Call it the Catch-22 of startup life.
You need talented employees to help grow your business. But without enough cash flow, you can’t get the money to pay them.
“It’s the dilemma every early-stage company faces,” says Rosalind Resnick, CEO of Axxess Business Consulting in New York.
Certainly, you might be willing to work 24-7 with little financial reward for many months. But you can’t expect an employee to do the same.
So how can you compensate the top-level talent you need to boost your business? Consider these steps.
Offer them stock. Of course, the most obvious approach is to supplement salaries with company equity. If employees feel confident the business will take off—and those who don’t shouldn’t be working for you—then they’ll probably be willing to accept lower-than-market wages, as long as they’re getting stock.
Trouble is, the tack is only useful for certain types of businesses—the kind backed by outside investors that are likely to go public or be bought by a company with deep pockets. As a result, “It’s not a strategy many small businesses can employ,” says Resnick.
Another tack for companies that intend to remain private is to offer so-called phantom stock. In this type of plan, you provide employees with shares in the company. But, unlike stock awarded in publicly traded enterprises, there are no voting rights and the value increases only as the company’s value grows. More important, you can structure it so that vesting takes place over, say, a five year period, giving your firm time to grow.
Tie salary to meeting milestones. When Paul Emery co-founded a Campbell, Cal-based telecommunications company four years ago, he promised employees a salary that was 60 percent of the market rate for compensation. But, he also agreed to raise compensation substantially and at regular intervals, as long as the company met such milestones as alpha and beta test completion and successful fund-raising.
After about a year, according to Emery, employees’ salaries were raised to 80 percent of market rates and, six months later, to 100 percent.
Hire interns. It’s a good way to grow your own talent at a low cost. By hiring promising employees who are still in school or are recent graduates, you can bring on board talented people with a lot of potential—at a price you can afford.
Look for people with a cash cushion. In these times of high unemployment, a company with enough growth potential might be able to hire a few qualified employees willing to work for a very small salary temporarily, because they believe in the company’s potential.
But, you need to be sure they’ll be happy with the arrangement—and able to afford it.
In some cases, you might want to protect yourself by hiring people with sufficient financial wherewithal. Take Bradley Will, owner of a one-year-old startup, Socialspin.com in San Francisco. He hired several high-level employees, including the former president of a successful mid-size company, who were willing to accept a salary of $2,000 a month, with the promise that their compensation would increase once Will was able to raise enough money from investors.
“We set the salary ahead of time, with the understanding they’ll get that when we’ve brought in the capital,” he says. “But I knew it wouldn’t work unless they were able to wait.”
Forget about hiring full-time staff. If you just don’t have the cash to pay a regular staffer, you should consider using independent contractors. For example, instead of hiring a salesperson, you can turn to manufacturers’ reps. They won’t receive a salary, but will take perhaps 20 percent of every sale.
For her part, Jennifer Silva, founder of Sign Up for Camp in San Francisco, uses mothers who are re-entering the job market as salespeople and pays them entirely on commission. “Not only do they know the local camp industry well, since they’ve sent their own children to camp, but it’s also a way for them to get back into the workforce,” she says.
If you decide to use independent contractors, be careful. State and federal agencies are cracking down on the misclassification of independent contractors. So, you’ll need to make sure you’re following appropriate tax and labor regulations.