Startup Team Building is Essential for Success
Congratulations! You have launched your company and you are on your way! Now it’s time to focus on startup team building so that it can achieve its maximum potential. Unless you have the mad skills of The Most Interesting Man in the World, this is no time to be a hero and go it alone. The success of your business requires that you get the right people on board, do the right things to retain them, and protect the Company in case anything goes awry.
Building your dream team requires you to carefully think through at least a handful of important decisions. For example: Where are the weaknesses in your team, and what skill sets are required to fill them? Who should you hire, and how do you know that you’re bringing on the right people? How much should you, or more importantly, can you, afford to pay? What about equity incentives? Do you need contracts? (Word to the wise: the answer to that last question is “Yes.”)
Building out a team is never easy, and the stakes are even higher for an early-stage company. This is why the effective management of team-building issues is absolutely critical because an early hire gone bad can jeopardize the success of your entire company. We have seen it: the estranged executive who takes valuable IP and employees to create a competing company; the toxic hire that disrupts company culture, causing colleagues to go sideways and off-mission at critical times; or, the contentious executive who files a break-the-bank lawsuit as he exits the company.
There is no exact science to curating a dynamic team, but there are some tried and true methods that can help. Here at CCG, we have had the privilege of working with many startups, allowing us to have a front-row seat to their startup team-building challenges and successes. We also have hired a few folks of our own over the years and continue building out our team as we continue to grow.
The Startup Team Building Process:
1. Get the Right Startup Team Members
If “clothes make the man,” it is imperative to ‘dress’ your company with people that suit your needs. Your employees are not only the foundation of your business, but an outward expression of your company’s standards, values, and work ethic. Would you seriously choose an ill-fitting Chris Farley “fat guy in a little coat” over a sharp, streamlined Tom Ford suit?
We didn’t think so. To avoid the employee equivalent of a wardrobe malfunction somewhere down the line, we suggest you do the following during your hiring process:
Ask the Tough Questions:
Before you start grilling job prospects, you need to ask yourself some hard questions about your goals and objectives, your culture, and the characteristics you value in an employee. Evaluate your team’s strengths and identify its weaknesses. This will become the criteria for your ideal job candidate. Once you have established who you need to effectively staff your organization, the spotlight turns upon finding the best person for the job. If you have done your due diligence, you have the information to appropriately interview and select your candidate to ensure they align with your organizational requirements.
Look for Trustworthiness and Tenacity:
Remember that show, The Office? You don’t want a Stanley who will be doing the minimum until they collect their pension. Growing companies need employees with TNT: trustworthiness and tenacity. Focus on job prospects with a “can do” mentality, who are engaged by your vision, and who will be there through thick and thin. When the inevitable challenges arise, they will work hard, not for their personal gain, but because they truly want the best results for the company.
Do Your Due Diligence:
You should approach talent acquisition with the same standard of care you would use when making any other investment. Complete a comprehensive appraisal of job candidates in order to determine their strengths and weaknesses, as well as to evaluate their unique potential to contribute to the success of your business venture.
Finally, Don’t Overlook the Simpatico Factor:
Once you have established that an individual has the talent that you are seeking, evaluate whether they “do business” the same way you do and share the values of your corporate culture. To lessen the chances of any future issues, involve your existing team members in the interview process to increase your chances of finding a good fit for your team. If the candidate does not fit, do not commit.
Accept the fact that this process will take time if it is going be successful, but it is more important to move slowly and get it right than to make a rash decision, which ultimately damages your team and slows your progress. Remember: If you don’t take the time to do it right from the start, you may not be able to do it over.
2. Startup Team Compensation
Once you have found someone who is a good fit for your company, don’t let them get away! You have put a lot of effort into finding them, and it is important that your employment offer be enticing. During the interview process, you should have gotten a good sense of your job prospect’s motivations for seeking employment with your organization, as well as their concerns. Your job offer should creatively address these areas where possible while keeping a firm eye on your bottom line:
Show Them the Money:
It is not unusual for a company in its early stages to be low on cash, and anyone considering joining a startup should already be aware of that. These employees are not drawn to join startups for their starting salaries; they are drawn by their belief in the payoff at the end. With that in mind, your offer should be both fair and transparent. Strive to compensate them both competitively and sustainably with the salary and benefits you can afford that is commiserate with their skill sets, but with a strong appeal to their excitement in your business, your team, and their contribution to the potential success of your venture.
Emphasize the Potential Value of Equity Compensation:
You can sweeten your offer by offering equity compensation in the form of stock option grants or restricted stock grants. Equity incentives should always be subject to vesting terms so that the employees have to work for equity over time. Stock options are designed to motivate employees by providing them with the opportunity to become stockholders at a fixed price. It is important to explain to your job prospect how the equity compensation works so that they understand its potential value. Be transparent with your employees about your company’s finances and prospects, so that they can make an independent evaluation of their risk and possible reward. Point out to them that their added value to the team’s efforts increases their potential piece of the payoff pie if the company is successful.
Creative Perks Might Just Work:
Offer creative perks over and above what you can pay to distinguish your company from the competition. Flexible work hours, the ability to work from home, a casual dress code, a lax vacation policy, or free snacks in your kitchen are all inexpensive perks that might attract a new team member. They speak to your concern for their work-life balance, a selling point to many millennials, which will take some of the sting out of less money in their pockets.
The Opportunity is Priceless:
Bang that drum, and then bang it some more. In addition to touting the reasons your company is a great place to work on a day-to-day basis, there is also tremendous value in the experience they obtain from building a company, the mentorship opportunities, and the networking relationships they will gain. Emphasize that working for a small startup will allow them to have more of a voice in decisions with a quicker path to advancement should they prove themselves able. Ultimately, if they believe in your dream, and the value you believe they can add to it, they will want to be on your team.
3. Startup Team Building Documentation
It is critical to use the correct documentation when you onboard your team. The careful and accurate preparation of the following documents is essential to avoid tax penalties, fines, and potential litigation:
Employee v. Independent Contractor:
It is important to understand the difference between an employee and an independent contractor so that they are classified correctly for tax reporting purposes. This analysis involves a multi-factored test that should be administered on a case-by-case. In general, however, if you are in control of a team member’s hours and work methods, and require that they only work for you and adhere to your workplace policies, they are your employee. In contrast, an independent contractor, who can provide services to multiple clients, typically completes a specific assignment without any input from you as to their working hours or how they get the job done. When you hire an employee, you pay their taxes on their behalf and issue a W-2 form to them at the end of the year. You will submit a copy of this form to the IRS which reflects the amount withheld for the purpose of paying your employee’s federal and state taxes. By contrast, independent contractors are considered self-employed, making them responsible for computing and paying their own taxes. However, you are responsible for reporting what you have paid to a consultant for their services by providing the consultant with a 1099-MISC form and submitting a copy to the IRS.
Attach Strings to Those Carrots:
Offering stock grants sweetens the compensation package, but do not give them straight up to your employees with no ability to pull back the shares if the employment relationship goes sideways. Equity compensation offered to team members should involve many important documents, such as the Stock Incentive Plan, Notice of Stock Option Award, Stock Option Award Agreement, and, in some cases, a Restricted Stock Agreement and Restricted Stock Unit (RSU) Agreement. These documents require careful thought and preparation due to the significant consequences they can have in the future, such as the treatment of outstanding stock options if the company is acquired, or an employee makes an early exit before their stock has vested. Proper documentation of the stock option plan and other equity award documents is critical, not only for your company’s compliance with certain federal and state securities law exemptions but to ensure you maintain ownership of your company.
He Said/She Said: The Danger of Informal Promises:
If you like to live dangerously, make verbal promises regarding compensation and equity awards without solid documentation to support them. Be forewarned that what is not documented in writing can become lost in translation, often resulting in potentially expensive disputes with team members. Your company should have a disciplined process in place to document all employee compensation, including the determination, approval, and tracking of its stock option and other equity awards. All option plan documents and company documents referring to stock option awards, including employment offer letters should be drafted with precision and appropriate caveats.
4. Do It Right
The decisiveness you exhibited in being able to identify and retain new talent for your team does not end there. Your insistent oversight of the following housekeeping issues is essential to the protection of your ownership of the company, as well as your biggest asset: your intellectual property:
The Devil is Truly in the Details:
Unless you enjoy Linda Blair moments with your team members, you definitely want to exorcise yourself of any lurking demons from the time you enter your first employment agreement. Entrepreneurs can be prone to overlooking important details and unknowingly exposing their companies to significant risk by not properly documenting their relationships with employees and consultants. It is imperative that you manage and document your company’s equity incentive awards and proprietary agreements from the beginning in order to avoid due diligence and other issues for future financing down the line. If no one in your company has significant experience in these areas, you should engage outside support to manage and track the documents and details.
Don’t Leave the Barn Door Open:
Compromising the ownership and stability of your company is completely preventable through the drafting of thorough agreements to protect your equity and intellectual property. Establish standard vesting terms in your equity incentive agreements to encourage your team members’ continued commitment to the company over the period of the vesting schedule. More importantly, should the employee decide to make an early exit, vesting arrangements retain the company’s right to repurchase any unvested (and sometimes vested) stock and avoid additional dilution. Oh, but we aren’t done yet. The fastest way to kill the momentum of your startup is to lose your intellectual property through an oversight. In order to prevent this from happening, you need to require that all employees and consultants sign a proprietary information and inventions agreement (PIA) when they join your team in order to cover your company in case any relationship goes sour. PIAs protects your company’s proprietary information by imposing written confidentiality and non-use obligations on company employees and consultants. In addition, the inventions assignment component of the PIA ensures that any inventions, modifications, and improvements created by employees and consultants on the job are properly assigned to and owned by the company.
Expect the Best; Prepare for the Worst:
You need to make sure you are protected from your employees for the long haul. One way to do this is to have written agreements with everyone providing services to your company, including employees, subcontractors, and consultants. You must also be aware of your risk exposures as an employer, including your financial obligations and reporting requirements. Make sure you comply with employment law requirements such as minimum wage, Workers Compensation, payroll taxes, and Workplace Health & Safety procedures and policies. You should also consider adopting an employment manual that outlines your company’s policies, procedures, and benefits. Finally, ensure that you have the proper insurance policies in place to cover you in the event of any claims filed by your employees. All of these precautions should be put in place at the time of hiring, not unlike a prenuptial agreement when one of the parties in a relationship has pre-existing assets they wish to protect should the commitment not make it in the long run.
The needs of your company will evolve over time, and so will your team. Just remember that great startup team building is a process. Take the time to bring on the right people at each stage of the development of your company and settle for nothing less than the best fit.