It is common for business founders and managers not to know how to hire employees for startup businesses. This can be a big problem: Budgets are often constrained, and a poor hire can be disastrous for the company’s long-term prospects.
Here we look at the key challenges faced by startup businesses when recruiting and hiring, and set out 11 tips for startup businesses when fulfilling their people capability needs.
Key Takeaways
1. When considering how to hire employees for startups, founders and managers have several challenges including; the risk of a poor hire, budget constraints, the risk of failure and a lack of brand recognition.
2. 11 key tips for how to hire employees for startups include:
- building culture
- recruitment strategy
- managing compliance and legal hurdles
- candidate profiles
- employee retention
- employer branding
- multiple outreach channels
- developing a talent pipeline
- international hiring
- remote hiring, and
- and use of a staffing agency or PEO.
3. If founders are unsure how to hire employees for startups, it may be worth engaging a recruitment partner to supervise the process.
Mitigate hiring challenges with Horizons EOR.
What Are the Challenges of Hiring Employees for Startups?
Recruiting and hiring employees for a startup comes with its own unique challenges. We look at the key challenges below:
- Risk of hiring the wrong person
- The success of a startup cannot be reduced simply to the work of the founders — a big factor is the people that the founders surround themselves with. In the words of Tom Eisenmann, Howard H. Stevenson Professor of Business Administration at Harvard Business School, “A broad set of stakeholders, including employees, strategic partners, and investors, all can play a role in a venture’s downfall.”
- As startups are generally lean machines, every hire of a new employee needs to be a net positive to the team, and hiring the wrong person can have an outsized impact on the success of the company. This is especially true for startup founders hiring managers for the first time.
- For this reason, hiring decisions are one of the things that can most contribute to the success or failure of a new business.
- Budget constraints
- Startups are often unable to pay the same salaries as more established companies. This can make it harder to recruit more experienced and senior staff. Where they do pay market rates for senior staff, this may mean hiring one employee rather than two.
- In response to this challenge, many startups consider equity/stock programs for early staff and/or more attractive benefits (such as unlimited paid vacation).
- The risk of failure
- Many startups, unfortunately, do not succeed to become long-term viable businesses. Many prospective hires, aware of this, will be concerned about leaving an existing job for a company with an uncertain future.
- For some startups, this risk is mitigated by emphasising the other benefits of being involved in a startup, such as having greater responsibilities and ‘development opportunities’ in general.
- Lack of brand recognition
- Working for a recognized brand is important for many jobseekers. A startup needs to combat the perception that a job with an unknown entity is less prestigious than a job with a larger or more established firm.
There is no wholesale solution to deal with these challenges. Ultimately, a startup needs to get creative in coming up with ways to attract excellent staff to the startup.
In many cases, this means focusing on actions that can be taken within the organization to recruit and hire the best employees. We set out 11 key tips below.
A broad set of stakeholders, including employees, strategic partners, and investors, all can play a role in a venture’s downfall.
Tip One: Build a Desirable Startup Culture
Any recruitment or hiring approach will fall flat on its face if the right culture is not already in place to attract and retain staff.
While compensation will always be an element of attracting top talent, there are many other factors. in place, including:
- Flexibility. Does the startup support employees in need of flexible work arrangements (such as employees with children and those with disabilities);
- Performance management. Are there incentives in place to support high-performing staff?
- Skill acquisition. Will employees be able to move into other areas of the business (besides the unit they are hired into), in order to broaden or grow their skillset?
- Brand reputation. Does the company itself have a recognized and well-respected brand? Employees and prospective employees are often attracted to working for companies with a ‘good name’ — even if the company is ‘up and coming’.
Tip Two: Establish a Recruitment Strategy
A recruitment strategy is essential in order to balance the people needs of the startup, the available funding, and the likelihood of acquiring staff at a certain price point. It is the internal guide on how to hire employees for startup businesses.
It is at this point that the startup needs to consider:
- How many workers are needed?
- Is it best to hire locally, or should I hire internationally?
- Do staff need to be in-office, remote or hybrid?
- Is it necessary to hire employees, or will contractors/freelancers do?
- What is the ‘cost of labor’, whether internationally or locally? (That is, the cost of salary, plus compulsory benefits, social contributions and compulsory employment/payroll taxes).
Tip Three: Consider Compliance and Legal Hurdles
Alongside the recruitment strategy, a company needs to take into account the compliance and legal restrictions that apply to hiring. Specific obligations depend on the country that the business plans to hire in. But some of the key matters to consider include:
- Payroll obligations
- In most (though not all) countries, the employer is required to withhold employee income tax and submit those withheld amounts to tax authorities at regular intervals.
- Rules on payment periods, and permissible methods of payment, can be quite different depending on country (for example, in the US payment can often still be made by check, whereas electronic payments are required in other countries).
- Potential employee misclassification
- Generally speaking, employees and contractors/freelancers are not interchangeable with employees. Treating them in the same way risks ‘employee misclassification‘.
- The misclassification of employees, in turn, makes a company liable to pay back-taxes, any social contributions that have not been paid, penalties and any applicable interest.
- Permanent establishment risk
- If workers are based in an overseas location, depending on the extent to which they are a ‘fixed’ and ‘ongoing’ presence there, this runs the risk that the location is treated as a ‘permanent establishment‘ of the international company: The presence of a permanent establishment in a location makes the company liable to pay corporate income tax there.
- Depending on the corporate income tax rates that apply, this can add a hefty cost to employing staff in that location.
- Varying employer obligations
- The legal obligations of employers differ substantially depending on location. For example, paid parental leave and annual vacation obligations can differ substantially depending on the location. In addition, only a few countries (such as the United States) allow for employees to be terminated ‘at the will’ of the employer. In many other countries, termination must be ‘with cause’, unless there is compliance with strict redundancy/severance rules.
Tip Four: Refine Your Candidate Profile
Once the recruitment strategy is in place, it is time to develop the ‘candidate profile’. This sets out the key characteristics of the professional that you seek to hire, including their educational background, qualifications and work experience.
This profile can then be used to create job descriptions for positions that need filling, as well as informing the HR analytics of the organization.
Tip Five: Don’t Forget Employee Retention
It is no use focusing on the recruiting and hiring of new employees for a startup without also considering the importance of retaning those employees that you do hire.
This means thinking about:
- Development opportunities. To allow employees to improve their skills with more challenging work;
- Ongoing training. Employees will often be attracted to opportunities to learn new skills or qualifications;
- Progressive benefits. Benefits that kick in after a certain time period (such as an extra week’s annual leave after a year) can be effective for retention;
- Culture. Employees aren’t just focused on the explicit benefits (financial or otherwise) of their job, they also want a positive work environment.
Tip Six: Always Work on Employer Branding
All startups are focussed on company branding when it comes to their core product or service. But not all startups are focussed on their branding as an employer.
A LinkedIn survey from 2017 found that 80% of talent acquisition managers considered employer branding to have a significant impact on recruitment. The company’s branding as an employer is how it represents its ‘employee value proposition‘: That means, the value that a company brings an employee in return for the value provided by the employee.
Prospective employees will check sites like Glassdoor, and the company’s ‘About Us’ page to get a feel for the company as an employer.
Aside from the obvious (offering a positive work environment for alll employees), businesses should ensure that all job ads and job descriptions draw attention to the benefits. ofworking at the startup.
Tip Seven: Use Multiple Outreach Channels
As well as traditional recruitment channels (e.g., job sites and LinkedIn), businesses should consider more targeted options, such as:
- Networking events and career expos. Startups should ensure that they are present at relevant networking events in their areas of specialization in order to attract the right potential employees.
- Academic/Trade school channels. By connecting with colleges, trade schools etc, you may be able to source a steady stream of potential hires through their graduates.
Tip Eight: Develop a ‘Talent Pipeline’
As a startup, it is important to avoid any lags in productivity as a result of hiring gaps. In order to avoid this outcome, it is important to have a continuous ‘pipeline’ of new hires into a growing company. Useful ways of managing this include:
- having an employee referral program for employees to refer relevant talent on to the company
- making multiple hires on each recruiting round.
Tip Nine: Hire an International Team
Hiring a global team can be a useful option for acquiring top talent for a startup, and at an affordable price. International hiring options include:
- International contractors or freelancers
- The advantage of hiring international contractors or freelancers (as opposed to employees), is that it can be a more affordable option than hiring employees overseas.
- The international contractor has to deal with their own income taxes and (if properly classified, see above), is not entitled to benefits.
- Set up a branch or subsidiary overseas
- For more significant operations overseas (e.g., trading and entering into contracts in that location), it may be necessary to set up part of the international business itself overseas. This can be achieved by setting up a branch office or a subsidiary.
- As long as the business has local employer and business registration, it is able to hire employees there.
- Read about the pros and cons of each option at Branch versus Subsidiary: What Is the Best Option for Your Global Expansion?
- Use a Global Employment Organization
- A Global Employment Organization (‘GEO’), also known as a global Professional Employer Organization (more on this below) recruits, hires and onboards staff on behalf of client businesses in international locations.
- Find out more about this option at What is a Global Employment Organization (GEO)?
Tip Ten: Consider Remote Hiring
Whether hiring within country, or going international, there can be considerable benefits for startups hiring remote employees. Potential benefits include:
- Cost savings
- With a constrained budget, extra office space and equipment for new hires can have a substantial impact.
- By going fully remote, or moving to a hybrid office model where only some of the employees are in-office every day, a business can make significant savings. While it is common to provide remote work allowances/stipends to support employees home office needs, this is often a lot cheaper than fully funding physical office space.
- Attracting more applicants
- When hiring in-office only, your applicant pool is limited to only those job-seekers located in that geographical areas — or those willing to move there.
- By going remote, you open up the position to applicants all over the country (or internationally, see tip above).
- Better internal networking
- Where employees are located in multiple separate offices, there is always a risk that the startup will become ‘silo-ed’, with team members not communicating effectively across the organization.
- A remote first set up with the right tech tools can ensure that all team members are ‘on the same page’ when it comes to day-to-day operations.
Tip Eleven: Consider a Staffing Agency or PEO
Whether hiring locally or internationally, there is an alternative to hiring a workforce (whether employee, or independent contractor) directly. This means using a staffing agency (sometimes called a ‘contract staffing agency‘) or a Professional Employer Organization (PEO). In the UK this is often called an ‘Umbrella Company‘.
The staffing agency or PEO is the formal employer of the employee. This means the staffing agency or PEO takes care of payroll, tax withholding, benefits administration and employer compliance. But the employee still works on a day-to-day basis, for, and at the direction of, the client company (in this case, a startup).
While the terms are sometimes used interchangeably, ‘contract staffing’ or ‘staffing agency’ usually refer to an organization that specializes in temporary hires.
‘PEO’ is a term which usually refers to a more ‘all-inclusive’ employment solution provider. A PEO can often provide employees on a long-term basis, and may take care of recruitment as well.
The benefits of using a staffing agency or PEO include:
- Compliance
- A startup will often not be in a position to be familiar with the extensive compliance, legal and tax requirements that apply to hiring employees.
- A PEO or staffing agency is an employment compliance specialist. They are familiar with all the rules that apply in the chosen hiring location and become liable for non-compliance.
- Scaling
- A startup usually exists in a situation of growth uncertainty. This means that their approach to hiring needs to be ‘scaleable’ relative to their growth.
- The advantage of using a PEO or staffing agency is that it is often easy to add additional staff as the need arises. The startup itself doesn’t need to advertise jobs, nor onboard employees with compliant contracts. As specialists, the additional unit cost of a staffing firm or PEO adding a staff member is often considerably less to the firm than it would be to hire themselves.
- For more scaling tips read PwC’s From startup to scale-up: five ideas for growing businesses.
- Efficiency
- Speed in all things is essential in a startup: Often a company is burning through initial funding and needs to grow as quickly as possible.
- Running a compliant recruitment and hiring process is time-consuming, and can pose a distraction for a business trying to grow its core revenue-generating activities.
- Multi-location set up
- A startup may be unsure in which direction exactly it will go over time. In many cases, businesses have the possibility of eventual international expansion in mind.
- A PEO with a global scope (i.e., a ‘global PEO’) is able to recruit and hire staff in almost any country. An ongoing relationship with a global PEO means opening up in a new location with ease, and with the same global partner.
Frequently asked questions
The employees the startup needs change as the startup grows. Initially, many startups will begin simply with the founders doing the work, and no employees.
As the startup begins to hire employees, it is often the senior management that is the initial focus. The following roles are common:
- Chief Executive Officer (CEO). This is the ‘captain of the ship’, with full operational responsibility for the business. Generally, they answer only to the directors/owners of the company (usually, but not always, the founders);
- Chief Technology Officer (CTO). This is particularly important when the business specializes in a tech product or service (e.g., a fintech or SaaS company);
- Chief Financial Officer (CFO). They take care of financial reporting obligations and are essential for ensuring the company stays on top of cashflow;
- Head of Sales. In the early days of a company, it is essential to have great salespeople on board to ‘get the ball rolling’ with the company’s products;
- Chief Marketing Officer. The CMO will direct advertising, social media, PR and SEO activities. This is crucial in the early days when the priority is on raising brand. awareness.
For more on hiring management check out How to Hire a Manager.
Some important ways to attract employees include:
- Focusing on employer branding
- Using multiple (and non-traditional) recruitment channels
- Employee referrals
- Offering remote work/hybrid work options
- Equity (i.e., stock or shares) as well as salary
- Non-financial work benefits.
The usual process for hiring in a startup is:
Come up with a candidate profile and job description
Advertise through the usual channels
Interview/test candidates
Check references or conduct a background check
Make an offer to desired candidate
Hire candidate with a compliant employment contract.
For an example of a typical hiring process in a startup see How to Hire a Software Developer.
