Building Out Early-Stage Teams

The success of early-stage companies is completely dependent on a core team’s ability to execute a plan tailored around the founder’s vision. Even the most talented founders can’t do it alone and need to delegate responsibilities to team members, those failing to do so will at best achieve stagnated growth, no matter how great the core idea may be.

There is a myriad of challenges around hiring and building out a successful team, the most fundamental of which is finding the right talent with like-minded beliefs about the future the company is trying to build, and that is bought into the founder’s vision to get there. Widely accepted as the best way to increase team buy-in is through aligning incentives to focus on key metrics identified by the founder as “growth drivers”, or by focusing attention on long-term value itself.

Widely accepted as the best method to achieve this is through equity compensation, which comes with its own challenges. Books such as “Slicing Pie” attempt to offer some out-of-the-box generic solutions to this challenge, but by the book’s own admission these are only general rules of thumb, and the intricacies of each startup make one-size-fits-all solutions impossible. Although it is almost impossible to adequately paint the complete picture of the issues surrounding building out early teams, we have isolated a few key insights that will aid in the process if properly recognized and appreciated by stakeholders in early-stage ventures.

Founders Can’t Do It All

Although founders are usually gifted individuals that are capable of executing the value add offered by their startup, there is no guarantee that these founders are talented stewards of capital or that they will do an adequate job of allocating capital to the correct places to drive growth

• Even for founders who have a good grasp of their company’s needs and the team required to build their vision, the process of recruiting, interviewing, hiring, and onboarding is extremely time intensive

• The largest and most obvious issue resulting from this process is the corresponding reduction in time spent executing the growth plan for the business and creating meaningful traction

• Selling the vision is just as important as having the vision. Founders that do not effectively do this risk hiring personnel that does not share or completely buy into this vision and can result in wasting huge amounts of time

Early Equity Mistakes Can Result in Long-Term Headaches

Due to capital restraints, startups are usually forced to offer large equity compensation packages to early employees in order to compete with offers from larger more established players

• Up to 10% of a startup’s equity will be used to make early hires

• Despite safeguards around vesting schedules, hiring mistakes at an early juncture can result in having people who have little to no positive impact on the business staying on the cap table for the complete lifecycle of the company

• Messy cap tables can be a turn-off for investors, and depending on the success and corresponding valuation of your company, capital requirements to buy out early employees might not be feasible.

Firms Offer More Value per Dollar than Individuals

Individuals inherently are not able to drive as much value as firms, who can offer a niche value add backed by teams rather than individuals

• Founders are forced to hire individuals or firms based on what they can afford, not what is actually needed to grow the company

• Finding top-tier provider talent that is willing to take equity compensation is the key to unlocking services founders need to scale their business

• Incentivizing providers with equity can change the dynamic of the relationship from client to partner
• Providers are free to go above and beyond and drive value whenever they see the opportunity
• Instead of not wanting to commit large amounts of time to a client that statistically will not be around the next year, providers time commitment can now result in larger payouts than any traditional cash engagements

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