Tag Archives: Startup hiring

Hiring undervalued people

I wrote about the importance of doing fundamental research in an earlier post.

The summary of the post is that, in order to outperform the market, you need to develop your own view about specific investment opportunities. If you rely instead on the thoughts and social signal sent by other investors, you will at best get market returns. To outperform the market, you need to evaluate the source material (team, market, product, …) yourself and come up with informed views based on this source material.

The same reasoning applies for talent. Evaluating a candidate consists of two things. The first is your own evaluation and the second is the external evaluation which results from the candidate’s formal background and reference checks of people who have worked with the candidate. Both should be part of your process.¬†However, you should weight your own evaluation more heavily.

The reason is that the external evaluation in the form of the candidate’s formal background and reference checks is accessible to everyone. As a result, this information will already be baked into the cost of working with the candidate. You’ll be paying the market price for whatever you think you’re getting.

This approach is available to you if you can afford to pay the market price, so it might work if you’re a market leading company with significant resources.¬†But it’s not how great startups are built.

Great startups are built by recruiting candidates who the market undervalues. This requires knowing the market value which results from the candidate’s formal background and references, having an insight as to the candidate’s actual value from your own evaluation, and having the conviction to bet on someone where the latter exceeds the former.

A startup’s edge in hiring over big companies

When startups compete with big companies for talent, they’re often unable to match the cash salary offers made by the big companies. The reason is that startups have less money than big companies.

However, startups have two big advantages over big companies which they can use to attract talent. The first is equity (or options on the underlying equity; I’m going to use equity to cover both equity and options throughout this post). The second is the offer of responsibility and the ability to have an impact which this responsibility brings.

Big companies rarely offer equity to their employees. In theory, they could, but in practice they don’t. I think this has to do with the fact that most big companies need most of their employees to execute on their existing operations. They don’t see the need for people to come up with and execute on creative new projects. And the former employees don’t demand equity.

And even if big companies did offer their employees equity, this equity doesn’t carry as much upside as that offered by a startup. The equity upside potential of a startup is much greater than that of a big company.

So startups can gain an edge over big companies by offering equity to their employees. As a result, startups need to frame their compensation discussions with employees around the value of the total package they’re offering rather than just the cash component. While they’ll likely fall short on the cash component, the expected value of the total package will be greater if the candidate believes that the startup has the potential to be a great company. And you want to work with employees who believe this.

In addition to emphasizing the value of the total package it’s offering, a startup can give its employees more responsibility than that offered by a role at a big company. And with more responsibility comes the ability to have a greater impact. Not every employee wants this. But, once again, you want to work with employees who do.

So, if you believe you’re a great startup but are having difficulty winning talent over big companies, keep emphasizing the total package you’re offering and the responsibility and ability to have an impact that the role you’re looking to fill provides. It’s a great way to filter out the talent that isn’t a good fit for your startup and attract that which is.