Copyright © August 2012 – The HR Matrix, llc – All Rights Reserved
by Brenda Gilchrist, CoFounder/Partner, The HR Matrix, llc
1) Giving away equity. The lure of giving away equity in exchange for services may not be the best solution for your start up –be greedy with your equity. One example is a local start up that had an outsourced CFO (a friend of the founder). The CFO offered to help prepare financial statements and provide future finance/business consulting in exchange for 10% equity in the business. Hmmmm….sounds tempting, yet, in this case, it was better in the long run to pay a finance expert a consulting fee in exchange for the services needed at the time. If the founder had given away the 10% equity, he would have been obligated to pay the CFO 10% of the future sale value of the company or buy that stock back at a much higher price. Based on the company’s projections, the 10% equity could have been valued in multi-millions of dollars, which is significantly more than the value the founder would have received in actual services. In addition, if the founder ever became dissatisfied with the CFO’s services, he would surely regret having granted the 10% equity. Be greedy and smart with your equity!
CEO and Investor, Rick Shepherd, says, “There are circumstances when giving away equity in a start-up makes strategic sense. The founders need to be cognizant, however, that they are using their equity as a currency when it is typically at its lowest value. If possible, the equity should only be given to partners that are creating long-term value and, if at all possible, not for low value-added functions or shorter-term projects and tasks.”
2) Bringing on a Partner. Before bringing on partners, think about the fact that you will be wedded to them (yes, it is like a marriage) until the partnership ends. Many partnerships go sour, resulting in one partner having to pay the other one off. I’m sure there are horror stories that you have heard about. It is often better to contract the person for their skills (as above), or hire the person through a temporary agency or as an employee versus bringing them on as partner. If there is a strategic and tactical reason to partner with someone, take your time defining what it would mean to be partners, before you become partners. Talk through the D’s first; what happens if a partner dies, ditches, divorces, or becomes disabled. How will the partners be paid? Will you be an “eat what you kill” partnership, meaning you don’t share revenue for business you bring into the company or products you sell? What types of expenses will you share? How much ownership does each partner have? 50/50? Will you each contribute the same amount to the expenses? It might be better to subcontract or employ the person before you decide to be partners.
Mr. Shepherd states, “With all the excitement of forming a new partnership, frequently some of the tough questions are not addressed. What happens when one partner wants to leave or is asked to leave the partnership? This process needs to be detailed in the partnership agreement at the beginning.”
3) Hiring your friends. Before hiring a friend, make sure your friend is actually the ideal candidate to bring into your start up. Before hiring anyone, think about the short-term and long-term talent and skills you will need to hit your goals. If you start to hire, be extremely diligent – employees can make or break your reputation, your brand and/or delay your start up from being successful. Conduct interviews to ensure your friends or anyone else you are thinking about hiring, actually have the skills you need and, even more importantly, they fit with your ideal culture and values.
“When hiring friends, the tendency is to hire fast and fire slow. This may result in the best candidate not being hired, potentially a difficult termination and the end of a friendship. In most cases, it is best to avoid hiring friends!” says Mr. Shepherd.
4) Weak hiring practices. Here are the most common hiring mistakes:
• Hiring out of desperation (the “warm body” syndrome) with little or no screening
• Not using a behavioral style interview
• Not taking the time to scrutinize the employment application
• Not checking references or, when needed, failing to run a background check
Past performance is the best predictor of future performance. [Click here to read “5 Keys to Successful Talent Acquisition"].
5) Trying to do HR yourself. Well-intentioned start-ups can get themselves into trouble if they don’t know what they’re doing. Don’t assume the state and federal government will let you plead innocence if you tell them you just didn’t know the employment laws that applied to your start up. Prior to hiring employees or bringing on independent contractors (1099’s), get the facts and do it right from the beginning.
You will need to understand and comply with the Fair Labor Standards Act (FLSA) rules (e.g., overtime) related to Exempt vs. Non-Exempt classification of employees. In many cases, as a result of failing to comply with FLSA rules, start-ups often are out of compliance with Meal and Rest period rules, which can lead to costly back pay and penalties. [For more information, read Exempt vs. Non-Exempt article]
Be careful when bringing on independent contractors (1099’s). The government wants its payroll taxes! So, unless and until your 1099’s meet the complicated IRS 20 factors test, they are technically considered employees.
States Mr. Shepherd, “Ignorance is not an excuse. Employment rules are complex and always changing. Work with a qualified HR consultant to ensure your compliance. A good HR consultant can address your needs and is typically more cost effective than paying your outside counsel.”
About the author: Brenda Gilchrist is the Principal/CoFounder of the HR Matrix, llc. Brenda has started three companies, one of which she recently sold. Brenda has been awarded the North Bay Business Journal’s Women in Business “Entrepreneur” award and also their Forty under 40 award. She is co-chair of the Mentor program at the Sonoma Mountain Business Cluster a North Bay iHub incubator located in Rohnert Park, CA. The HR Matrix, provides start-ups with expert advice and consultation to hire right, to find talent that fits with their culture and help companies to understand and comply with complicated state and federal employment laws.