The most valuable asset in an early-stage startup is the team behind it. For entrepreneurs who are … [+]
The most valuable asset in an early-stage startup is the team behind it. Unlike established companies with a validated business model, scalable product and paying customers, in the early validation stages, if the team stops, the startup instantly fails. Essentially, in the beginning, the startup is the team.
For entrepreneurs who are looking to build a team or make the first hire, here are your options and my recommendations for which and when those options are best for you.
1. Payment In Milestones
Most self-funded entrepreneurs rely on contractors instead of hiring full-time employees. There are many advantages to paying hires on a contract basis especially in the early stages from idea to a business with more predictability. Not only do you minimize expenses but also in case things don’t work out with your venture, it’s a much easier termination of employment.
Payment in milestones is the most predictable compensation structure. With it, you known what to expect ahead of time and by when. This is the best payment structure if the recruit controls most of the variables. In other words, if you hire a team to build an app, create and launch a marketing campaign, prepare your tax returns, and any project where the outcome depends only on the input of the team.
2. Hourly Payment
This payment structure provides the highest level of transparency. Essentially, the hire, directly or indirectly through time tracking software, documents every worked hour. Paying by the hour is a good structure if your needs cannot be easily defined such as hiring an administrative assistant with an unpredictable schedule.
Additionally, it is an effective strategy for evaluating candidates’ competencies and speed in completing a small task before switching to a milestone-based contract or other payment structures.
3. Monthly Payment
With more predictability about team responsibility and the next stages of the business, a fixed monthly compensation is the best structure. For example, after launching the product, chances are insights gathered from customer feedback will require quick and frequent changes. Creating milestones for each change can be inefficient while an hourly compensation can be financially unpredictable and costly especially for bootstrapped founders.
Monthly payment, especially with aligned interests by rewarding performance through bonuses for achieving predefined goals, is what your startup should progressively move towards. In fact, most of my team members were initially compensated by milestone before turning our partnership into part-time and full-time employment under a monthly payment.
If you believe monthly payments is the right structure for the work you need done but still feel skeptical, divide the monthly amount into two biweekly payments which gives you an opportunity to evaluate progress more frequently while having the option of adjusting the payment structure if needed. It is like paying for completed milestones but under a monthly fixed payment term.
4. In Exchange For Equity
Startups at the idea or pre-product stage are like babies. In their first few months, they grow very fast and learn very quickly. Your startup can be just an idea today and a profitable venture six months later. If you exchange equity for services in this early stage, you risk selling your startup short.
Equity is an expensive payment structure but an effective way to reward the best employees for their contribution and commitment. In any case, although this rarely happens unless the candidates are interested in joining the startup as co-founders, you are better off not using equity as the only form of payment. Instead, sometimes equity can substitute a portion of team members’ compensation which minimizes your short-term expenses.
5. A Hybrid Compensation
Combining equity with other payment structures is an example of a hybrid compensation. Also combining monthly or per-milestone structure with hourly payment for extra work beyond the agreed upon scope is another example.
For whichever structure you feel is best for you and the team, complicating the process or the agreement will hinder performance. Choose a simple, transparent and fair compensation structure.