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Your startup needs to hire rock-star workers if you’re going to make it to the next level.

Your business bank account, on the other hand, disagrees.

Bringing any business idea to life is a careful balance of timing. First, there’s the initial challenge of determining when to launch your company.

Do you risk wasting your first mover advantage by launching a product that isn’t quite market-ready? Should you hold off on promotions until your beta release has proven itself in the market?

But once you know you’re on to something, a second challenge presents itself: when should you hire your first employees?

And, perhaps more importantly, how can you afford to pay the people needed to help your company burst forth from its initial stages when you’ve barely got a trickle of revenue coming in?

You’re not Google - you can’t pay even close to what they’re paying for top talent. But that doesn’t mean you have to be a Bing either.

Attracting and retaining top-performing candidates doesn’t necessarily require that you pay market rate + 10%. There are, in fact, a number of alternative compensation strategies you can employ when you need workers, but don’t have cash on hand:

Offer all-equity or all-commission compensation

Hiring an employee with zero money upfront might sound like an impossibility, but there are actually two ways you can make this happen: all-equity compensation or all-commission compensation.

First up, the all-equity approach...

In an all-equity arrangement, your worker opts to take a small ownership stake in the company in lieu of a regular paycheck. It’s rare to find candidates who are open to this compensation strategy, but it’s not totally unheard of.

If you want to go this direction, you’ll need to be aware of a few key considerations:

  • All-equity arrangements tend to be short-term in nature (think months, rather than years). For this reason, limit your all-equity offers to positions that don’t require a high degree of continuity or that aren’t adversely affected by turnover.

  • Given the limited length of these arrangements, you may need to alter your vesting approach. Straight monthly vesting, for instance, might be a better fit for both your company and your candidates than standard one-year cliff vesting.

  • Work with your attorney to ensure your all-equity offers don’t run afoul of minimum wage laws. Bringing the employee on as advisor may exempt you from these requirements, though further regulations exist to prevent companies from deliberately misclassifying employees as advisors.

The bottom line? Be sure your attorney is onboard with this particular compensation scheme before you begin making offers.

Next, the all-commission option...

As an alternative to all equity-compensation, all-commission packages achieve the same no-cash-required objective (assuming you’re looking to hire salespeople).

In an all-commission arrangement, salespeople don’t get a dime until they bring in sales (presuming you pay on cash instead of contracts signed, of course), allowing you to grow your book of business without initial cash outlays.

The downside, of course, is that this compensation strategy really only works with salespeople - and opinions are mixed about whether your startup’s first hire should be a salesperson.

TalentBin co-founder Peter Kazanjy argues persuasively in favor of bringing top producers on early:

“It's hard to overstate the importance of hiring successful salespeople early. Especially if you're in a business where your biggest cost is opportunity cost. If this is the case, then every week you don't have another rep making calls to qualified accounts is another week where your competitors are locking in your customers. And, if your startup has yet to turn a profit, you're racing against time before you run out of money. Landing attractive sales metrics stands between you and your next round of funding.”

Venture capitalist Tomasz Tunguz, on the other hand, suggests holding off on filling this role until your product has achieved product-market fit and you’re confident that your increased sales productivity will exceed your costs:

“[W]hen your startup’s software can command a high enough price and when your lead volumes reach a certain threshold, you should have the confidence to hire your first salesperson.”

Offset below-market cash compensation with equity

If you’re able to commit some cash to your compensation cause, you’ll find that pairing it with equity creates an attractive proposition for workers who willing to take on the risks associated with startup work.

The specific way you mix cash and equity will depend on your business model, your geographic location, your industry and a host of other factors, but could look something like the following model, offered by Shockwave Innovations’ Gordon Daugherty:

  • Entry Level Positions - $20-30K cash + 0.10% equity

  • Professional Positions - $30-50K cash + 0.25% equity

  • Sales Professionals - $40-100K cash + 0.10% equity

  • Manager Positions - $30-50K cash + 0.5% equity

  • Director Positions - $50-70K cash + 1.0% equity

  • Vice President Positions - $65-85K cash + 2.0% equity

The chart below from Radford demonstrates how different types of equity might be used within Daugherty’s framework to build loyalty and reward performance:

It’s worth noting, of course, that paying below market rates - regardless of the amount or type of equity offered - will impact the types of candidates you’re able to attract.

A parent with two kids at home and a mortgage to pay, for instance, may be less able to accept an alternative compensation package than a young engineer who’s just graduated from college.

Daugherty suggests four particular types of candidates that will likely be open to alternative compensation arrangements:

  • Young professionals who are newly out of college and lack the high monthly expenses of more established workers.

  • Employees who currently work part-time with other businesses, but who are interested in the opportunity your company represents.

  • Older workers who already have most of their retirement needs taken care of.

  • Workers of all ages who have substantial savings already (whether due to an inheritance or the one-time payout of a severance package, lottery winnings or other windfall).

If mixed compensation packages represent the right fit for your company, be aware that conveying to employees the true value of their equity options is the key to securing candidate buy-in.

Molly Graham, former Manager of Culture & Employment Branding at Facebook, offers the following tip on making compensation packages including equity positions more attractive:

“No matter how smart the people who walk in the door, many won’t understand how to value their equity. You can say, ‘You have 15,000 shares,’ but that’s pretty meaningless. Even 0.1% is meaningless. You should also give them the most recent valuation of the company, the number of outstanding shares and the basis point.”

To support Facebook’s growth objectives (the company tripled in size from 500 employees to more than 1,500 during her tenure), Graham led the creation of a guide that helped prospective employees evaluate their equity offers.

It’s a simple trick, but one that could make your compensation and benefits packages more appealing to candidates who are on the fence about accepting anything less than market rates.

Defer compensation based on profitability

Another approach to stretching your startup’s hiring dollars as far as they’ll go is to offer compensation that’s deferred until your company becomes profitable. Asheesh Advani, writing for Entrepreneur.com, suggests three different approaches for doing so:

  • Offer a cash bonus to be paid out once the business generates a set amount of revenue

  • Allow for a salary increase when the employee or the business hits key performance milestones

  • Arrange for back pay to take effect once the business is profitable

Of these, Advani suggests deferred salary increases as the optimal choice, given that goodwill created by either cash bonuses or back pay dissipates quickly thanks to their one-time nature.

He’s also quick to recommend consulting an attorney before making an offer that includes deferred compensation:

“Even using the term "deferred compensation" (as opposed to "bonus payment" or "performance incentive") can create a binding liability for your company. This is one of the areas where spending $200 for an attorney to provide you with a sample offer letter could save you thousands later.”

Use alternative hiring strategies

Hiring regular, full-time workers brings with it financial demands apart from salary and equity considerations.

Even if you elect not to offer a benefits package, you’ll still be on the hook for Worker’s Compensation insurance, state and federal employment taxes, and the costs associated with administering your payroll.

Fortunately, there are other options besides hiring traditional employees - all of which can help your company save money:

  • Interns. The days of bringing on unpaid interns to shoulder a company’s workload are (thankfully) long since passed, but that doesn’t mean interns can’t make viable contributions to your company. Their going rate still falls significantly below traditional employee wages, and as long as you structure your internship appropriately, you’ll benefit from interns’ enthusiasm while getting needed work taken care of.

  • Part-time workers. If the intricacies of internships don’t appeal to you, part-time workers can fill the same needs. Part-time employees typically work up to 28-34 hours a week and are generally not subject to the same ACA benefits requirements as full-time workers.

  • Independent contractors. Working with independent contractors can help you cut your costs further, as these workers are responsible for paying all their own employment taxes. Independent contractors typically work on a part-time, project-specific basis - just be sure the way you work with independent contractors falls within IRS tax and labor regulations that separate them from traditional employees.

Another underutilized resource to consider is stay-at-home parents who are looking to re-join the workforce. Jennifer Silva, founder of Sign Up for Camp in San Francisco, has seen tremendous success hiring mothers who are re-entering the job market as commission-only salespeople:

“Not only do they know the local camp industry well, since they’ve sent their own children to camp, but it’s also a way for them to get back into the workforce.”

Advani agrees, stating:

“When my company first launched, we advertised for "flex time" employees in local papers and were surprised by the number of highly qualified applicants we received. For less than half the cost of full-time staff, it's possible to attract experienced employees to your company.”

Delay hiring until funding rounds are closed

This final compensation scheme is one you may not want to hear, but it absolutely deserves consideration as you identify the best ways to move your business forward.

In some cases, it may not make sense to hire employees until you’ve undergone successful seed or early series funding rounds.

Certainly, in some businesses - restaurants, in particular - opening without a staff simply isn’t feasible. In others, though, waiting until sufficient funding has been arranged can offer some benefits.

For instance, going through the VC or angel funding process forces you to get realistic about your business model; investors simply won’t invest if the opportunity isn’t there.

One particular challenge that could come to light through this due diligence process is a burn rate that’s too high to support increased spending on workers.

Investors may also look at your financials and determine that, even if your cash flow can support employees, doing so will jeopardize your company’s ability to innovate or to scale in response to increased demand.

In these scenarios, bootstrapping using the schemes described above may be less preferable to waiting for fundraising to come through given the time commitment required.

Coordinating multiple part-time workers and arranging complex compensation packages takes time which could be better spent preparing your business for accelerators or investment.

Clearly, there’s no “one-size-fits-all” answer that’ll determine how and when your business should hire. Evaluating these different schemes may reveal new ways to bring on top talent without draining your business’s bank account, but even these five ideas represent only a starting point for young companies that are willing to think outside of the box.

Take them all into consideration with your directors, advisors and attorneys as you work to identify the best way to expand your staff.

Have another compensation strategy you’ve seen work effectively? Share it by leaving a comment on our LinkedIn page

Images: Flickr, Flickr, Flickr

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