By Eric Saraniecki
Further readingHow to Start a Startup: Are Entrepreneurs Born or Made? How to Start a Startup: Early Funding How to Start a Startup: Looking ahead into the unknown How to Start a Startup: What to Consider Before You Take the Plunge How to Start a Startup: Building a Founding Team
How to Start a Startup: First Employees
By Eric Saraniecki. Jun 24, 2020
Welcome to “How to Start a Startup,” a short series aimed at giving aspiring entrepreneurs a range of views about starting a new team, product, or initiative.
This week, our panel of founders will discuss what goes into making first hires.
Michael Shaulov, CEO and Co-founder of Fireblocks:
"There’s a fairly limited group of people who are willing to take the risk of joining as the first, second or third employee"
When you and your co-founders decided how you want to run the company, did you insist the first people you hire fit that corporate culture or were you willing to flex a little bit more to fill critical gaps?
I’d say 80% of your first employees will be critical to your company for a long time. So I think it is important to make sure that they’re qualified and fit the culture.
This is a point when the co-founders are already helping each other. When we interview people, we all see different aspects of personality. For me, I really like top performance, and I would say I’m more flexible on the cultural stuff. It's usually easy for me to get along with a different type of personality.
One of our other co-founders is very obsessed with personality — that someone understands guidelines and isn’t a Dennis Rodman type. You can have only one Dennis Rodman in the team, and usually a company has its own Dennis Rodman.
But the reality is that I think those things are important, and what really helps us is the combination of the co-founders, we are able to filter through those properties.
How do you attract the right level of talent when you're so young as a company?
It's really hard. When we were first hiring for Fireblocks, it was really, really hard for us to get the first couple of employees in terms of just finding superstars that are culturally fit and willing to bet on a new company.
There’s quite a large group who are comfortable joining a company that already has five or 10 employees. It's like a sweet spot where people are like, "Oh, it's early. I'm joining as one of the first employees," but to me, they’re de-risked. They’re not walking into an empty office. There’s a fairly limited group of people who are willing to take the risk of joining as the first, second or third employee.
It's very scary. You need to drop everything to join this startup that's barely funded. They don't have a product, they don't have customers. There's nothing. It's basically like starting your own company, but without all the benefits.
Had you already raised some money when you hired your first employee?
Yeah. We were also three co-founders who had the benefit of being second-timers.
So did you pay your first employees a market rate since you had already some funding, or did you do some sort of staggered compensation scheme?
First employees usually take a much higher equity stake. I think it's reasonable to ask them to take a salary that they can live on — comfortably pay their rent and their kids' education. And just that.
That's what you have funding for. You don't want the employees or the founders to be stressed from their economic day to day. You don't want them to come to work and think about how they're going to pay something. But on the flip side, it's not that they're going to get rich on their salary.
So when you started hiring, was it all engineering? Did you hire a salesperson? What did you think about in terms of the shape of the team?
For the first five months, we only hired engineers because we had to build the product.
I think it’s usually a good thing if one of the founders is able to close the first three, four, five deals if he has the skills and experience to do it. Once we had our first two or three customers, that's essentially when we made our first sales and marketing hires.
Having said that, I think it really depends on the founders. If the founders are highly technical and don't have a lot of commercial experience, it makes a lot of sense to hire a savvy sales guy who can close the first couple of deals and have the conversations with the customers.
I'm only experienced in B2B. I assume B2C is a bit different. Maybe you do need marketeers at the very early stage of the process because you actually tried to validate some thesis around your ability to reach a big market fairly quickly.
So I don't think that there are clear formulas for that, but I do think that you need to hire strategically.
Ben Milne, Founder and Chairman of Dwolla Inc:
"And in my first company, I hired out of the customer pool, so people who were buying the products"
Can you remember the first three people you hired? Are they still in the company?
I don't know if the first two or three or even four people who were hired at Dwolla are still there, but there are people that were in the first-20 cohort who are still there, and I think continue to have really successful careers. Once they get over that one- or two-year mark, most people are really invested.
Something that's exciting for me is the number of people who have gone on to be leaders in other businesses, or are now running accelerators or building their own startups. That certainly gives me a lot of pride in a way I did not expect.
And in my first company, I hired out of the customer pool, so people who were buying the products. I just said, "Look, I'm hiring, I'm looking to hire," and sent it out in a newsletter. I got applications from clients, which in that business was a really great strategy because the people ended up working in the company really loved the product and were really, really intense users of it.
Why did you decide to hire a local team instead of doing something more distributed?
It was probably a benefit of ignorance. I didn't know! What I knew is that if I was in the same room with people, we could get stuff done. But the concept of intentionally building our remote team was not a concept that I was thinking about deeply at the time.
I think over time, Dwolla has continued to get better at building a very mobile infrastructure, so it really doesn't matter where people are. Early days, it's just a question of where the people are that are working on it with you, I think. And I just happened to get lucky initially, and then I found some of those people in Iowa, in the Midwest, generally speaking. And when we took on our first actual round of funding, it helped solve a really complex regulatory issue for us and the investors were Des Moines based. And they did, I think, want us close to them as a kind of just in case.
But also, we were leaning heavily on them for a number of processes and there was a meaningful amount of money moving through the system that us going rogue would have been really terrible. We never did. It's one of the reasons we're still here. But in the early days, somebody puts in some early money when they haven't been doing software investing before, they're managing against different types of risks.
Arti Arora Raman, founder and CEO of Titaniam:
"One lesson learned from being a serial entrepreneur is the mistake of going too fast too early and running out of runway"
How do you think about the team as it relates to your concept? Will you grow the team as your revenues and customers grow? Or will you preemptively build the team you need to hit your roadmap?
For me, it's going to be in two phases. Early on — because my demand hasn't hit any kind of a hockey stick yet — I am hustling for every deal. So at this point, I'm definitely going by customer need in order to scale the team.
I have my core team, and as I get more and more customers using it, I need a few more people to just keep up with the work. My plan is to grow that way.
But once we have this established demand, and my customers start talking to other people, I will start anticipating that and grow a little bit in advance. One lesson learned from being a serial entrepreneur is the mistake of going too fast too early and running out of runway. But hopefully, I'll have this wonderfully positive problem right where I'll need to anticipate.
Daniel Chait, CEO and Co-founder of Greenhouse:
"I think you've got to think of it like rocket boosters: You need the people to get you through to that next funding round or to that next stage of growth or whatever it is. Then they may or may not fit for the next round"
I'm curious about, maybe, the first three to five people you've hired.
I don't think we knew at the time, but the first hires we made were incredibly impactful.
And so the first two: I hired a programmer, and he’s now our CTO. And he hired a guy that he had worked with, and he's still with us as well. And they’ve really formed the backbone of the engineering and product team to this day.
But at the time, we had some kind of handwritten outlines and notes of what we wanted to build, and I told my co-founder, “Jon, build it.” And as product manager, Jon was basically shipping kanban cards every day.
The engineers’ job was to pick them up off the board and just bang out the code as fast as they could. Mike and Mike basically just sat down and put headphones on, we fed them snacks, and they made the product.
It was about six months of just working with them, but it turns out that they formed a core of the company culture, the way we design code, the way we build our organization, our values.
Not every one of our first five or 10 employees lasted that long, but a lot of them did. The first sales reps I hired were here for years — one of them just left last year and had a long successful career. So those early hires can be really impactful if you get them right.
If you have a vision but don't know exactly what you need yet, how do you filter for employees? Is it similar to picking a co-founder — someone you think is capable and is going to grow with you — or do you really target the skill set at that point?
We did a much more structured hiring approach. We had the index-card version, so we wrote down what we were looking for and how we were going to test for it, and then we went out and sourced proactively and worked our networks and tried to find the people.
Mike, our CTO, remembers this: We interviewed hard, and he passed with flying colors, and we hired him. But we thought we were hiring a programmer. If you asked me at the time, I probably would have said our programmers were going to last a year or two, and then the company was going to grow and change and need different things.
And I just got really fortunate that the programmer we hired ended up being a better CTO than a programmer — and he was a pretty good programmer.
As the company grew, he just kept being more capable at doing the leadership that we needed. Looking back, sitting down and just writing code 10 hours a day was not a very natural fit for him. He’d already led a team of 20 people at a big media company, so for him to step back and build the startup with his bare hands was a real effort. The lucky part for us was, by the time we got to the stage where we need leadership, he had it already cooking.
So how does that translate into advice? I don't know. We happened to get lucky. I think you've got to think of it like rocket boosters: You need the people to get you through to that next funding round or to that next stage of growth or whatever it is. Then they may or may not fit for the next round.
As I've looked back over the last eight years, we have hired some incredible people along the way in every area of the business who were really right for the stage we are at. Then ultimately the company changed to such a degree that they weren't the right fit for what we needed at the time, and either we or they had moved on.
So to me, that's a very natural part of the startup ecosystem. We could not have gotten where we are without those people. They also then go on to have other things happen in their careers and in their educations. They may well be right for other companies at different stages.
But for us, it's like, “Wow, between 50 and 90 people, that person was it. Out of 100 people, they just weren't the right thing anymore.” So we've gone through a bunch of that as a company and probably still will. I define a startup as a company that needs to change or die.
How do you think about compensation for those very early hires? Do you give them really large equity stakes or do you do it more incremental over time as they grow with the company and prove themselves?
That's why equity grants are so much higher at the earlier stage. Roughly speaking, you're going to allocate more or less the same percentage of the company every time you raise a round.
Say you take 7% of the company, and that goes to your first round of employees, before you raise your Series A. That might be 10 people. Then you raise your series A, now you've got another 7% of the company that you're going to dilute and get that 7% of the people to the next group of people. But you just raised $8 million, that might be 50 people, and then you're going to raise your next round and you might allocate another 7%, but that goes to the next 200 people.
There's a point at which your salary pay kind of equalizes to the market and your equity pay drops off as a relative piece, but that's exactly why early employees get so many shares.
Do you feel that is fair to employees who join later? Do you ever have to justify it to later stage employees?
It's definitely a crapshoot. So if you're not prepared for that level of risk, then definitely don't do it — and definitely don't take it because you think the shares are going to be worth any money at all.
Why does the 400th employee get 1,000 shares and the fourth employee get 100,000? Well, because when they started, it was a massive risk, but nobody joining Greenhouse today has to worry, “Is this company ever going to raise a Series A? Is this company going to ship a product or ever have a customer?”
Marwan Forzley, Co-founder and CEO of Veem:
"I think it's a key requirement for the early set of people that join the company to have been in startups. Otherwise, it'll be quite an adventure they may not be ready for"
Who are your critical first hires?
You basically are looking to extend the core team that you set up. You're looking for someone who is going to be in it for the long term with you — not exactly the same commitment as a co-founder, but up there.
In terms of what you actually need — engineers or finance or compliance or whatever — it really is dependent on the key gaps in the business.
And how do you convince someone at that early a stage to join you in your idea?
Generally, you'll look for someone who has been through startups before, so that they understand what they're getting themselves into. I think it's a key requirement for the early set of people that join the company to have been in startups. Otherwise, it'll be quite an adventure they may not be ready for.
Identify the gaps and figure out exactly who can help you. You're looking for someone who has been in startups, someone who wants to be in the thick of it with you. And then you're looking for someone who is not necessarily deep into a single thing — someone more utilitarian who can function in different settings. They're going to be doing everything from coding, to making coffee, to doing some paperwork, whatever. It's going to be a multipurpose setting.
I think engineers are a bit more steeped in this concept of what it might mean to be in a startup. But when you need to hire a position that’s less common in a startup, like compliance or legal, how do you convince someone that a startup is a reasonable idea?
Every startup has to hire compliance and legal, so it's not that it doesn't exist. It's just that it's a longer search or a bigger search. But companies have been built, and there's been the first compliance and the first engineer and the first lawyer. You just have to find them along the way.
Do you often go into your own network when you make these first hires? Or do you engage with the recruiting agencies?
Usually, the first batch of hires are people who we know from various settings because at that stage, it takes a lot of convincing about what you’re trying to do. You’re not ready to have a search for all that. Because at that stage it's like they're joining you more than they're joining the idea.
And I guess it's a form of commitment for you to convince your friends to do it, right?
It's a commitment on both ends. I mean, you're also taking a lot of risk as a new employee for a company that has not been defined yet. So, it's important for both sides, and there's work required to make sure you have the right set of folks that join you.
If you start to build the team before you start to get some funding, how do you think about compensation? It must be pretty tough to ask people to be very lean.
That's why you have to have people that have done startups before, because that discussion starts to happen. And at that stage you may not have funding, so you want to make sure you’ve got people who are flexible. Obviously at that stage, you're looking for people who are more interested in options and equity than cash, and that all gets factored into the discussion. It's going to be a lot more material on equity than on cash.
Nimrod Lehavi, Co-founder and CEO of Simplex:
"Someone may fit right in what you need right now, but you're not sure they’re able to grow to the next phase — and that will f*** you up so badly in a few months"
So it feels almost like you hired your co-founders, right? You had a sense of exactly what you needed to round out the skills of the core group. When did you hire your first true employee?
It came pretty fast. As soon as we had the first term sheet signed, we signed up another developer.
Hiring is a tricky business. You always hit and miss. Some of the people are obviously misses and sometimes it takes a long time to understand that you missed. We're trying to make it work after we've made a decision, and many of the decisions are wrong. Someone may fit right in what you need right now, but you're not sure they’re able to grow to the next phase — and that will f*** you up so badly in a few months.
I don't want to hire good people anymore. I want phenomenal people. Because it's just tiring to re-explain things or redirect people. It sounds like such a cliché to hear myself saying that, but if you hire amazing people, you have an amazing company.
It's like all the management-school crap: A people bring A people, B people bring C people. So it's always like that! If you let go just one bit because you want to make the quota and you need another developer just to finish a task… You need to kick him out six months later because he's poisoning the culture or he's just not that good. It's so f***ing frustrating.
So do you have any of the first three or four people you hired, are they still on staff?
The first developer is still on staff. A bunch of the first 10 are still on staff.
At this point, do you have a play sheet of who you think you would hire first?
I have an amazing COO, and I would definitely go to work just with him. He's very operational and detail oriented, and I'm just this crazy-guy visionary. I can sell anything to anyone and just make shit happen. And then he needs to go and pick up the pieces, and make it actually work. He can look at a spreadsheet and dig into all the details without falling asleep twice or moving to do something else. So someone who compliments where you know you'd suck, I think is the most important one.
And how do you think about scaling the team in the early days — back when you went from two to 20, and were just starting to structure the team?
I think that our Number 11 employee was HR, which I think was instrumental in creating the culture.
How did you compensate people early? Because I'm sure you want to just try to be super lean because you took in some funding, but it wasn't a ton of money.
No, it was very little.
And you had a really tough grind ahead of you in terms of the amount of work to do. So did you hire people and say, “Your salary is this now and then later as we improve it'll get better?”
Yeah, exactly that. We pay market salary, and you come because you believe in what we do, you believe in the purpose.
That's how you get people really to sign up for what they do. They are engaged, they love the company, they really believe in what we do.
I'm marketing fully convinced that crypto promises a literally better world.
In the weeks ahead, we’ll explore these high-level topics:
- Startup Series 8: Life beyond the first few months
Each post in the series comprises a short set of questions about a specific topic. Our participants will offer their own views and we encourage you to add your voice to the discussion.
Do you have your own questions for Digital Asset’s panel of entrepreneurs? Please write to us at email@example.com.
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