How Your Startup Can Attract Top Talent Without Huge Funding

Tim McLoughlin is a partner at Cary-based Cofounders Capital.

Last week I was invited to participate in a roundtable discussion at HQ Raleigh hosted by John Dearie, President of the Center for American Entrepreneurship. The group consisted of a range of entrepreneurs, investors, and accelerator/incubator managers. Across the board, access to capital and top talent were challenges that all of us faced. Today we’re going to focus on making great hires, though as with seemingly everything else at an early-stage startup, that task is significantly impacted by your access to capital.

For an entrepreneur, more capital means that you are better equipped to attract, afford, and retain top talent. Part of considering ourselves “cofounders” in our portfolio companies—thus our name: Cofounders Capital—means that after we invest we help CEOs build their management team and make key hires. The founding team will still typically own over 60% of their company after their first capital raise in the Triangle, so the upside is there for them to justify a significantly below-market salary for themselves. But what about early employees?

Companies in Silicon Valley, Boston or New York can raise millions in their first round and thus afford to pay market rates right away—and can’t really afford not to because they have hundreds of other funded startups to compete with for talent. But what about hiring your first 5-10 employees in the Triangle while bootstrapping, or after raising only a few hundred K? What happens when you cannot afford to pay market rates yet are trying to pull talent from out of state; or are competing for employees with local corporations like SAS, RedHat or IBM; or with better-funded and further-along startups like Pendo?

Here’s how:

  1. Sell the vision: Our CEOs who have been able to recruit best are the ones most passionate about their business. They care about the customer and how their solution is going to change an industry. They don’t only focus on the exit strategy and (potential) accompanying windfall, but the inflection points along the way that are much more concrete. For example, how would getting to a break-even point or raising a Series A change the value of your employees’ options? How would it change their salary? Convince potential hires that they won’t be stuck at below-market salaries for years.
  2. A large stock option pool: In the first round of financing, we encourage our companies to carve out a 15-20% option pool. We often get push back from entrepreneurs, until we tell them stories about another company missing out on a key hire. There are always “rockstar” hires who are worth the “cost” of handing over several percentage points of your company’s equity. Make sure they understand how valuable that equity is/can be. If you are hiring them away from high-paying jobs, their upside needs to be well worth their opportunity cost of forgoing current salary given the risk involved.  Keep in mind that the equity they receive will be subject to vesting (four years is standard, with a one-year cliff), so you’re not risking all that equity up front. You’ll know if they are worth it before any or all of that equity has vested!
  3. For sales hires, be generous with commissions: For any company, but especially early-stage startups, the right sales hire will rock your world. We don’t encourage hiring this person until there are a few referenceable customers, but when the time is right, offer a generous comp plan. Sales people are typically very optimistic so they respond well to commission-based compensation plans, and if they deliver the goods, they deserve to be the highest-paid folks in the company. For SaaS businesses that are valued at 4-8x top-line revenue, increasing sales moves the needle the most. Don’t be stingy with heavily weighted commission plans that enable sales people to make serious money.
  4. Negotiate comp plans for one year: Let your candidates know that you are negotiating their compensation plans for one year at a time. In a startup, a lot can change in 12 months. During that time they will prove their worth—or not—and the company will be in a position where you can afford more… or less.
  5. Always be recruiting: One of the benefits of the Triangle entrepreneurial ecosystem is that it is relatively collaborative. If you’re an entrepreneur, I’m sure you have been given the old “It’s not a fit for me/us, but let me introduce you to…” Take those meetings. Recruiting is a numbers game. It takes a lot of cups of coffee and beers after work to meet someone crazy enough to join you on your startup’s wild ride—and is also at the right place in their life to take the risk. When you find that person and know they are the right fit, find a way to hire them! We recommend starting with tips 1-4…