Somewhere along the way, you and your co-founders will be faced with the need to hire your first employees. Regardless of how much funding you have for salaries (versus equity compensation), one decision you’ll be faced with is how to level the roles – executive, mid-level, or entry level. The trade-offs and guidance described in this article are valid until you have about 20 total employees and have no choice but to build out a team with employees at various levels.
The Benefits of Hiring Executives First
If the founding team doesn’t already have a lot of experience, that’s the biggest benefit of adding one or more executives first. They’ve done lots of things, which means they’ve made lots of mistakes among their successes. Avoiding common or rookie mistakes can be the different maker for survival.
Executives with years of experience know how companies should operate. This covers their functional areas of expertise, for sure. But it also covers cross-functional things like hiring & firing, strategy setting, management systems, culture development, and the like. That’s pretty valuable.
Executives with years of experience have established networks. And if their background overlaps your business plan (industry, product type, etc), their Rolodex could be really valuable.
Hiring some seasoned executives first sounds like the way to go, right? Well, I wouldn’t have written this article if the decision were so easy. Read on.
The Risks of Hiring Executives First
The more years an executive has under their belt and the larger the companies they’ve worked for recently, the more they’ve forgotten what it’s like to do low-level grunt work. You know, the 90% of the work you need done in the early days when you’re trying to get a product built and launched so that you can acquire your first paying customers. Even after starting to acquire customers, 80% of the work you need done fits into the category of grunt work done by individual contributors.
You’ll probably add to your hiring criteria that the executive must have worked for an early-stage startup. That’s a good start. But I can tell you from experience that the cells in their brain that host the memories of exactly what it’s like to work 80 hours per week scratching and clawing to the next round of funding get pushed to an inaccessible part of their brain until you hire them and they are suddenly resurrected. Oops!
During your pre-hiring discussions, the executive candidate remembered all the exciting parts of running a startup, but not the stressful and super hard-working parts.
You’ll know exactly when this revelation occurs. They will say something like this:
- “You’re paying me too much to do entry-level grunt work”
- “All of the time I’m spending on entry-level grunt work is preventing me from serving in my executive capacity”
Either of the above statements leads to a request to hire an entry-level employee or contractor. But you don’t have that in the budget and are now faced with a dilemma that usually ends up with firing the executive and either finding a more suitable executive or taking a different approach. I’ll cover each of these options next.
Side Note: You might also be considering adding a corporate executive to your advisory board. If so, first read my article titled “When Corporate Execs Advise Startups“.
The decision to hire an executive for a given function before mid-level or entry-level employees is for you and your co-founders to make. Hopefully, this article helps with that. But if that’s what you decide, you’ll want to modify your typical interview to best identify any big risks or likely issues. Consider discussing the topics below with your candidates:
- Salary Expectations – Do they understand that you’re not going to pay them a $250,000 salary? In fact, you might only be able to pay them $5K per month (or less) in salary while making up the rest in equity. This is the first opportunity to weed out executives that have forgotten what the scrappy, early-stage startup life is like. (For more on this, read my article titled “Founder & Early Employee Compensation When You’re Cash Poor”)
- What Excites Them – Why are they interested in working for an early-stage startup? Understand that their answer will be informed by the brain cells that are still active (the ones that remembered the exciting parts). But you’re looking to see if they actually enjoy building a new function from the start so that it can have their fingerprints all over it (done exactly the way they want).
- Grunt Work – Depending on how they answer the question about what excites them, make sure they understand that you don’t have any entry-level employees to actually get that done. They are going to have to do 100% of it. Ask them to repeat that back to you 3 times with conviction and a smile on their face!
- Their First Hire – Remind them that the budget is going to remain extremely tight until the first real round of funding. Then ask them how they will know when it’s justified to add another headcount under them. Also ask them how long they can go at their current salary and without such additional resource. If you like their answer, repeat it back to them and listen for the words “yes, that’s right”.
- Authority – Especially if the executive candidate is considerably older than you, you want to have a discussion about who ultimately makes critical company-level decisions. You want an executive that brings differing views to your discussions and debates. But they MUST respect the fact that you run the company and you are ultimately accountable to your board and investors – not them.
The alternatives to hiring seasoned executives is probably obvious. You can hire entry-level employees with just a few years of experience or you can hire mid-level managers with 10-12 years of experience. Actually, you can hire freelance contractors too, so I’ll add that to the consideration list.
Alternative 1: Hire Entry-Level Employees First
Hiring entry-level employees is certainly helpful to the budget. And since they candidates are likely early in their adult life and without a family or similar big obligations pulling on them, they can work as many hours per week as their passion drives.
The downside with this approach is the management oversight needed to direct, review, and sometimes redo their work. If you have experience managing their function, this will be easier than if you don’t. In other words, if you’ve never managed a marketing or sales employee, how are you going to know what they should be doing and whether they’re doing it well versus poorly? This might be where your advisory board comes into play, but they can only help so much because they aren’t working for you full-time or even 5 hours per week.
Alternative 2: Hire Mid-Level Employees First
You might give them a title like Senior Manager or Director, but they still have to start out as an individual contributor, just like described above for the executive hire. And since they have prior experience managing people, you’ll want to use the modified interview approach suggested above to make sure they have the right expectations.
A benefit of mid-level employees with roughly 10 years of experience (hopefully including time in early stage startups) is their startup brain cells are still somewhat intact. This reduces the risk of shock and surprise as they get dirt underneath their fingernails. Additionally, the job they’re coming from probably involves them doing some levels of grunt work as compared to the true executive that delegates all grunt work to others.
Mid-level employees should be able to contribute at least some of the things first mentioned as benefits of hiring executives. It’s just they won’t have as many data points to draw from, both successes and failures, and they won’t have developed as many superpowers as a seasoned executive.
One risk with this approach comes later, when you do decide you need a more seasoned executive over the function. Your mid-level manager is almost certain to want (and maybe expect) a promotion to that position. Maybe they’re ready for it, which is great. But if you don’t see that possibility when you initially hire them and that conclusion persists, you’ll want to carefully message the likely future executive hire. This dilemma is especially pronounced when first-time, inexperienced founders give themselves all “chief” titles like CEO, CTO, and COO and then hire someone with 10-12 years of experience, give them a “director” title, and later hire a VP or Sr VP above them.
Alternative 3: Hire Freelancers First
I’m assuming that you’re using freelance contractors for some functions. If not, it can be a great place to start for the functions you and your co-founders don’t already know well. Freelancers can work as much or little as you can afford. And they usually bring at least the experience of the mid-level employees described in this article. They can get the function stood up and can operate it until you can afford to hire a full-time employee in their place, which puts you right back to the start of this article.
One downside to freelancers is they won’t work just for equity like some early employees might – at least, it’s extremely rare.
Freelancers usually setup systems and processes for a function the way they recommend. It’s possible that you’ll later hire a mid-level employee or executive that disagrees and wants to replace it all. But this risk also exists if you hire full-time employees to get a function started. I mostly mention it so that you can ask the freelancer about the systems and processes they plan to setup and then double-check that with an advisor or another startup that’s further along than you. Ripping and replacing those things can be costly, time-consuming, and very frustrating.
There is no right or wrong answer to these decisions. I actually find a mix of decisions within a single startup, as they work their way to 20 employees. In other words, after using various freelancers for a while, they hire an executive for a particular function, one or two mid-level managers for other functions, and several entry-level employees for others. What’s most important is for you and your co-founders to make informed decisions about this for each role during the early days.