THE STARTUP CHAT

[0:00:03]

Hiten Shah: And this is Hiten Shah.

 

[0:00:04]

Steli Efti: And today we want to talk about how to make your first hire, how to make that first crucial hire at your startup. So the scenario here is that either you’ve been running your startup solo so far, or you’ve been working and running it with a co-founder or co-founders. Maybe you had some contractors, freelancers, other people in agency, other people that did a certain amount of work for you, but were not fully employed by your company and doing it full time. And now you’re getting to a point where you want to make a full time hire, somebody that is not an owner in the business, doesn’t have necessarily significant equity, was not there from day one. But that will work for you full time. And making that first full time hire is kind of a very crucial and interesting transition in the startup, right? From something that only the founders, or you as the founder, were mainly involved in, mainly pushing forward to, now you’re really building a business and you’re hiring people. There’s a bunch of challenges involved with what constitutes a good first hire versus a bad first hire at a startup. There’s a bunch of things in terms of timing, so let’s unpack this for people out there, to make sure that that first crucial hire is done successfully. So first of all, what is typically, is there some kind of a rule for when the right time is to hire somebody full time? Do you have any kind of rule or guideline that you would use on when is it too early or too late, or how to think about hiring that first full time person at a startup?

 

[0:01:52]

Hiten Shah: Yeah, so at the earliest stages, generally the people on the team are doing a lot of stuff. And they have multiple hats, multiple roles in the company, maybe there’s only two or three of you who started the company. And everyone’s responsible for everything. And so one way not to do it, that I’ve found, is that in an ideal world, and there’s some exceptions here, but an ideal world, don’t just hire because you think … Don’t hire for something, I know this is going to sound weird, but don’t hire for something you don’t know how to do. I see that mistake a lot. Like we have a product, it’s out there, and now we’re going to hire a marketer. The caveat is if you’re not an engineer, nobody on the team’s an engineer, you’re probably going to need to hire an engineer or do some contracting or something, right? So there are caveats, because for me, I can’t start a company without having an engineer, whether it’s a co-founder or a first hire. And typically, it’s usually the first hire, for me, is an engineer in any new company I start because I don’t cook. And if the co-founder isn’t that, then we need to find an engineer that we can work with, right? But outside of that, you don’t want to hire for something you don’t understand or you don’t know yet. And that includes sales, includes marketing, which are the two core areas I see a lot of people hiring for early on. Right? I don’t see too many others. Sometimes I’ve also seen one other one, which is if the founders cover marketing and product and sales, then they might hire someone in customer support. So to me the three options, just to help frame this, would be marketing, sales and customer support. Steli, do you think there’s other ones that are usually typical first hires, besides engineering. Let’s not count that.

 

[0:03:39]

Steli Efti: Besides engineering, no, the only thing I could think of that sometimes people hire is … I don’t know, an assistant, an office manager. Somebody that does a lot of administrative tasks. Sometimes I see this at startups that there’s going to be like two or three founders, and then they’ll think well, we have too much scheduling stuff and ordering things and let’s hire that person. But that is unusual. Usually that person comes in once you have a few full time hires and you have an office, and these admin tasks grow to a point where you’re like, somebody should do this full time. But generally, if it’s not an engineer or developer, yeah, it’s marketing, sales or support.

 

[0:04:22]

Hiten Shah: Yeah. Right, again, biggest tip, biggest thing, don’t hire one of those roles if you haven’t done it. Especially early on, and the reason for that is not that you need expertise necessarily. But it’s because you’re not going to understand what you need in that hire unless you have some idea of what it entails and where the deficiencies are for you. Like where is it that you’re stuck? Where is the process slow or what have you.

 

[0:04:48]

Steli Efti: Yeah, the problem when you hire somebody for position that you have no experience in, is that both of you are going to have a very difficult time to evaluate people. Right? How do you know if somebody’s good at something if you have very little insight into that thing. And then even once you made a decision in whatever framework you used and you hire somebody, whatever result they’re going to generate, you’re going to have a very hard time figuring out if the result … Doesn’t matter if they’re good or bad, if the results are a result of that person, or are the result of the market you’re in or whatever. You’re not going to know how good they are, basically. And especially when things aren’t going well, which is most of the time, you’re not going to know if, are they not going well because this is very difficult to do right now, and it would be challenging for anybody? Or are they not going well because this person is doing a poor job. And just alone that doubt will lead you to take way too long to make any kind of decisions on what to change, and will create friction within the team. That doubt will create a sense for that person that you’re not trusting them, or that you have doubts, or that they don’t have a full mandate. It’s just toxic and I’ve seen this so many times, where somebody was like, we have no idea with marketing so we have this head of marketing person as our first hire. And then you’re nine months down the line, or a year later, we let them go and it took us so long because we just weren’t sure if the person’s doing a good job or not, and how to evaluate it, and now in hindsight, oh god, we should have let that person go in the first month or something. And this is such a common thing I hear, and a mistake that a lot of people make.

 

[0:06:36]

Hiten Shah: You don’t want to make that mistake in your first hire, it’s such a crucial hire. So even if you feel like you’re inundated with lots of stuff, and you really, really need someone, don’t just settle on the first person you find that you think is awesome. Right? Like really spend the time to interview a few people. and one of the reasons I say that, it’s basically what you said, basically startups aren’t easy, especially when they’re really small. And you really do need someone who isn’t just sitting there and saying I’m a marketer, I’m just going to do marketing. Because that rigidity tends to be very problematic for a startup. And that’s one of the main reason those early people get let go really fast, like within 30 to 90 days. The reason is they’re so rigid. And then the founders are like well we’re doing everything. You’re not willing to do a little bit of everything? You know? And I know it’s a fallacy because you’re like oh look, I hired a marketer, they should be doing marketing. Actually, you hired an early stage startup team member. They need to be able to roll with it.

 

[0:07:36]

Steli Efti: It is a really unique position, isn’t it. You’re looking for somebody that, ideally you’re looking for somebody that will resemble a founder, as close as humanely possible in terms of … the way they think, the way they act needs to be very entrepreneurial, they need to be very resourceful, they need to feel like they can stand up to the founders or founder and be a partner. And they need to feel real ownership, so they can’t be looking over their, at some area in your business where things are going really horribly and thinking, well that’s not my fucking department, I have nothing to do with this. But they need to feel ownership over the whole business and chiming in, helping out, getting their hands dirty, being very pragmatic and practical. So you’re looking for a founder, that is not a founder. That doesn’t get the benefits of the title and the ego boost, and the whatever their name being associated as like the person that started this whole thing. But you want them to act as if they are. So it’s a unique type of person. Who is that? Who is that perfect first employee at a startup and why are they not a founder themselves?

 

[0:08:49]

Hiten Shah: Yeah I mean it’s usually somebody who’s just not willing to take the risk or able to take the risk. Willing’s probably too strong of a word in this case, but they’re just not able to take the risk, right? Like they have student loans that they’re paying off, right? So they can’t take the risk of no salary or very little salary. They have been used to it and maybe even they have a family and they have a certain amount of money they need to make. And if you’re a couple people, you’ve raised some money, then you might be able to hire that person. I mean these people are becoming even people who are married and have kids, are becoming a lot more common in a company, even at the earliest stages just because, companies are raising money, etc. So to me it’s just someone who just wasn’t able to take that extra amount of risk that a founder would, is one way to look at it. Another way to think about it is it is someone that has a lot of potential, is a little more junior. But you see that they have the potential. They might be like … they might be add a very specific role to the company being an individual contributor. Somebody who is just doing the work. Maybe like third level down, it’s a larger company, the third or fourth level down from a director of marketing or something. And you just see that they have the startup hustle, right, if you want to call it that. And you believe that they should be able to help you. Another thing I’ve seen is actually, it’s usually a friend of the founders. Some kind of friend that has been helping out a little bit, has a job somewhere else, and they’re just ready to jump ship because they want to be at a smaller company. They really want that. And they might already have been helping you out. I found that to be actually a common scenario too.

 

[0:10:25]

Steli Efti: Yeah, I totally agree with that. And as you were describing that kind of second scenario, I was thinking about somebody that does not yet know that they are as entrepreneurial as they really are, right. So sometimes people, I see that, as you said maybe there’s a close friend that helps out. Eventually it’s kind of clear that, hey, why don’t you join full time? And they think yeah, let’s do it. And then they do act really entrepreneurial, they are very resourceful, they take real ownership of everything. And down the line, they might realize, wow, I really love this, and wow, this is really my type of jam. But they just weren’t exposed to it before, they never thought of themselves as potential entrepreneurs, they never thought of joining a startup. Kind of just organically jumped into it and discovered themselves what their true talents are, and what the perfect environment for them is.

 

[0:11:19]

Hiten Shah: Yeah, so a big thought there, and something that I’ve seen that I just didn’t realize until we started talking about this, is that a lot of times, as founders you’re working on the weekends. Especially when you’re just two people, three people. You could have different weekends every month where you have different people that fill in, that you think might fall in that criteria come work with you. So come work with us on a Saturday, and help us with X because you’re a marketing expert, you’re a sales expert or whatever, and eventually you’re like somebody we might consider hiring. Right? And working, you can pay them a little bit, you can give them a little bit of shares, or they might just do it because they just want that startup energy. A lot of people do it just because they, and I’m not advocating for free work, I’m just saying these are friends of yours. These are specific to people you are friendly with or are literally friends of yours. You probably have some amount of friends right? Especially if you’re in some area that’s a little bit entrepreneurial or there’s a lot of companies out there, so that’s almost everywhere at this point. You just bring them in, for a day or two and just see how they work and see if you guys get along. And eventually one thing that happens is that that person just keeps wanting to help you. So you build sort of a relationship, and you might never need to interview anyone else, for that role, for that next hire. And that next hire, if you’ve already had enough interactions with them that actually they’ve done work for your company, there’s a lot of benefits that come out of that, because they can ramp up really fast and they might be a lot more, not even might, you’ll know if they’re capable of being in a startup as an early stage team member.

 

[0:12:47]

Steli Efti: Yeah, I mean, for everything we say there’s exceptions, right? But in general, I would say that ideally, the first hire you make … In an ideal scenario, it is somebody you already know, or you’ve gotten to know well, before they join full time. It’s very unusual that the first full time hire you make is just, like you put up a job post and people apply with their CVs and you just interview a few people and hire somebody. That can work, of course, as well but the challenges of you picking somebody that culturally doesn’t work, or picking somebody that … There’s just a lot more risk that is eliminated and that you don’t have to worry about as much. If it’s a known quantity, somebody you know, somebody you trust, somebody you know you jive well with culturally. Then, all those things don’t have to be figured out and you can jump into like can we do the work? How well can we accomplish our challenges, and tackle our challenges together? Versus, this person seems trustworthy, but can I truly trust them, right? I mean, these basic questions, they take a lot of time away, they slow down a lot of things. So ideally, your first hire, if you can, hire somebody you already know. Talking about pitfalls,

 

[0:14:03]

Hiten Shah: Yeah, I agree.

 

[0:14:04]

Steli Efti: Talking about pitfalls for a little bit. There’s a few challenges that I see that a lot of startups are tackling for their first hire. Sometimes it is expectations on salary and equity, which is an interesting one. Let’s take these three categories. Salary, equity, and title. Right? So some early employees, they might really want to be founders down the line. Or feel like they have ownership like a founder, so why don’t I have the title like a founder? Similarly, early employees, what should the expectation be in terms of salary, taking salary cuts, kind of the financial incentives of things. And then last but not least is equity, right. A lot of times I see startups struggle when they make the first offer to bring in a full time hire, that full time hire, many times especially if somebody that’s not super experienced in joining is the first hire at a startup. Which most people aren’t. It’s not a job position that you have for your entire career. I was always the first hire at a startup. That’s kind of an unusual thing. So a lot of times when they do, they think, well, I’m really going to almost act like a co-founder, so if these two people, to simplify this, have each 50%, well now bringing me in, I should maybe get 20%. Or 25% equity, right. A lot of times they see this as a challenge that the first hire may have very aggressive asks for equity, or the founders gave way too much equity or too little, or were too stingy. But so these three things are I think interesting, maybe, to unpack. Title, salary, and equity. How do you think about these three things when you think about your first hire?

 

[0:15:46]

Hiten Shah: Yeah, I’m going to start by saying title shouldn’t matter much. I know that sounds, you know, kind of direct. But I don’t think the title should matter, because like, the co-founders have no titles, usually at that point. And everyone’s doing everything. And it does take a good amount of trust, especially if someone’s coming from a position where they’re used to titles, or an environment where they’re used to titles. But the whole point of it is not to have a title. But you can say, I’m running marketing for a three person startup. Right? But that doesn’t mean you have a title. So, but that would be one piece that I think about because as people come in, especially that early, it’s really tricky to give them a title unless they’re an engineer.

 

[0:16:25]

Steli Efti: Yeah, you know what’s interesting with title is that, you know, I’ve seen very different philosophies. I can tell you what mine is, but there’s companies that … I think even said this, in his startups or whatever, his philosophy was always, the cheapest thing you can give away is the title, so be really aggressive with it. Whatever. Just give them really great titles, because it’s free. And it doesn’t really matter. And I know of –

 

[0:16:51]

Hiten Shah: And I actually disagree with that, I don’t think it’s good and I think it actually influences what somebody thinks about their job. So it’s actually not free, it’s actually very expensive.

 

[0:17:00]

Steli Efti: I do agree with it. And I don’t think that you should be giving out VPs of something titles to everybody. And the other thing is, I know some startups that were very aggressive with the co-founder title, that basically the first 10 employees, or not 10 but the first like five, six employees, they all got eventually co-founder titles. To retain them in very challenging times down the line or something. I disagree with that as well.

 

[0:17:26]

Hiten Shah: I’ve seen that too.

 

[0:17:27]

Steli Efti: I disagree with that as well. I do believe that the title will influence behavior, and it also will influence everybody else’s behavior towards that person. And also their behavior in terms of how they feel about their own title or position. I think if you start giving out really aggressive titles, you create an org chart that is out of control from day one. And it creates all kinds of politics and issues down the line. So, and people that care really really a lot about titles to me, are suspicious in terms of how will they act, how pragmatic will they be about things. Versus being political about them.

 

[0:18:00]

Hiten Shah: Agreed.

 

[0:18:01]

Steli Efti: But I’ve seen some companies be hyper-aggressive with these things. And giving out titles left and right. And when founders have asked me about, hey, you know what, this person’s always acted like a co-founder and has been around, for a really long time and they really care about this, what’s the harm of just calling them co-founder from now on? I always go, well, were they there at the inception of the business? Did they invest as much time as you in day one? Did they invest as much money? Did they create as much? Because if they didn’t birth the thing, they can’t be the biological parents, right? They just can’t. Like if they weren’t there at the inception of the idea of the business, to me they’re just not a co-founder. That doesn’t mean that they’re not incredibly important. But to me, it’s deceiving to give them that title, because they were not there day one. Now, I don’t care if you were day one or day two. But if somebody had the idea, brought it to market, started it, created some kind of traction, and then six months down the line you join, you just can’t be a co-founder. In my mind.

 

[0:19:07]

Hiten Shah: I agree, I mean, this giving away titles, and making people co-founders, you’re just appeasing somebody for the short run. You’re just appeasing them because you feel like guilted into it or something like that. I do appreciate the title of founding team, you know? And there are people in my companies, you know I am more than happy to say, they were on the founding team because they were there very early, right? And their contribution should definitely be respected like that, and I appreciate that. But like calling all these people co-founders leads to a lot of disgruntled team members in the long run. I’ve seen this first hand. And so yeah, that’s definitely a pitfall. Definitely a big pitfall. Titles, and this idea that you have extra co-founders, so to speak.

 

[0:19:49]

Steli Efti: Yeah, so let’s talk, so let’s go to the next one. Which we can either discuss salary or equity.

 

[0:20:00]

Hiten Shah: Yeah, let’s start with salary, just because I think that might be easier, possibly. Or harder, who knows. To me, salary’s just whatever you can afford. You know, at a startup at a early stage because you can’t afford a lot. And one of the key criteria I use, and I’d love to hear your thoughts, but is like, for whatever the main role is, so if it’s sales, marketing, even engineering if you’re hiring a first engineer for some reason. Or customer support. It should reflect what is either market, or some discount on what market is considering you’re really small. So there are no rules, except, for example you don’t want to go, you know, pay a marketer 100 grand, as your first hire. It would be an exception if you were to do that. I’m sorry, some people might want to get paid that, but they’re probably not the right person early stage. That being said, the founder should definitely not promise necessarily that the person will get paid more. But as the company grows, they are going to be responsible for sort of making that person’s salary appropriate. Right? But these are conversations you need to have pretty early on, meaning in the interview process, so that you can understand what someone expects and how they realize, what they realize about the company. For example, if you’re that small, I usually would recommend that you actually share the financials of the company with that person. Because the co-founders will probably have been talking about it the whole time, right, about numbers and runway and budget, and all these words. They might not be using those words, but they’re talking about it. And so the first team member should have that transparency, in my opinion, which means that they should have a very good idea of why their salary is the way it is.

 

[0:21:39]

Steli Efti: Yeah, I love that. I think also just my two quick cents on top of this is … Usually, when people, if somebody joins as a first hire, their main motivation typically needs to be around joining this particular team and joining your mission and vision. And they should be, the main appeal of that, of making that step is that they’re passionate about this and that they feel that they can be part of something great at the very beginning, and help it make it happen. That’s the appeal of the job, it shouldn’t be the salary. Right? Doesn’t mean that you want to underpay people as dramatically as possible, but if salary’s their number one criteria, it’s probably not a good fit. But also on the flip side, what I’ve seen also is that sometimes, founders will try to just pay as little as they can get away with. And I don’t think that’s a good idea either, right? Because that’s also very short-sighted.

 

[0:22:37]

Hiten Shah: I agree.

 

[0:22:38]

Steli Efti: Just because somebody’s willing to make massive sacrifices, because they’re so passionate about what you do, if you can afford to pay them more than they are willing to suffer through, you should. You shouldn’t just go “Oh, fuck it,” if they just ask for this much, as the worst case scenario, let’s just pay them this much. I think that that can be very short-sighted as well and create all kinds of resentment and issues. If you can afford it, you want to pay market rate, usually it is a discount on market, some discount on it because it’s a startup. It’s going to be more fun, it’s going to be more exciting, more fulfilling. They’re going to have more ownership, they’re going to learn hopefully more and at a faster pace, that’s worth something. In many cases, that’s the next thing we’re going to get to, they’re going to get some equity,

 

[0:23:20]

Hiten Shah: Yeah, we should get to that.

 

[0:23:22]

Steli Efti: That is worth something as well. So let’s talk about that, right? What is the framework that you advise startups and founders when it comes to, how much equity do I give out to my first hire?

 

[0:23:33]

Hiten Shah: Yeah, it’s a really weird question. You know, and a really weird answer, just because there is no right answer on this one, especially because we’re dealing with startups. I think this trade-off is what you usually do, between salary and equity, when you hire people. Right? One of the tactics you use when you’re hiring is you say, I can pay you one of these three salaries, and that comes with one of these three equity points. Equity points meaning like, one of these three percentages of equity. And so you might want to do that, and if someone’s really willing to sacrifice the salary, just because they don’t need it, don’t want it, or are really motivated and want ownership in the company, like more ownership, then giving them a little more equity’s not a bad idea. The one thing I would say is that just because people have different experience levels, and you’re hiring the first team member, I can’t really give like a solid like, “Oh, this is what you need to do every time,” or anything like that. I think it just boils down to being fair, and honestly, having a very, very honest, transparent conversation with that team member, especially if you believe they’re going to be a long-termer. You know, and you better believe they’re going to be there long term. So then you talk to them like, what’s going to motivate you, right? These are your options in the world today, right? And a lot of it has to do with their specific situation, what role they currently have, how much salary they have, how much equity they might have, and how much risk that they want to take in their life. And those things aren’t something where you can give a prescriptive answer and say, everyone should get 5%. Right? Because that’s actually pretty high in my opinion, but like, who knows. That person might really actually need that, want that, or there’s some reason why it makes sense to give them that. There’s a lot of different theories because some companies have come out and said, usually there’s like 10 to 20% of the company that’s given to team members over time, with the option pool and all that stuff. But some companies have come out and said, I’m going to give away 40% of our company to team members. Right? And so that’s why I say, there isn’t a general rule here. It’s more about really making sure you’re aligned with that team member when you hire them.

 

[0:25:38]

Steli Efti: Yeah I love that. And I agree, I think that when it comes to this, I think a lot of mistakes are being done on both sides sometimes. And it’s usually because of, sometimes just inexperience and insecurities, like what is right and what is wrong, is such a challenging question for this. So I would just tell people to just make sure to a, be transparent to each other, but also get advice from people that have started multiple companies and have given out equity and hired their first employee multiple times. And that can be somebody that helps both sides kind of see, and come up with an amount that makes sense. As I said, when you hire somebody for the first time, and they have very little experience in working for startups, oftentimes I see that their expectation for what equity they should get is somewhat unrealistic. And disproportionate, right? It’s very rare that it will make sense for them to get 20, 30% equity. That down the line will cause all kinds of issues. But conversely, sometimes founders can be irrationally stingy with their equity and thinking the first employee should get 0.001%, although they’re taking some massive cut on their market rate. And that can be toxic and a bad idea, and short-sighted. So, if you don’t have experience in this it’s a good idea to just get outside advice, and get somebody that both sides can trust to help come up with an amount that will work long-term. But yeah, I think in general you want to figure out something that really gives that person real ownership, as you said they are a founding team member. That is a title that’s worth a lot. They’re going to have a real chance to influence the business and be associated with the brand and the success of it. If it becomes a big success. And they will have the opportunity to act really entrepreneurial and see eye to eye with the founders. Those are all things that are really, really valuable. But on the flip side, you’re looking for that unique individual that doesn’t care maybe as much, from an egotistical point of view, if they have the fancy founder title, or expects to have some insane amount of equity, if they were not there when the biggest portion of risk was eliminated, which was the day the thing started. So it is a very unique kind of person I’m thinking now. There should be a block dedicated to successful first employees of startups.

 

[0:28:10]

Hiten Shah: Oh yeah. And interviewing them and all that good stuff.

 

[0:28:13]

Steli Efti: Interviewing them and all that good stuff.

 

[0:28:14]

Hiten Shah: Yeah, I love that. Great idea.

 

[0:28:15]

Steli Efti: There’s just too much stories about the founders, and not enough stories about the super crucial, unique types of people. And that’s also one of the reasons why I recommend The Paypal Wars so much as a book because it’s written from an employee perspective and not a founder perspective.

 

[0:28:35]

Hiten Shah: Founder perspective. I agree. Well there you go, everyone should at least read summaries of that book, The Paypal Wars. I totally, full-heartedly agree with you. That is an amazing book, when it comes to the viewpoint of a team member.

 

[0:28:49]

Steli Efti: And then if you know of blog posts, books, stories that are told by the first employee of that company, of how they joined, why they joined, and how the story unfolded, ping us on twitter @hnshaw and @steli, and share those with us. I’m super curious, I want to learn more about these people.

 

[0:29:13]

Hiten Shah: Same here. All right well, that’s it.

 

[0:29:15]

Steli Efti: That’s it from us, we’ll hear you very soon.

 

[0:29:17]

Hiten Shah: Thank you. All right.

[0:29:19]