startups: attracting and retaining talent (updated 3/6/13)

All Rights Reserved Revised: February 2013

Attracting Talent to Startups

By Patrick Seaman

February 2013

Updated 3/6/13

WHITE PAPERWHITE PAPER

TAKEAWAYS

•Startup -vs- Corporate Culture

•Incentives, Compensation & Equity

•Retention


Topics in this White Paper

✚ Introduction 3✚ Insanity & Genius 4✚ Founders & a Whiteboard 5✚ Wearing Many Hats 7✚ First Hires 9✚ Prototype 10✚ Beta 11✚ Pre-Launch 12✚ Launch / A-Round 13✚ State of the Team 14✚ Growing and Growing 15✚ Startups are Nimble 16✚ Startups –vs- Corporate Culture 17✚ Networking 19✚ Referral Incentives 21✚ Events 22✚ Interns & College/Universities 24✚ Compelling? 26

✚ Who works for a Startup? 27✚ Early Employees 28✚ Poaching? 29✚ Location & Recruiting 31✚ Flex 32✚ Compensation 33✚ Options Value 34✚ Compensation Plans 35✚ Retention 36✚ The Simple Things 39✚ Family 41✚ Perks & Bennies 44✚ Change of Control 48✚ Flush with Cash 51✚ Or not 52✚ About the Author 53✚ About Pepperwood Partners 54

Note: This paper is based on my personal observations and experiences. It is not intended as a blueprint or roadmap or endorsement of any particular strategy, nor does it reflect the views of Pepperwood Partners.


Introduction

This white paper discusses some of the unique problems that face startups, the “phases of life” that they go through, and how these affect the recruitment of both core team members and talent in general.

We’ll discuss startup ✚Culture ✚Recruitment✚Incentives✚Compensation✚Equity✚Talent retention✚Etc.

2929 Elm Street, Dallas, TX – original home of AudioNet / Broadcast.com (after Mark Cuban’s spare bedroom)


Insanity & Genius

“The distance between insanity and genius is

measured only by success”

-- Ian Fleming Tomorrow Never Dies – said by Elliot Carver (Jonathan Pryce)

You have to be somewhat crazy to launch a startup….


Founders & a Whiteboard

There are several typical stages in a startup:

Founders & a whiteboard

In the beginning, someone has a crazy idea. This crazy person somehow talks another crazy person into working with them on the idea – giving up a big chunk of their otherwise normal lives.

Courtesy, Rick Jackson


Founders & a Whiteboard

The part about being crazy is not an exaggeration. Founders – and the people who follow them into the fray, must be somewhat crazy to do what they do. They are risk takers.

Unhappy with the status quo, they have a pioneer spirit. There’s a “Problem” they want to solve. They’re unwilling to take the safe and ordinary path, or, the ordinary corporate career.

Who needs Vegas? I run a startup!


Wearing Many Hats

Founder

SalesMarketing Engineering

Accounting

Operations

Quality Control

Support

CustomerServiceCreative

Legal

PR

Cook, Bottle Washer, Janitor


Wearing Many Hats

The founder(s) and the early team must wear many hats. A startup isn’t a corporation where a task can be sent off to another department. The buck, and everything else, start and stop here.

I know of one startup that had a commercial product, and active sale. They just couldn’t seem to make ends meet. The “CFO” who had been hired from a corporate background up and quit one day.

The founder looked in the vacated desk and discovered all the checks the departed financial wizard had not deposited – this had always been done by another department when he had worked at a big company….

And Starts

!


First Hires

First hires: By now, the founder(s) have raised some limited friends and family money and/or Angel Investor money and hired some talent to do the heavy lifting. Sometimes this is a contractor(s), but usually it is another startup junkie – willing to work for minimal pay plus equity.

Leap of faith: The risk-takers, wanting to get in on the ground-floor, and willing to take the low pay and (usually) no health insurance or other benefits, often view themselves as rebels. They don’t want a “traditional” corporate lifestyle, and may leave if the company starts to become too large. They like the relative independence and less structured environment.

While Steve Jobs may have needed to suit-up to get funding, don’t expect suits and ties from early hires at your startup!


Prototype

Prototype. The prototype is built, and the founder(s) use it to convince more angel investors to take a risk.

They go on to convince more startup-junkies to join the merry band.

Top secret


Beta

Beta. The founder(s) convince otherwise sane people at regular businesses (corporate types) to invest their time, and hence money, in trying the beta product.

Beta users aren’t quite adventurous enough to leave and start their own companies – but vicariously experience a hint of it, just by being beta users/testers.

By the time the beta comes out, the startup is beginning to develop its own “culture”


Pre-Launch

Pre-Launch. The founder(s) have now convinced enough Angel investor(s) or small private equity investors to contribute sufficient funds to keep the dream alive.

Terms like “pre-money valuation” and “burn rate” are often overheard from the founders-circle, answering to investors.

The merry band is still tiny, but has attracted multi-talented and colorful team members.

A few of the early AudioNet / Broadcast.com gang

(courtesy D Magazine)


Launch / A-Round

Launch / A-Round. The product has proven itself enough to attract more substantial investment. The founder(s) are challenged by advisors and investors – how will the company manage growth and meet its goals and projections?

The harried founders pressure employees to provide KPI’s and reports of all kinds.

The growing AudioNet /

Broadcast.com gang

(courtesy Stan Woodward)


State of the Team

Throughout these (oversimplified) stages, the company might have grown, for example, to a dozen or more people. These are often people uniquely qualified for this early stage.

What does the profile of these early team members look like?

✚ Each must wear many hats

✚ Many report directly to the CEO/founder(s)

✚ Each has much more responsibility than in normal corporate environment

✚ Often, these team members are strong generalists – good at multitasking & firefighting -- able to do many things


Growing and Growing

AudioNet / Broadcast.com just kept growing (courtesy Stan Woodward)


Startups are Nimble

A word about culture: There is a reason why big companies buy startups. Startups are able to innovate and explore new ideas and markets in a way that big companies cannot.

Perhaps a sports metaphor would help. Think of startups as a farm team system. Successful startups create attractive, fresh, young, attractive products. That’s why so many are bought out by larger organizations.

Broadcast.com ultimately

merged with Yahoo! for over

$5b.

During the rocket-like growth of Broadcast.com, we often “looked over our shoulder” expecting Microsoft to step on us. Instead, MS partnered with us and leveraged our network to prove-out their own media player technology.


Startup -vs- Corporate Culture

So, if big companies can’t do what startups do, why do so many startups try to recruit through mainstream recruiting channels dominated by corporate (ie: big companies)? I’ve seen this over and over. A startup recruits a corporate... Err... person, and finds out weeks or months later that he/she doesn’t have a clue about how to work in a small organization. There are no “departments” to hand a problem off to.

Wikimedia commons


Startup -vs- Corporate Culture

Don’t get me wrong. Big companies are the way they are for many reasons. They need a certain amount of inertia. They can’t afford to run off in multiple directions, losing focus.

They have a business plan and their investors require them to execute on it.

STAYTHE

COURSE


Networking

Startup founders need to be very active networkers. They need to regularly attend relevant “events” as well as local user group meetings, professional and technical groups/meetings/forums, and all the other “startups-anonymous” groups out there. Founders need to be plugged-in to their community.

Many startups are largely beneath the radar. Clearly, recruiting from them can be hard if you don’t know they are there!

Startup Networking Groups


Networking

Of course, it goes without saying that founders should be aggressive in quality networking on Linkedin, and take advantage of relevant interest groups.

Here are some example job boards that target startups (in no particular order):

✚ http://www.conotes.com

✚ http://www.startupers.com

✚ http://www.ventureloop.com/ventureloop/home.php

✚ http://www.crunchboard.com/jobs/

✚ http://jobs.mashable.com/a/all-jobs/list

✚ http://www.startupzone.com/

✚ – just google “startup job board”


Referral Incentives

Startups often offer referral incentives, such as cash for referring / recruiting new team members. If your startup has a following, offering swag may also work. Signing bonuses or top recruits may include cash or equity, or both.

Each situation is different, but all require an upbeat and creative approach. Have fun with it!

Some incentives include cash or even stock options, warrants, or straight-out stock

grants.

We gamble that the stock in a startup will someday be valuable, though many times it ends up being worth less than wallpaper or

… other paper products.


Events

Sponsoring special events provide a nice opportunity to reach out to your collective network. This can range from setting up a “mixer” at a local hot spot and inviting lots of people to informally hear about what you’re up-to, to, specialized events like hackathons. Willie Nelson event & Broadcast.com. Courtesy Laura Boyd DeSmith


Events

Events like these are an opportunity to invite people to get to know you and for old colleagues to find out what’s new. It is also an opportunity to share your growing company culture and attitude.

In many ways, your company is the one that is “auditioning.”

Courtesy American Idol

STARTUSTARTUPP


Interns & College/Universities

College career centers and job boards can be a great place to recruit interns and entry level team members – young, fresh and untainted by Dilbert®-esque corporate culture.

As you grow, your best interns may stay-on, or return later as some of your very best talent.

Build a relationship with local universities and they’ll begin to trust to send you the best and brightest.


Interns & College/Universities

My friend Bettina Bennett, of WhichBox Media, has a summer “Einstein Intern” program with the following requirements:

✚ How can I help you? Attitude✚ Mac savvy and a wizard with Word, Excel, PPT✚ Loves widgets, gadgets, iPhone, iPod, iPad, etc.✚ Excited about all things digital media✚ Loves research and discovery✚ Has good communication skills✚ Is detail oriented and organized✚ Is a self-motivated and independent thinker✚ Strives to go beyond what's expected✚ Excels at multi-tasking in fast, fluid environment✚ Strong artistic/graphic design/creative skills✚ Good line and copying skills✚ Superior oral and written communication✚ Superb online research skills

Einstein Intern Program:


Compelling?

Why is working at your startup a compelling thing?

✚Are you on the bleeding edge of your field?✚Use the latest technology that will help a candidate in his/her next job?✚Is the “coolness” factor so high that people just “want in?”

Sticking a foosball table in the corner does not cool make. Startups do not exude job security. People are attracted to startups not because it’s a career, but because they want to be part of something non-mainstream.

You’ve built a Value Proposition for the product you make – you also need a value proposition to attract the top talent. You are competing against other startups and organizations for the talent you want.


Who works for a Startup?

CBInsights reviewed VC Funded startups back in 2010 and found that typical founder was a 35-44 year-old white male who served as a CEO in a previous company.

This falls inline with the following chart of average startup team member ages, although these numbers are for VC funded startups, not indies.


Early employees

Your early startup employees (the good ones) are specialists at working in fast-moving, unstructured, chaotic environments. They are geniuses at the math of Startupville.

Cultivate these people and treat them well. Many won’t want to stay on after your company gets big enough for an “HR Department.”

You’re going to be looking these same people up for your next startup. Treat them with respect!


Poaching?

Where do you find talent? From your competition, of course. Business Insider did a study on LinkedIn, backtracking Apple employees’ previous employers to find out where Apple recruits from.

Looks like Apple loves HP, IBM and Microsoft!

http://www.businessinsider.com/where-apple-hires-from-2012-4?op=1


Poaching?

As a startup, you probably don’t have the deep pockets to pay big salaries and steal talent from the likes of IBM or Microsoft.

That’s good. You don’t want corporate-types. You need people who understand what it means to work a startup – and who are willing to take that risk with you.

So, instead of stealing from the big boys, you need to really know your local startup community. There are always struggling startups, low on cash. Put on a straight face and circle the wounded beast like the predator you are at heart. Just be careful to take only the best cuts.


Location & Recruiting

Startups often end up at a location that is convenient for the founder(s). Before setting the anchor, look at where you are located with respect to the talent pool you are recruiting from.

For example, if you are a tech startup, where are the companies you want to recruit from located?

This is a very strategic decision. Locate companies that have the kind of people you need (competitors, or not) on a map and draw a circle around the highest concentration. You need to try and be inside that circle.

Map, copyright MapQuest


Flex

Are you providing flexible working arrangements? While you obviously need to watch out for people who abuse the privilege, keep in mind that you’re often asking people to work below market rates, for long hours in the hopes that there will be a long term liquidity event. That is, if everyone survives that long. As long as the work gets done in a timely way, it can pay-off. Trust, but verify!

The flip side is that there is really no substitute for having your team together in the same space, sharing the vibe, the energy and working as, well, as a team. I prefer to have my team physically together!


Compensation

Technical fields are especially price-competitive. To fill these roles, you need to look for people who want to use your startup to push their personal envelope. Overachievers, who seek the greater responsibility and relative freedom in startups as cure to the anathema of a corporate cubicle.

Make sure you communicate an understandable picture of the options pool, and what the total outstanding shares look like.


Options value

For example, if you are offering a salary that is, say, xx% below market, and are offering stock options -- are those options going to conceivably worth *more* than the difference?

I’m serious. Over the years, I’ve seen founders offer substantially below market salaries and a pittance for stock options.

That said, you can’t predict an actual value – and you need to be careful you don’t try to. OTOH, if you offer 1000 options to offset low wages, how much will those options have to eventually be worth to make up the difference? Is that number…. Crazy? Is it believable? Let the employee do the math themselves, but the numbers had better seem “reasonable” and within the risk the employee is willing to take.


Compensation Plans

There are many, many papers, blogs and articles on how to structure your options pool (just google “startup compensation package”). The following links talk to structuring compensation packages and equity and benefits. These are sample links to give you a feel for some of the questions often asked. Keep in mind that there is a huge difference between a large VC-funded startup with $30m in the bank and a small private equity backed startup with a fraction of that amount available to work with:

✚ http://theoperationsguy.com/building-compensation-package-startup-equity-compensation

✚ http://www.payne.org/index.php/Startup_Equity_For_Employees

✚ http://www.quora.com/Startups/What-compensation-can-a-CMO-VP-of-Marketing-expect-for-a-late-stage-startup-that-has-closed-series-C-and-is-growing-rapidly

✚ http://www.quora.com/Startup-Compensation/Whats-the-typical-salary-for-an-entry-level-Marketing-PR-Social-Media-position-at-a-San-Francisco-start-up

✚ http://blog.salescrunch.com/how-to-compensate-at-vp-sales-at-a-tech-startup/

✚ http://www.zanebenefits.com/blog/bid/121633/The-5-Minute-Guide-to-Affordable-Startup-Health-Insurance


Retention

Whether the economy is up or down, keeping your team members from jumping ship when the wind blows is challenging. Retaining team members with high demand skills is hard enough. If you happen to be located in an area experiencing growth, it gets harder-still.

It is a catch-22. The best people are usually found where the action is, and where the action is, is often where the location cost goes up.


Retention

On the other hand, you can take advantage of local conditions – such as locations with high tax rates or costs of living (like California). If you can offer a great environment with significantly lower costs but is a great place to be, you can attract savvy people.

For example, many California-based companies have been either moving operations to Austin and Dallas — or — keeping their offices in California, but opening new offices in Texas where the bulk of growth is taking place.

Facebook is building a major office in Austin, and Apple already has over 3000 employees there.


Retention

Example: It is no secret that it is more expensive to do business in California — and the tax situation reminds me of an old-world hunt, where beaters walk through the bush, driving the tigers out into the open. In the case of California taxes, driving business out of the state.

Don’t forget, the tiger bites back. Gutenberg Project


The simple things

Sometimes, it is the simple things that help. If you’re good on everything else, *knowing* your people counts:

Attention to detail: Knowing when birthdays, anniversaries, etc. are and just sending a hand-written card is, sadly, rare these days. Bump it up with flowers or the equivalent – appropriate to the individual.

Extra time off after really pitching in with long days & nights on a project.

Extra vacation days. Pros: This is a popular method that does not require direct cash, and it can be just the ticket for overworked, overstressed and burnout-avoidance. Cons: Care needs to be taken when using it. Jealousies can erupt if not perceived as being applied fairly. Also, extra vacation days can turn around and bite productivity and even delay product launches at critical points in your roadmap.


The simple things

Impromptu. Pros: Extra time off doesn’t just mean vacation time. Impromptu company celebrations– “Hey everyone, take tomorrow off!”, or, “Wow, great news on closing that big sale, take the rest of the day off!” can be great ways to relieve stress in improve general morale. Cons: If you do it too often, it can become expected.

An employee may want to attend a trade or industry conference or event. Subsidize the trip with time-off or even paying for some portion of the trip.

Keep up with money issues, such as pay freezes or other actions that may have been necessary earlier, but should be regularly revisited. Be open with fiscal realities – don’t keep your team members wondering. Transparency can be your best defense against the rumor mill.

Movie day. Is there a big movie coming out that one or more of your team really wants to see? Either buy them tickets or even make an event of it – shut down early and all go to the movie – “I’m buying the popcorn.”


Family

Invite spouse and/or children to lunch or other “company events.” While this can sometimes be logistically challenging for working parents and school schedules, the payoff can be honest good wishes if you are able to “connect” with the spouse and family. Your team member sacrifices a lot to work for your startup. Establishing good will and support from the spouse and family can go a long, long way to reducing the stress on your team member.

This doesn’t have to be a complicated or expensive event – it can be as simple as a company picnic or other family-friendly outing.

You have a team member who has put in much extra time, long hours, and been a total rock star. Send flowers or equivalent gifts to the spouse and/or family!


Family

Simple, simple, simple: Find out when the spouse’s birthday, anniversary, children’s birthdays are – send a card or cake! Bump it up by enclosing a gasoline gift card or just a Visa/MC gift card.

Date night. Pay for dinner & a movie (you get the idea) to help your team member(s) stay happy on the home front. I recall during the early days of broadcast.com, we had encoder/servers sitting at Mark Cuban’s house in Dallas. Mark was off to talk to investors in New York, so he paid for my wife and I to have a nice dinner and spend the night at his house while I tended to the hardware. It was a nice gesture, which my wife never forgot.

Find a great vacation deal (for cheap) and award tickets for a long weekend vacation, or, similarly, concert tickets.


Family

Junior Interns. Inviting teenage family members to be a summer intern can be a great way for parent and child to have a special bonding opportunity – expanding on the ‘take your child to work’ idea, and turning it into a real learning experience for them. Of course, some pre-screening is important – you need to be confident that the teenager is really interested in doing it, and, that they’ll actually be serious about it. Take it slow and non-committal to make sure it is really going to work out. If it does, then everyone wins and you can have fun giving them special recognition.

Gifts for the kids – a gift-card to Game-Stop is the kind of thing kids prize these days.


Perks & Bennies

Enhance their “space” – upgrade their chair or desk or some other improvement to their workspace. Similarly, upgrading their computer, monitor or tablet device or phone, is something they’ll use every day.

Pay an auto detailing service to clean and detail the team member’s car, while it is sitting in the parking lot (maybe even pitch-in, too!).

On their birthday or work anniversary, have cake and personally narrate a brief PowerPoint/slide-show that lists and celebrates their accomplishments and longevity with your organization.

Have a trophy or plaque made that honors the team member and their accomplishments.

EASY / SIMPLE: Write a nice recommendation for them on their LinkedIn profile.


Perks & Bennies

Year Book: Many on-demand book printing services exist now that make it easy to have one or a small number of hardcover or perfect bound books printed. Create a company “Year Book” that celebrates your people, your company, and the milestones, accomplishments and individual contributions. Give them out for a company annual anniversary, Christmas, or other occasion. Combine it with a company signing party. Make sure the founder(s) personally sign and write an individual message of appreciation in each book.

Meals. Bring in or cater occasional breakfasts and/or lunches, and make them relaxed affairs / mixers.


Perks & Bennies

Alternate job titles. Consider “secret identity” or, simply, fun alternate job titles. They keep their official title, but you help them choose a more fanciful title. For example, at WhichBox Media, Bettina Bennett is CEO, and also “Chief Maverick.” Other examples might be “Legal Eagle” or “Head Intern” or “Codaholic” or “Java Junkie” – you get the idea.

Telecommuting may or may not work for your organization. In my own experience, I’m not a big fan of it for startups – you really need the in-person dynamic. Regardless, I do encourage organizations to be flexible, especially under special circumstances. For example, if the weather is bad, or the roads are icy (usually a day or two out of the year, here in Dallas, at most), I encourage people to work from home.


Perks & Bennies

ANYPERK.COM – (Added 3/6/13) This is a website that says

“By pooling thousands of companies together, AnyPerk is able to get the best perks on the market in fitness, entertainment, travel, and much more.”

Business Insider says, about AnyPerk: “For $5 per employee. companies can offer perks like discounted movie tickets, discounts on DirectTV and Dish Network service, and even free coupons for Costco.”

AnyPerk is reportedly used by Pinterest, Klout, BirchBox, and even Pandora.


Change of Control / M&A (Merger & Acquisition)

Much has been written about the structure of options plans and vesting. Is the deal fully vested at issuance, or over time? What are the vesting triggers?

One of the tricky areas has often involved what happens on a material change of control in the organization, including a merger or acquisition. Some plans have vesting triggers tied to such a change of control.

Whether the company is expecting a 4-5 year play, or is on an accelerated trajectory, will impact what kind of plan really makes the best sense for the unique requirements of the organization.



In other cases, there are Change of Control bonus plans, granting a contractually agreed upon amount of cash to be paid to the employee in the event such a change happens. More complicated plans may use a formula for a bonus payout based on the size of the deal.

Often, these documents are dumped on the team member with little or no explanation. “You get x options that vest on a y formula at a strike prize of z… “ Followed by 50 pages of legalese.



Transparency is critical here. Those team members who’ve been around the block may have been stung by other deals in the past. It needs to be crystal clear to team members what the stakes are – how the deal is set up, and how it will work in different scenarios and liquidity events. If certain questions are asked over and over – maybe you need to have your agreement “improved” to be more understandable.

Beyond these issues, it is normal for most startups to rely heavily on an options pool (or equivalent) to provide for some degree of deferred compensation and upside liquidity. Care should be taken here. Regardless of NDAs, employees will often compare notes. Gross allocation disparities will often come to light, and it’s usually not good when they do.


Flush with Cash?

Even some of today’s high flying organizations, flush with cash, find it difficult to attract and retain top echelon talent.

For them, it is gourmet cafeterias, free massages, laundry service, shuttles, hair cuts, upscale cubicle/work-spaces, couches, pubs and bars, park-like campus settings, full-service gyms, arcades (yes, even foosball), bring-your-dog-to-work policies, and on and on.


… or Not

Chances are, your startup doesn’t (and shouldn’t) spend this kind of money. That’s not what your investors had in mind. Oh, and don’t go and buy a new car or boat!

You can creatively build a fun and fiscally responsible environment. The kind of people who are attracted to companies at this stage of development will usually appreciate that you’re not blowing money on frivolities, and instead are focused on your company and product.

Take pride in what you are able to do, and listen to your team!


About the Author

Patrick Seaman currently mentors and advises technology startups and turnarounds at Pepperwood. Most recently Patrick served as the Chief Operating Officer for Cinsay Inc., and as COO and CTO of the Software as a Service company, WhichBox Media. Author of the first major book on online media, Website Sound, Patrick was the first employee of Broadcast.com (then owned by Mark Cuban) and served as Director of Technology, VP of International Development, and on the Board of Directors of Broadcast.com Japan. Broadcast.com sold to Yahoo! for more than $5 billion.

Patrick currently serves on the Advisory Board of Kraftwurx (3D Printing), Qples (Digital Coupons) and the University of Texas at Dallas School of Natural Sciences & Mathematics Advisory Council.

Contact Patrick at [email protected],

[email protected] and

www.linkedin.com/in/patrickseaman/.

Patrick Seaman


About Pepperwood Partners

Pepperwood Partners is a boutique investment banking advisory firm headquartered in Dallas, Texas. Pepperwood provides a suite of investment banking advisory services to businesses in the technology, media, telecom, nanotechnology, energy and alternative asset sectors. With a strong focus on institutional relationships in the Russian, European, and CIS regions, Pepperwood works with businesses to achieve capitalization and growth objectives.

Two Lincoln Centre5420 LBJ Freeway, Suite 535Dallas, Texas 75240 USA+1 [email protected]

Learn more at: www.PepperwoodPartners.com

startups: attracting and retaining talent (updated 3/6/13)

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