The Startup Playbook: No. 9

Every Founder’s Least Favorite Letters: HR

For many, a human resource department feels like the adult version of the principal’s office, but an HR team is one of those things founders cannot fall into the trap of dismissing. Why? At an early-stage company, your people are everything, and I mean everything. You must take care of them, and that starts with an excellent HR management team.

HR management should not be confused with culture building (a topic for another playbook lesson), but it can be a significant force behind a great company culture. In fact, HR management can help you accomplish three critical goals:

1.     Keeping the right people,

2.     Letting go of the wrong ones, and

3.     Maintaining compliance with state and federal laws which comes in handy when raising capital and efficiently navigating the diligence process.

This post could be an entire book, as there are so many layers to HR management and so many federal, state, and local employment laws. But we’ll shoot for something more concise: A rapid-fire 11-step guide to the critical aspects of sound HR Management. Let’s get to it:

1. Incorporation is not the starting line

Let’s start at the beginning. When you incorporate an entity, you may not need or want to implement an HR strategy, especially as a team of one. Many facets of HR come with financial costs you may not be ready to incur. As the company founder, you can incorporate your entity and serve as a shareholder, board member, and officer to avoid acting as employee no. 1 for a short period to focus on product development, market analysis, and customer discovery.

But, as the company’s founder, you shouldn’t remain “unemployed” and unpaid for too long. When you’re ready to hire other employees or take on outside capital (often, these two things happen close in time), the founder should become employee no. 1.

2. Building your HR team

Holy guacamole, what does employee no. 1 actually mean? That is a complicated question, making it even more vital that you have an HR team ready to help you.

Who’s on your HR team: (i) employment lawyer, (ii) payroll provider, and (iii) benefits provider.

An employment lawyer is critical as they are the person helping you navigate all the federal, state, and local laws that will apply to your company’s employees. In addition, a great employment lawyer can help you address strategic issues, such as what type of intellectual property agreement to establish and whether it should include a non-compete provision. Most importantly, you will want an employment lawyer to be there when (not if) the unexpected happens. If anyone needs a fantastic employment attorney, I know one!

A payroll provider makes payroll a breeze as there are specific tasks you’ll do each day, and you mustn’t forget them. Payroll providers should have intuitive online platforms that give you 24/7 access to your past and current payrolls and a transparent calendar system so you know every deadline to make and file your payroll changes. Missing payroll is not an option.

Sometimes, the payroll provider will also serve as the benefits broker. If the payroll provider does not require benefits, you’ll want a separate benefits broker to help you make sense of benefits, pick your plan, and manage it throughout the year.

With the team HR team assembled, we’re ready to consider hiring.

3. The org chart and job descriptions

It may seem silly, but here’s some useful advice: Build a simple org chart in PowerPoint and maintain it as you grow. It is good for everyone on your team to know reporting structures and handy for data rooms and investor presentations.

With your organization chart in hand, make sure you have corresponding job descriptions (“JDs”) for every position on the chart. You’ll use JDs when posting new roles and after hiring to review it with the employee and put it in their file.

Here is another quick tip: Create a JD template to swap out each role’s title and job description. Make sure your template has an equal opportunity statement.

Startup employees can wear a lot of hats, but it is beneficial to define positions and manage your team members’ performance against the roles they are performing.

4. The hiring process

Establish a hiring process and stick to it. This will help with managing a deluge of candidates to evaluate them fairly. As you bring folks through this process, let those you don’t hire know so you keep good relationships with those interested in you and your company.

Great candidates may find you before you post an open position, and these candidates could make great employees. However, a process should always start with standard hiring documentation, especially as your team starts to grow.

5. Compensating your employees

Ah yes, the whole reason we work, the Benjamins. Getting ahead of compensation issues and establishing a good plan early is essential for a few reasons.

First, you want to ensure your financial model can support compensation, as employee compensation is likely the largest single line item in your financial plan. Second, ensure salaries are competitive and set at levels that attract suitable candidates. Third, evaluate what portions of the compensation will consist of salary and what will consist of other forms of payment, such as stock options. Your salary plan must align with your stock option plan and vice versa.

One helpful idea is to build a compensation ladder that establishes compensation ranges (i.e., salary, stock options, bonuses) employees can earn at stages in the company’s hierarchy (i.e., associate, manager, director, VP, C-level). The compensation ladder is handy in financial planning and cap table management.

Side note: When inserting compensation into your financial model, consider the payroll taxes, administrative expenses, and benefits costs associated with each employee. This additional burden can be easily accounted for by applying a factor of 1.15 – 1.25 to each employee’s salary, giving you a fully burdened expense for each employee.

6. Payroll and benefits

Now that you know what you’ll pay your new employees, you must ensure they get paid. This is where your payroll provider comes in, providing an easy-to-use platform that allows you to manage and track payments

Payroll providers will charge a fee (sometimes per payroll, sometimes per employee) for each payroll run. Still, if you pick an exemplary service, the simplicity of the payroll provider’s platform should make the fee worth it.

A few quick payroll considerations:

a.     Make sure you set up your payroll provider before you hire your first employee.

b.     Pick a payroll cycle that works well for your company—I suggest 24 yearly pay periods.

c.      Calendar all deadlines and dates, or set up your payroll system to send reminders before each deadline.

d.     Remember to get yourself on the payroll! Investors will appreciate it.

e.     And remember, you have to report your payroll taxes to the federal government quarterly using Form 941. Ask your payroll provider if they will help you do this!

Now, many payroll providers (especially professional employer organizations like TriNet) also offer benefits, creating a one-stop shop for payroll and benefits. If your payroll provider does not provide benefits, you must find a benefits broker or provider to help you establish a benefits plan.

When thinking about benefits, check with your employment lawyer to understand what, if any, benefits you are required to provide to your employees. This determination is state-dependent and will change based on your number of employees.

Once you’ve made that determination, then you can think about what benefits you want to offer: paid time off, company holidays, sick days, medical insurance, dental and vision insurance, 401K, life insurance, short and long-term disability insurance, commuter reimbursements, to name a bunch!

All these benefits have costs (even PTO has a price because it becomes an accrued wage that sits on your balance sheet as employees earn it). Some benefits cost more than others, with medical insurance often being the most expensive. The good news is benefit renewals happen annually, so you can establish an initial benefits plan and add to it in the years ahead. Just remember to review the costs of all these benefits with your benefits provider so you can budget accordingly! Once you offer a benefit, it’s hard to take it away, so you want to feel confident about the cash you are allocating to cover benefits.

7. Onboarding new employees

All right, you’ve found a great candidate. Let’s bring them onboard.

You’ll need a standard form offer letter, an intellectual property agreement, and an I-9. Ensure you get all these documents fully executed on the first day of employment, and make sure the completed documents make their way into the employee’s personnel folder, along with the job description and any other hiring documents (i.e., resume, references) you collected.

With paperwork in place, create a plan with your HR team to make sure the new team member gets into the payroll system and selects their benefits so no hiccups emerge. The last thing you want to do is hire a passionate new employee only to have them not receive their first paycheck!

Build an onboarding plan for the new employee, including the people they must meet, resources they will review, and IT steps they will need to complete to receive access to their company-assigned hardware and software.

And of course, do not forget to get your new team member a company T-shirt. It is the little things!

An organized onboarding will go a very long way to making a new team member feel appreciated and excited for the work ahead.  

8. Performing annual reviews

Building a team is a hectic and exhilarating process, but annual reviews for existing team members should not be overlooked while bringing on new team members.

The process of reflecting on past performance, identifying areas of improvement, and charting a path forward can be beneficial to employers and employees alike. Don’t let the stage of your company or the excitement of rapidly building a team keep you from making an annual review process a permanent part of your HR management strategy.

The best way to handle annual reviews is to create a standard form everyone uses and a dedicated yearly period to complete the reviews. Forms should be collected and inserted into the employee’s personnel file.

You should be picking up a theme by now of standard forms and uniform processes, both of which ensure you treat employees fairly.

9. Documentation

Personnel files, whether physical or digital, should be kept under lock and key. First off, many states require such security. Second, you don’t want prying employees to see things they shouldn’t.

With this filing system established, it is imperative that you keep excellent personnel files. When an employee isn’t working out, you want to have all documents in place to demonstrate the employee’s performance is not meeting expectations. Conversely, if an employee’s exceptional performance merits promotion, you want their personnel file to contain annual reviews and recognition of their past performance.

In other words, regardless of the nature of the situation, good documentation is helpful.

10. Your policies and the employee handbook

In due time and with the help of your employment lawyer, you will likely develop and adopt an employee handbook. In the meantime, as you start your company, you’ll want to address and pass a few key policies. These policies may include a PTO Policy, Travel & Entertainment Reimbursement Policy, and Anti-Harassment Policy, to name a few. Your employment lawyer can work with you to determine what policies you should have at the company’s earliest stages and what you may be required to have. In addition, your employment lawyer can review what procedures need training sessions and help you prepare training materials. Many employment lawyers also make great trainers.

As you build out your library of policies, be sure to communicate them to your employees. You may even want them to acknowledge receipt. Keep all procedures in a central folder for easy viewing and management (and easy transport to a data room if you’re fundraising!).

Finally, review and update your policies as needed. An annual review is a good bet. You don’t want to waste your time nitpicking policies, but an annual review of policies, just like benefits, ensures all these HR systems and tools are working in the company’s best interest.

11. Offboarding employees

Sometimes, it is not going to work out. The last thing any early-stage company wants is a protracted dispute with an employee leaving on troublesome terms.

Whether an employee leaves on their own accord or at the company’s request, it is imperative that the employee gives all company property back and leaves with a clear understanding of what rights and responsibilities they still have to the company. For example, an employee could go with an intellectual property agreement requiring the employee to keep company information confidential and a stock option agreement providing 90 days to exercise their options.

Good documentation and processes matter, especially when you are a startup with a limited runway.

I could keep going, and I probably will in future posts, but these 11 issues give you a sense of the challenge and complexity of HR management.

I still underestimate how long it takes to bring new folks onboard and how challenging it is to lose great people.

Active and engaged HR management allows you to move faster through the hiring process and helps create the culture that will keep your best employees working hard. The bottom line: Your people are everything. I’m not saying strong HR management is a guarantee for success, but it will make success much, much more likely.  

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