Scaling People & Culture

For any rapidly growing startup, your current management style won’t be sufficient as the team scales. Managing a burgeoning, multifunctional team requires a different approach compared to overseeing the original founding team focused solely on product development. Now, building your company has become as crucial as developing your initial product. This means strategically engineering the way in which you manage your team.

Here are five tactics to effectively manage your expanding team:

1. Develop an effective team of people managers
2. Clearly communicate expectations and assess performance.
3. Establish a framework for promotions and career development.
4. Establish a compensation model that appreciates and retains talents.
5. Empower a stellar people team to support you.

Consider the management practices of established companies like Amazon, Google and Meta. They have systematic performance review processes, well-defined job ladders spanning 10-15 levels per function, competitive salary benchmarks, and well-structured bonus and stock programs. They also invest in management training programs and have extensive human resources teams specializing in various areas.

The point isn’t that you should emulate Google; it’s that you need to proactively design the way you manage people. You also need to make sure your employees understand your approach. Otherwise, employees may start to feel unappreciated or underpaid and look for jobs elsewhere. Some will ask for senior titles and complain when others receive them. Others will ask what it takes to get promoted, how they can get a bigger raise or more equity, and why they can’t become a manager. You need to anticipate these questions and develop thoughtful answers well ahead of time. If you don’t, the chorus of questions and complaints will start to grow louder and louder until it becomes deafening to you and distracting to everyone else. The benefits of being proactive pays off in retention, employee engagement, and peace of mind that the company is scaling in a healthy way.

1. Develop an effective team of people managers.

“I’ve never had a manager at this company. I have no one to learn from. I’ve worked here from the start and feel comfortable talking to the CEO but s/he’s hard to get a hold of these days.”

Startups often employ individuals who are in the early stages of their careers. As your company grows, many of these employees may seek managerial positions, viewing them as the sole path for career advancement. They may even oppose the idea of bringing in external managers, fearing that it might limit their own opportunities for desirable roles. Conversely, in departments like engineering, you might encounter situations where none of your individual contributors (ICs) are interested in taking up management roles. Every founder faces the challenge of balancing the aspirations of early employees with the necessity of bringing in seasoned managers from outside the organization.

In our perspective, you should resist the pressure to promote inexperienced hires into senior leadership roles.  Emmett Shear from Twitch shared:

“As a small startup, you want people who roll up their sleeves and work really hard and who are really smart. Their level of experience doesn’t matter as much. But as you get bigger, it turns out that management benefits from experience in a way that no other skill inside a company does. The more experienced people I’ve hired have always been better than the less experienced. I’ve never hired experienced enough.”

It should be noted that experienced managers you hire should remain willing to roll up their sleeves to help execute the intricate and chaotic tasks required in startup work.

Recruit your first 1–2 managers externally (if your early team lacks this experience)

Ensuring that your first managers are exceptionally competent is crucial. If your current team lacks management experience, consider hiring your initial one or two managers from outside the company. Bringing in exceptional managers into a startup elevates organizational standards, setting a higher benchmark for managerial effectiveness. This introduction allows your early employees to witness firsthand the qualifications and influence that remarkable managers possess, facilitating smoother conversations about career development and promotions.

Criteria to consider when hiring your first managers:

• Extensive Hiring Experience: Choose managers who have substantial experience in hiring, as the right ones can significantly amplify your hiring process. Examine their history of building teams from the ground up.
• Expertise in Their Field: Your first engineering managers, for example, should not only excel at managing but also be outstanding coders. They should be capable of performing as individual contributors (ICs) at a high level. (This aspect might become less crucial as your company expands.)
• Mentorship: Opt for those who are genuinely passionate about managing and mentoring others, demonstrating enthusiasm in guiding team members.
• Alignment with Your Values: The managers you hire should embody and uphold your values
• People management experience: 5+ years of people management experience managing teams of 5+

If you personally have never managed before:

• Talk to reference candidates: Before beginning the hiring process, consider consulting with 3-4 seasoned managers in the function you are trying to build out. Instead of trying to recruit these managers, leverage their expertise to learn what constitutes exceptional management.
• Gather Insights: Understand the nuances of their roles, their daily routines, strategies they’ve adopted for effective management, and their approach towards recruiting managers and identifying vital characteristics in candidates.
• Networking and Candidate Sourcing: Engage with a multitude of candidates. Meeting a diverse array of individuals enhances your discernment in recognizing potential talent. It also helps you build a picture of the type of person you want to hire for the role. Ensure consistency in your questioning to facilitate comparative evaluation across candidates. Avoid hiring the initial appealing candidate you encounter.
• Evaluation and Decision-making: Invest significant time with your chosen candidate to align leadership styles and cultural visions. Conduct thorough reference checks, seeking insights into the candidate’s managerial style, responsiveness to feedback, and handling of failures.
• Adapt and Learn: Accept the possibility of making hiring errors. Embrace a learning mindset, adapt from experiences, avoid over-aiming for perfection, and make informed and resolute decisions. Focus on engaging with numerous individuals, executing due diligence, and swiftly learning from your decisions and experiences.

Recommended reading for first-time managers

• Scaling People by Claire Hughes Johnson, former Stripe COO
• Multipliers by Liz Wiseman (here’s a related First Round Review post)
• Becoming the Boss (HBR)
• Saving Your Rookie Managers from Themselves (HBR)
• Managing Humans by Michael Lopp, Slack’s VP of engineering (and his blog)
• Who: The A Method for Hiring (a book on becoming great at hiring)

Ensure managers have a clear understanding of their roles and responsibilities.

For effective job performance, managers should be competent in the following areas:

• Recruitment and Onboarding: Managers should be adept at hiring and integrating new team members effectively.
• Direction and Alignment: They should be capable of setting the team’s direction and ensuring that everyone’s objectives align with the company’s goals.
• Regular Check-ins: Managers should conduct consistent 1:1 meetings with their direct reports for guidance and support.
• Feedback Provision: They must offer continuous feedback, both positive and constructive, to their direct reports.
• Progress Communication: Managers should effectively communicate the team’s progress to relevant stakeholders across the company.

Encourage your most proficient managers to play a role in hiring and mentoring other managers.

People tend to excel in identifying and nurturing individuals who resonate with their skills and attributes. Utilize the expertise of your best managers to foster the growth of others and to attract exceptional managerial talent. Below are some tactics to consider:

• Skill Highlighting: Select managers who possess distinct strengths, such as providing feedback, continuous coaching, or delivering difficult messages, and feature their skills in team sessions. Conducting interviews with these managers by the CEO, founder, or a venerated senior leader amplifies a significant cultural message regarding the company’s value for these skills and offers due recognition to the managers.
• HR Partnership: Once an HR professional is onboard, encourage collaboration with managers for future developmental sessions. Consider the initiation of mentorship programs or explicitly require existing managers to contribute to the growth and development of emerging managers.
• Informal Initiatives: Consider introducing informal initiatives like organizing regular roundtable discussions where managers can share and explore various managerial strategies and ideas.

Exercise caution when promoting internal candidates, particularly those lacking management experience. 

To assess an individual's suitability for management:

• Team Support: Look for candidates who are well-regarded by their peers and show willingness to support their team. Assign them lead roles in projects to evaluate their potential. One tactic to identify these people is to look for the employees that others already go to for support regardless of functional reporting lines
• Job Excellence: Seek candidates known for exceptional performance in their current roles.
• Communication Skills: Choose individuals who express themselves effectively, as communication is pivotal in management.
• Perception: Be wary of those who consistently self-advocate to the point of being overly aggressive. How a person is perceived within the organization strongly influences their acceptance as a leader.

Discuss promotional paths transparently with your employees, including viable paths to graduate into more senior roles as an individual contributor. External managerial hires might lead to disappointment among internal team members aspiring for upward movement. Convey the following to your team:

• “Experience is important. By hiring experienced managers, we can build a better company and create more opportunities for everyone.”
• “We are going to set up training and mentorship for those who want to learn how to become good managers. We want to set you up for success, so we can’t promote people with no experience into a management role without training and mentorship. It’s not helpful to your career or the company.”
• “Becoming a manager isn’t the only way to get more opportunity or higher pay. There will be other paths to more responsibility and greater pay. We are lucky to work at a company where there are more important, interesting things to do than people to do them. So there will be plenty of opportunity for everyone to grow and take on more.”

Consider formal training for teams with five or more managers. 

This could involve engaging external firms or developing internal programs. External partners offer rapid and cost-effective solutions but might lack contextual familiarity with your organization. Ensure comprehensive preparatory engagement with external partners to impart essential insights about your company’s operational style and organizational nuances. Regardless of whether external or internal resources are utilized, maintain a strong organizational tone and gather post-training feedback to assess effectiveness and content relevance.

Encourage managerial involvement in pivotal people management decisions. 

Utilize the insights of proficient managers to craft fundamental aspects of your people management strategy, like performance review processes, career path designs, and compensation philosophies.

Case Studies and Examples

Manager expectation setting and training

2. Clearly communicate expectations and assess performance.

“I've been here two years, had three bosses, and I still don’t know how I’m doing or what I need to do to get ahead, much less where my career is headed. I’ve asked to get promoted, but no one gives me a straight answer about what I need to do to get there.”

To put it bluntly, survival in the business landscape necessitates proactive management of employee performance. There are discussions among HR professionals about the ideal frequency of performance reviews and whether feedback should correlate with compensation. Initially, it is advisable to conduct performance reviews semi-annually, linking feedback directly to compensation.

Performance management fundamentally ensures alignment between employees and managers on:

• Recognition of Employee Strengths
• Identification of Areas for Improvement
• Career Aspirations and Desired Skills or Experiences
• Employee’s Current Job Satisfaction and Career Ambitions

Steps to Effective Performance Management:

Hire Competent Managers first:

• Ensure you have a robust team of people managers before kicking off formal performance review processes. Without good managers, executing performance reviews is challenging. Once you have your initial layers of managers, training managers to deliver constructive feedback is essential, as they are pivotal in the review process.

Conduct an Employee Pulse Survey:

• Prior to initiating the performance review cycle, conduct anonymous surveys to gauge employee sentiments. Identify recurring concerns or factors hampering productivity. Segmenting responses by team can offer insights into managerial effectiveness and areas requiring attention. It is a good idea to run this survey once a quarter or every six months as it helps you understand organizational health.

Establish a Clear Performance Criteria:

• Determine specific evaluation metrics and the assessment scale. Aim for consistency in evaluation by establishing common criteria aligning with organizational values and objectives, supplemented by role-specific criteria. Be transparent with the entire company about the evaluation criteria, so both managers and ICs understand evaluation criteria. This is vital for organizational clarity and fairness.

Linking Performance to Compensation:

• Performance evaluations should influence merit-based compensation adjustments. While some argue for separating performance reviews from compensation to maintain focus on feedback, practical considerations often intertwine performance with compensation expectations. A balanced approach could involve conducting bi-annual reviews, with one directly influencing compensation adjustments.

The intricacies of aligning compensation with performance are explored further in the compensation section.

Launch a lightweight feedback system

Implementing a streamlined, user-friendly system is essential for effective performance management. Tools like Lattice or even Google Forms offer convenient platforms for continuous, real-time feedback between managers and employees. This ongoing interaction fosters a dynamic of continuous improvement, minimizing the stress and recency bias associated with annual reviews while negating the need for extensive work during the review periods.

Execution and Analysis:

• Continuous Feedback: Encourage a culture of consistent communication where managers provide regular feedback to employees, rather than waiting for formal review sessions. This approach facilitates continuous improvement and personal development.
• Utilization of Tech Tools: Utilize tools like Lattice, Google Docs, Notion to facilitate the constant exchange, capturing data that becomes instrumental for promotion and compensation considerations, and enabling upward and peer feedback as the system evolves.

Strategic Review and Planning:

• Data Review: Analyze cumulative data from pulse surveys to discern organizational trends and individual performances, facilitating a more nuanced discussion with team leads about focus areas.
• Identifying Performers: Segregate the workforce into high and low performers, developing strategies to enhance the productivity and satisfaction of each group.
• Focused Discussions: Depending on the organization's size, convene meetings with leadership, either collectively or in smaller cohorts, to devise strategies targeted at employee enhancement and organizational improvement.

Swift Execution:

• Time-Efficient Reviews: Given the demanding nature of performance reviews on managerial resources and organizational focus, expedite the process where feasible. Aim for a concise yet comprehensive review cycle, ideally completed within a month. One tactic is to model what you expect from managers by telling the company, I expect reviews to take “x minutes” for each report.

Case Studies and Examples

Performance Reviews and Feedback

3. Establish a framework for promotions and career development

"I've been working here for over a year and haven’t gotten a promotion. Why did that guy get promoted? How do I get a promotion? When can I become a manager/director/VP?”

Building Career Ladders:

Every employee is keen on understanding the roadmap to progression—whether it's in terms of salary, role enhancement, or elevating statuses such as manager, director, or VP. Employees seek transparency and a structured pathway to ascend in their careers.

Here’s an approach:

• Develop a Structured Framework: Initiate the construction of career ladders with the most substantial team, often engineering. Define explicit steps, roles, and proficiency benchmarks that clarify the career advancement process.
• Consult Market Standards: Align your framework with industry benchmarks and standards. Using tools and guides such as those provided by Pave can help in setting a structured, market-aligned ladder.
• Differentiation and Levels: Ensure distinct levels that accurately reflect the employee’s experience and role scopes. Aim for a nuanced differentiation, avoiding oversaturation of levels, with a suggestion of maintaining three to seven as a foundational guide.

Everyone at your company wants to know how to get ahead. They may measure progression in terms of pay. They may measure it in terms of being a manager vs. an individual contributor. They may measure it in terms of their job scope or how much autonomy they have. But more than any specific title or level, what they’re asking for is clarity on the rules to get ahead. As with performance reviews, wait until you have enough managers in place before you establish a formal career development process. Eventually, the head of each department in collaboration with HR should own their team’s career ladders.

Initiate the process with your most substantial team, typically the engineering team. Before engaging in fruitful discussions with employees regarding career advancement, establish clear pathways, inclusive of various positions and skill categorizations available within your organization. Here’s a guide on how to go about it:

Conduct Market Research for Position Leveling:

• Consult market standards to comprehend various career levels effectively. Platforms like Pave offer insightful guidelines; consider them instrumental in formulating your organizational hierarchy. Avoid investing excessive time creating an original framework from scratch for the initial version.

Determining the Number of Levels:

• Analyze existing job titles, constructing a provisional hierarchy to identify the number of levels it manifests. Assess whether the resulting number feels excessively comprehensive or limited. Ensure that each level distinctly accommodates variations in experience and role responsibilities. A structured differentiation ranging between three to seven levels is recommended, offering room for future expansion. We include examples below.

Strategizing for Administrative Functions (Finance and HR):

• Given their specialized focus, administrative departments like Finance and HR require a unique hierarchical approach. Create specific progression pathways, such as HR business partner or senior HRBP, ensuring coherence with the broader organizational hierarchy.
• Establish an initial compensation strategy aligned with other organizational roles, influencing the quality of talent attraction. Allow departmental leads like CFOs or VPs to refine this strategy further.

Employee Level Assignment:

• Encourage department leaders and managers to collaborate, determining the appropriate placement of each employee within the organizational hierarchy. Ensuring consistency and fairness in this placement is crucial, with HR’s guidance facilitating the process.
• Implement calibration sessions amongst managers, promoting uniformity in employee placement

Communication and Implementation:

• Transparently communicate the newly established structure to all employees, emphasizing its significance in ensuring equitable career progression and compensation.
• Conduct comprehensive sessions, allowing employees to understand their positioning within this hierarchy and its implications. Continuous communication of this structure, particularly during the onboarding process, is essential.

Addressing Unique Cases:

• Certain positions might have limited advancement opportunities due to their specialized nature. Collaboratively engage with such employees, exploring their career aspirations, and guiding them towards realizing their professional objectives, whether it involves nurturing their existing roles or exploring new opportunities within or outside the organization

Case Studies and Examples

Levels and Career Development

Create a consistent promotion process.

Do adjustments within roles only once a year. If you’re promoting someone to a completely new role, that should be done immediately.

Managers and HR should recommend promotions, and the CEO should approve director-level promotions or higher. “Director-level” should generally mean that they are a manager of managers. For levels below director, the head of that business unit is sufficient approval. Some companies also require managers to include the employee’s most recent performance review.

Model out the salary and equity impact of promotions. HR should partner with finance and department leaders to scope your company’s target number of promotions each year. This will help you understand how a given promotion will affect your growth trajectory, burn rate, and stock option pool, and how it shifts the rest of the org. At a growing startup, you generally shouldn’t promote more than 20% of employees per year. And avoid promoting someone who joined less than a year ago (unless you mis-leveled them when they joined).

Manage low performers.

A good performance management process will inevitably reveal that some people are not performing up to expectations. In fact, if you have no low performers, that’s a sign that the process is flawed. What to do with low performers:

• The first step is to make the employee aware of their low performance in specific terms, so that they understand clearly where to make improvements. None of it should be a surprise to the employee; it’s merely a summary of already known issues.
• Many companies put low performers on a formal “performance improvement plan” (PIP) that documents the performance areas that the employee needs to address over a specified time frame in order to remain at the company. We recommend a lightweight PIP for startups as a forcing device to put things into writing and set a ticking clock to take action.
• After a 4–8 week PIP period, you should take action to either restore the employee’s good standing or terminate employment.
• If your performance review process identifies ethical breaches, sexual harassment issues, or other inappropriate or illegal behavior, it may make sense to terminate the employee immediately.

Learn how to fire well.

A lot has been written on this topic, so we’ll stick to the basics and point to a few blog posts. If low performers are showing no improvement and the only option is termination, the basic things to know are:

• Don’t procrastinate. If you’ve concluded that it’s time to fire someone, address it quickly. You should not be spending more time on your lowest performers than your highest performers.
• Firing people sends a message to those who stay, so be conscious of what you want that message to be (e.g., Do you give people a chance to fix poor performance or do you fire immediately? Do you fire people who don’t embody your culture even though they are strong performers?). Have a well-defined process for what and how to communicate during terminations (e.g., “If someone’s been at the company less than three months, we send a department-wide note; if they’ve been there 12+ months, we send a company-wide note”). Consistency ensures that you never inadvertently set the wrong example or “spook” employees with a departure.
• Don’t be stingy with severance. Try to make the departure amicable.
• Always do a post-mortem on what went wrong, and use it to improve your recruiting process.

Layoff-related resources:

• When & How to Fire an Employee at a Small Startup (Elad Gil)
• It’s Never Too Early to Fire (Lars Dalgaard)
• Preparing to Fire an Executive (Ben Horowitz)

Keep your best people on the boat.

Even if you are managing employees well, there will always be good people who find other opportunities and want to leave. This is particularly true in tech where the market for talent, especially in product and engineering, is brutally competitive. Here’s our view on how to deal with good employees who want to leave:

• Founders should proactively build relationships with the best employees. Make it part of your job to develop relationships with your best people. They’ll feel heard and valued, and you’ll be in touch with their satisfaction at the company. If a prized employee is considering leaving, it will be easier for you to get to the bottom of what’s driving their unhappiness and hopefully get them to stay.
• Address single points of failure. Work with managers to identify the single points of failure on their teams and make sure you have a plan in place should those people leave. Have this conversation with your managers on a quarterly basis. Push managers to be in touch with the happiness of their teams. There will always be people who leave for other opportunities. But you should try very hard to avoid being surprised when this happens or left without adequate replacements, at least in the short term.
• Understand and address their true motivations. Put yourself in the employee’s shoes: If faced with the same set of choices, would it be rational to leave? There will inevitably be instances when the employee is making a rational choice and where it will be difficult to change their mind, like if they want to pursue their lifelong dream of starting a company or if Google is offering 5X what they currently make. But if they’re thinking about joining another startup because they think it will advance their career or be more fun, you should try hard to keep them from leaving.
• You can bend a little, but don’t break your system. Sometimes, a better title, more compensation (via performance rewards or a raise), or more autonomy will keep a good employee from leaving. It’s always better to address this before an employee has another offer. But since that’s not always possible, be prepared to bend your levels and comp bands to some degree. If the employee is extraordinarily important, it’s ok to stretch bands by 10–15%. Beyond that, you’re breaking your bands and not just stretching them, so weigh your decision not just against the additional $30,000 for one employee but against the $1M that it would cost to adjust everyone’s bands. No matter how great someone is, think about the business long-term.

Case Studies and Examples

Promotions and Workforce Planning

4. Establish a compensation model that rewards and retains talent

 “My last comp adjustment was a lot smaller than I think I deserve. I’ve been doing the work of five people. What do I have to do to get a bigger raise and more equity? Am I getting paid fairly?”

Compensation management is often a significant challenge in startups, primarily due to hasty hiring processes that result in tailor-made compensation packages for each employee. This individualized approach can breed dissatisfaction and disputes over fairness as the company evolves and expands. Typical compensation components at startups include a base salary, stock options or restricted stock units (RSUs), and occasionally, cash bonuses.

When structuring compensation, clarity, consistency, and equity are paramount. Given that employees are likely to discuss their compensation with peers, it's essential to operate under the assumption that compensation data is not confidential. A useful guideline in making compensation decisions is to consider whether the rationale behind various compensation packages would withstand scrutiny if all employees had access to this data. This approach encourages decisions that are justifiable and equitable, promoting a sense of fairness and transparency within the organization. 

(Note: This guidance primarily pertains to general compensation structures and does not specifically address sales incentive compensation.)

General Compensation Principles

Begin by acquainting yourself with the prevailing market salaries for each role.

• A substantial amount of this research has been previously conducted and is accessible through platforms like Pave, commonly used by startups, and Radford, favored by larger companies. These platforms provide salary ranges categorized by job function, industry, and funding stage, among other factors. Venture capitalists typically have access to this data, so seeking their advice on salary benchmarks is advisable.  It is also beneficial to validate these salary benchmarks by consulting with comparable companies in your industry. Additionally, if an employee or candidate voluntarily discloses a competitive offer from another company, it is worth documenting this information as it can contribute valuable insights to your salary data.  
• Based on this information, establish salary ranges for each position, aligned with the career progression within your organization. Generally, a salary range should not exceed a $10,000 difference, and a slight overlap in the salary ranges for different positions is acceptable.

Build a strategy on where you want to pay relative to the market.

• For example, if your company’s stock is perceived as highly valuable, or if there are unique benefits that make your company attractive, you might be able to set salaries at or below the median market range and still attract excellent candidates. For companies that are less known or struggling to secure candidates, offering salaries at the higher end of the market range may be necessary.
• Ensure that your compensation strategy is practical and competitive by continuously evaluating and soliciting feedback during the recruitment process. Consider questions such as: Are candidates accepting your offers? Do they often feel the compensation is inadequate? Are valuable employees leaving for better compensation elsewhere?
• To assess the effectiveness of your compensation approach, monitor the acceptance rates of job offers. Track the results for every 5 to 10 candidates. A success rate of 75% or above indicates that your compensation strategy is effective. However, if the acceptance rate falls below 50%, and compensation is frequently cited as a concern, it might be time to reassess and adjust your strategy.

Communicate compensation philosophy and framework to the entire team.

• Ensure that all team members within your organization have a clear understanding of your compensation philosophy and framework, especially if there has been a past practice of customizing compensation packages and impromptu raises. Managers, in particular, should be proficient in conveying the compensation strategy and methodology accurately and confidently. A transparent and well-communicated compensation process is likely to be embraced by employees, offering them a renewed and clear perspective on their remuneration structures.

Establish a clear relationship between performance evaluations and merit increases.

• Performance outcomes should be a primary factor in determining pay adjustments, considering also the individual’s current position within the pay range.
• Define a standard expectation that merit-based salary adjustments will be made annually. Equip managers with a designated salary budget to be distributed among their team members based on performance. Offer explicit guidelines dictating the potential salary increases correlating to various performance tiers (for example, high performers might receive an X1–X2% raise, average performers a Y1–Y2% increase, and below-average performers a Z1–Z2% hike).
• Avoid making sporadic salary adjustments outside of the annual review, unless exceptional circumstances such as promotions, role reclassification, or market shifts necessitate an immediate revision in the compensation

Incorporate each employee into the revised compensation system

• After the introduction of a market-aligned compensation strategy, adjustments to the existing employees' salaries might be necessary
• For employees who are performing exceptionally yet are undercompensated, consider applying an expedited raise plan. Gradually adjust their compensation with more substantial increments than usual (up to 20%), aligning the timing with the company’s standard compensation cycle. This approach provides continuous recognition, encouraging sustained high performance
• If an employee's compensation exceeds their contribution, several options are available:

1. Reduce their salary, which might be perceived as equitable but could negatively impact the employee's morale and raise concerns among the team.
2. Limit or decelerate future salary increases until a balance is attained, though this may also affect the employee's satisfaction and perceived fairness among the team.
3. Maintain the current salary, which might satisfy the employee but could generate equity issues within the team.
4. Evaluate whether the employee’s continued presence in the company is beneficial.
5. While adjusting salaries, it’s also essential to consider if there’s a need to revise the employee’s job title to accurately reflect their contributions and responsibilities.

Cash Bonuses

Avoid implementing a cash bonus program if your company hasn’t started generating significant profits. Maintain simplicity in your compensation structure: compensate employees with a salary and stock options. Implementing a bonus program can introduce unnecessary complexities, diverting focus and consuming more financial resources in its administration.

Stock Options/RSUs

Ensure that there’s a structured approach to granting stock options or RSUs, aiming for a balance between minimizing dilution and preserving an appealing value proposition for employees. Effective stock planning hinges on the narrative presented to current and prospective employees regarding the potential value appreciation of the stock and the intended size of the option pool designated for recruitment purposes. This requires strategic foresight to maintain competitiveness and attractiveness in compensation offerings.

Establishing Equity Distribution

Determine Dilution and Stock Bands:

• Define a target dilution level and formulate stock bands for each position.
• Consider factors such as funding stage, hiring plans, board inputs, and market data.
• Distribute options proportionally across various job levels after determining the pool size.

Develop Strategies for Clear Communication:

• Develop effective communication strategies regarding equity’s long-term value. 
• Equip recruiting teams and managers with the necessary knowledge and tools to address queries and explain equity values to candidates and employees.

• Modify the communication about stock ownership from a percentage-based narrative to a value-based perspective.  Instead of “You own 0.25% of the company”, articulate “Your grant is worth $X if we are a $300m company, $Y if we are worth $1b” etc.  
• Illustrate the potential worth of equity grants by providing value estimates under various company valuation scenarios, helping employees visualize the potential financial gains.

Regularly Assess Fairness:

• Regularly assess equity distributions for fairness, ensuring no biases against specific groups.
• Rectify substantial disparities in equity allocation among employees who joined at similar times.

Adjust ranges following every round of financing:

• After each financing round, recalibrate equity grants and salary structures.
• Transition messaging from percentage ownership to potential value realization scenarios to better communicate equity’s worth.

Delay the transition to Restricted Stock Units (RSUs) until it’s strategically necessary.

• The transition becomes essential when broad-based tender offers are made, resulting in increased 409a valuations, impacting the attractiveness of new option grants.
• If concerned that the higher valuation will make it hard to compete for talent, shift to RSUs. Otherwise, stick with options for as long as you can, to avoid creating two tiers of citizens at your companies (people with options vs. those with RSUs).

Refresh grants should be used to retain and reward your most valuable people:

• Aim to establish a refresh grant program as the organization scales, ideally by the time you reach 25-30 employees.
• Key questions: How early in the employee’s tenure should refreshes start; how large should grants be relative to new hire grants; and how do you differentiate between top employees and everyone else?
• Concentrate the refresh grants on retaining crucial employees by offering them incentives commensurate with their future contributions to the company, not overvaluing the “old guard” at the company.

Example: Simple Method for Refresh Grants

• Begin the equity refresh process around the second or third year of an employee's tenure.
• Initially, allocate grants equivalent to 80% of the prevailing new hire grants for comparable positions, structured to vest over four years. Each year, consider granting 25% of the modified new hire grant, retaining the flexibility to reduce the annual grant sizes in line with declining new hire grant allocations.
• Aim for a strategic alignment where, as the company evolves and succeeds, the levels of new hire grants naturally reduce. Base your calculations on the potential replacement cost of each employee, applying a discount from that level by 20% to 40%.
• For example, if a new hire is allocated 1,000 shares, consider applying a 20% discount for the refresh grants, resulting in a 200-share grant in the first year. If the new hire grant subsequently decreases to 800 shares in the second year, adjust the refresh grant to 160 shares (calculated as 800 shares x 0.8 x 0.25).
• Implement the refresh equity grants on an annual basis, each with a four-year vest.
• Customize a more generous program for the top 10-20% of performers, tailoring the approach to emphasize the retention and motivation of your most valuable talent.

Compensation-Related Case Studies

Compensation Philosophy Examples

Communicating the value of Equity

5. Empower a stellar people team to support you

Having exceptional HR personnel can profoundly influence the success of your startup. A common error startups commit is allocating excessive resources to recruitment, while neglecting other essential HR aspects. HR encompasses various distinctive roles and responsibilities beyond recruitment, such as:

• Onboarding new employees
• Managing employee relations (addressing employee issues, resolving conflicts, etc.)
• Evaluating and managing performance (inclusive of terminating employees)
• Handling compensation and promotions
• Overseeing learning, training, and development
• Administering benefits (e.g., healthcare)
• Contributing to business strategy

Consider bringing on a full-time HR professional when your team grows to 25–30 members, especially with diverse functional roles. Your initial HR hire should be a well-rounded individual with a wealth of experience in managing employee relations. They should be proficient in collaborating with managers to address issues such as performance, training, promotions, and terminations, and should primarily be an HR generalist rather than a recruiter or office manager.

Don’t hesitate to employ 2–3 HR generalists before appointing a VP, focusing on tactical expertise at this stage. These professionals can temporarily report to another department, like finance or operations.

As your team approaches 80–100 members and is poised for rapid expansion, contemplate hiring a VP of People. Prioritize candidates with comprehensive experience and discernment. Opt for someone ready to actively participate in establishing infrastructure, possessing extensive experience beyond recruitment. The chosen VP should be inclined to innovate and improve systems, portraying an understanding of business strategies and the company’s culture and values. Avoid hiring candidates who lack the enthusiasm to build systems from scratch or those overly focused on recruitment.

When selecting a Head of People, look for:

• Robust business acumen and people management skills, prioritizing business advancement.
• Extensive experience, having served in significant positions such as VP of HR or Chief People Officer, and a wide-ranging involvement in HR.
• A proclivity for innovation and system development, coupled with a background in senior roles, possibly in large companies where they may have faced and overcome bureaucratic challenges.
• An embodiment of the company’s values and culture, given their extensive interaction across the organization.

Case Studies and Examples

HR and People Job Descriptions