters

Many early-stage startup leaders leverage their personal networks and use online postings to source talent. However, sometimes it makes sense to pay recruiters for help. Broadly speaking, two types of recruiters help companies secure critical talent.

• Contingency Recruiters source candidates and present them (usually without names and contact information) to companies trying to hire, usually at a director to staff level within the company. The deal is that if the company hires one of the candidates the contingency recruiter provides, the company will pay a substantial fee to the recruiter. Multiple contingency recruiters can be sourcing candidates alongside the company’s postings and recruiting efforts. Most of the candidate evaluation process and the risk of a failed hire is borne by the company.
  
  
• Retained Recruiters sign an up-front guaranteed contract with a company to recruit candidates for a specified, usually executive-level, position. The retained recruiter helps craft a position description and information about the company, actively seeks to identify and screen qualified individuals, and ultimately presents a slate of potential candidates for the company to review. Other recruiters and the company itself cannot independently recruit candidates; instead, they refer any identified candidates to the retained recruiter. Once a candidate is hired, the retained recruiter is paid a significant percentage of the position’s first-year compensation and guarantees to replace that individual if things do not work out for a period of time, often one year. 

With that groundwork laid, I will focus the rest of this post on some lessons learned using retained recruiters.

When Does It Make Sense to Hire a Retained Recruiter?

Bigger, wealthier organizations tend to have more executive-level hiring needs and the funding to pay for recruiting help to find executive talent. This includes larger companies and venture-backed startups. The decision to hire a retained recruiter typically comes after the company has done at least an initial push to see if there is someone in their network who fits the need.  This avoids paying the considerable cost (often 25-35% of the candidate’s estimated first-year compensation) of an executive search firm. Often, the reasons that investors and company executives decide to retain an executive search firm include:

• The goal of the retained recruiter is to present a carefully curated slate of four to five high-quality candidates with the right skills, fit, compensation expectations, etc. The company is outsourcing much of the search and pre-qualification work of finding excellent candidates, using the search firm’s proven methodology and leveraging its deep database and network of potential candidates.
  
  
• Executive search consultants will conduct exhaustive research and scour relevant competitors to reach in and identify potential highly-qualified, passive candidates. These candidates may not be actively searching for jobs. This potentially results in the broader pool of candidates than just those actively searching.
  
  
• The advanced expertise and cost mean that these specialized recruiters are primarily used for C-suite and board-level placements, which means that retained search firms have dialed in their processes and tools to focus on providing top-tier talent for these high-level roles. The high risk of a failed leadership hire means that it is often worth it to pay their fees, which are often structured as 1/3, 1/3, 1/3 up front, progress, and then offer points in the process.

In my experience, the positions where you use a retained recruiter are typically those where investor-board members and the C-suite leader collaborate to get the best talent for a critical position.

Bear in Mind That Retained Recruiters Have Their Own Incentives

To be fair, I have had both excellent and awful experiences working with retained recruiters. However, the fact that retained search firms are only typically used for the C-suite and board level placements means that, for a startup founder-CEO, it is often not a frequent experience.  There can be unusual dynamics at play that are worth being aware of, including:

• Incentives exist for search firms to push for higher compensation packages because their retainer is tied to the ultimate compensation package, and it is easier to attract top talent with a generous package.
  
  
• Since retained recruiters are paid a commission for making placements, there is an incentive to get multiple engagements at the same company, if possible. Multiple engagements are efficient because some of the work, writing up information about the company and sourcing candidates, can be leveraged across multiple placements. Once in, if a search consultant can identify additional high-level hiring needs, they can offer a slight discount to encourage being retained again, or even try to convince their client to hire more than one, such as in the case of board members, with fees paid each time.
  
  
• Because the company, usually the CEO, is hiring the search firm, you might assume that it views the CEO as its client. However, the reality is that VCs fund startups and will have multiple portfolio companies that may each only need one or two hires. Still, the recruiters may earn future assignments if they do a good job by referral from the VCs. So, remember that even if the CEO of a startup hires a retained recruiter, the recruiter may care more about their relationship with the investors and may even undermine or cast doubt about the CEO or their C-suite team members to the investor-directors in a bid to get hired to fill more than one position.
  

I have hired executives with the help of a retained executive search firm that were truly exceptional. There have been other times when the consultant tried to convince me to recruit multiple independent directors when we only needed one or questioned our team leadership in search of more commissions.

Many retained recruiters have high integrity, fantastic networks developed over many years, the capacity to offload much of the work recruiting legwork for executive positions, and the ability to find superb resources. Still, not all of them are wonderful, so I approach this process with some healthy skepticism to avoid the pitfalls and secure the potential benefits.