INCENTIVIZING TECHNOLOGY STARTUP TEAM MEMBERS
1. Understand why some people thrive in startups and others in a larger structured organization.
As an entrepreneur willing to be surrounded by an efficient group of people, you need to provide all the elements that these people seek to join a new employer. For the sake of simplicity, we can consider five main components.
a. The importance and breadth of the vision and the goals to achieve it.
Being part of a world-changing project brings them an unparalleled sense of purpose. It sets apart startups from most established businesses that cannot risk their existing activity and venture into the unknown. Big businesses grow incrementally, not by leaps and bounds.
b. Quality of Work
Two aspects are recurring among startup employees:
i. A startup is the greatest learning ground: no book has ever been written that can be relied upon to accomplish the work. New skills are uncovered as the need evolves.
ii. Startup employees thrive as being part of a cohesive team ebullient with talented individuals from diverse background. Problem-solving within such teams is exhilarating and yields great result.
c. Higher responsibilities and bigger challenges
i. Unlike in larger businesses, startup employees are given substantial responsibilities at an early stage in their career. They witness the immediate results of their action and are held responsible for them. They like being acknowledged as performers rather than being treated as one good employee among many peers in a same division.
ii. Efficient startups do not have a long chain of command. Employees enjoy the direct access to executives with no waste of time.
d. Innovative culture
This is the trait that big business has tried to emulate decade after decade. There are scores of advisors and business gurus, academics and consultants who keep pounding on corporations to implement what they perceive as an indispensable process to maintain a permanent innovation culture. Some have been quite successful, but none has come close to showing the creativity and speed of execution encountered in startups. As an evidence, one can consider the continuous stream of technology startup acquired by larger tech companies. The best way, so far, for big companies to innovate, is to acquire innovative startups. The innovative culture so much praised by startup personnel is characterized in two ways:
i. Inward: workers keep bumping into novel tasks as innovation is a permanent state.
ii. Outward: the corollary is that everyone in the team is free to create.
e. A bigger appetite for risk
The fact that success is not granted challenges them. They relish their contribution to the success of the enterprise, as much as they understand that they could bear responsibility in a potential failure. Participating in realizing what is deemed impossible is truly stimulating.
2. How can an entrepreneur attract, motivate and retain talent?
This is one of the biggest challenges faced by entrepreneurs as competition for talent has been fierce among startups in technology hubs. It is a difficult and relentless task. Retrospectively, one can spot the entrepreneurs that have excelled at it: their startup quickly grew to become a giant while they stayed at the helm. Though there is no recipe, as I trust the personality of the founder is a major influence, we can provide the following guidance.
a. How to attract.
i. First step: convince talent to leave their job. The easiest is to expose how the five points in section 1 will make a difference.
ii. Second step: invite the candidate to meet the team.
iii. Third step: insist on three points your team and you believe could seal the deal.
iv. Do not focus on money as the key motivator. It is a sure way to attract the wrong person.
v. Beware of job hoppers. Generally, their resumes highlight their flaws. Unfortunately, there are plenty of job hoppers in high tech.
b. How to motivate:
Once your new employee has joined, and past the honeymoon, your job is to maintain the excitement at a constantly high level.
i. Be an inspiring leader: have a clear set of values and stand by it.
ii. Empower employees. Once you have tested their capacity to take on new assignments and responsibilities, keep planning for more, ideally in a binomen setting.
iii. Treat all employees with fairness and show them respect in all circumstances.
iv. Allow for some play time: celebrate milestone successes with the whole team.
c. How to retain: how not to lose a star player.
As your enterprise will show high achievements, all your executives and star employees will be swamped with concurrent job offers. More often than not, the major lures revolve first around an attractive vision on a challenging disruption, second on the role potentially assigned to the star player and third on the names of the key members of the poacher’s team who may resonate highly in your team player. To avoid losing the player, you are defied to provide an extended vision with new execution challenges, and to offer her a broader position with high risk in this unchartered territory. In addition, if funding permits, such position will require hiring outside expertise. To win it, you must constantly be ready and not be reactive. It is part of the CEO job.
3. Understand why startup employees leave.
Yet, startup employees leave, for many reasons.
a. The hired employee does not fit.
It is a failure of the recruiting process to not have detected a potential for misfit. Quick action is of the order. At first, convene with the employee to understand the scale of the problem. Another responsibility may better suit the personality of the employee and allow her to become successful. Bar such option, you must come to terms as soon as possible. A disgruntled employee shall not participate in a high-tech startup.
b. Burnout
Burnout is a common occurrence among fast-paced technology startups. It is difficult to anticipate among employees. Usually, it is borne out of a lack of balance between work life and personal life. Such balance is not equal among individuals. It is important to realize that productivity, though an over-rated word used to label many concepts, is often optimized through understanding how the right balance works for each person. I remember a CEO of a wireless company literally disappearing for a few days with no message left to anyone. He would suddenly show up early one morning with a brilliant set of ideas and changes that would propel the venture one step above. His absence had been used to making long solitary walks in the countryside. Some prefer meditation, others playing with their kids, or doing very patient tasks such as reproducing illuminated manuscripts from the middle-age. The important is to be tolerant for all the unconventional behaviors. It will help reduce burnout.
c. Weariness
Weariness comes when the vision, or the personal contribution to execute the vision, suddenly loses its appeal. It is sad to acknowledge as you have only yourself, lead visionary, to blame. In so many startups, employees come to realize that they are not actually making the world a better place. It was well sold to them, and they feel cheated. Employees then quickly lose any interest in their work. Do not fight it. Read the clear message it sends to you and act upon it.
d. Company reaching maturity (“no more fun”)
Some employees start to feel uncomfortable when the headcount reaches a certain threshold. Some people thrive in a 15-person team, some in a 150-person team, others adapt to all sizes. Maturity is often more a perception than a reality. My experience of businesses of all kind is that maturity stage is the antechamber of death. Death may not be lethal, when an employer is bought by a big group to add market share. The sparks have left and startup smarts pack and move on.
4. Financial incentives
Financial incentives, you realize by now, are not deal breakers, unless your offer is out of proportion with what the world of tech employers propose.
a. Base incentives on a mix of team and individual achievements.
The first reason is that there is no such a thing as an individual contributor isolated from the team. The second reason is that it instills the importance of the community’s progress: the team must succeed.
b. Encourage a mid-term contribution.
Some companies, in their stock option plan, give almost as much incentives in the fourth year as in the three first ones together. Deep tech startups are likely to extend to a longer term the spread of the financial incentives, because of their longer cycle. However entrepreneurs must evaluate how far along employees will maximize their contribution before feeling any burnout.
c. Link some of the team’s incentives to cash flow generation.
Operating cash flow is the most important financial result that matters in early-stage startups. Reaching a recurring positive cash flow stage allows to avoid a liquidity crisis, and temper any fund raising. All employees must learn to contribute to cash flow within their repective domain. Linking part of the incentivization to cash flow generation will serve the purpose.
d. Profit sharing as a tool
Profit sharing is used obviously only once the startup is becoming profitable. Its advantage to the employees is that it grants them immediate cash. For investors and founders, it is non-dilutive. Yet it reduces the potential distribution of dividends, and ultimately slows equity growth. Employees favor the visibility of this tool compared to a stock price upon which stock options depend.
e. Stock options: the most conventional type of incentives.
Stock options have been around for half a century, under various forms. The principle is familiar to all: stock options can be exercised during a determined period, usually 10 years, as long as the employee remains a company employee, against shares of common stock, providing the performing employee a means to share in the equity value of the venture. Historically it has been hailed as the quintessence of aligning the interests of the workforce with the success of their employer. De facto, most stock options are not exercised, for many reasons (failure of the startup, early resignation of the employee, tax treatment etc.).
Stock options are granted according to a Plan that has been accepted by the investors of the company who estimate how much dilution of their respective stakes they are ready to bear to increase the likelihood of success or to accelerate the time to “world domination”. Crafting a fair and effective Plan is a thorough task that implies anticipating where the business will be a few years from the starting date of the Plan. All stock options are proposed by management and granted by a resolution of the Board of Directors, or Supervisory Board.
5. Ongoing incentives
Offering a package of incentives to attract and motivate employees is common practice. To retain employees for a longer period, it is also common practice, once the employee has fully benefited from the initial incentives and maintains a valuable contribution to the company, to provide ongoing incentives. The most appropriate at that later stage, as the business must have become profitable by now, is to devise a profit-sharing scheme. It does not make much sense to create an additional Employee Stock Option program. Yet most companies keep distributing equity as in a casino-type society. The cost of these programs is high. It is not proven that the advantages outweigh the cost. Ex-startups, that are now public companies, keep spending huge amounts of money in stock-based expenses. In doing so, they have become hostages to their own practices. Boards and Management teams seem to have forgotten the initial purpose of granting stock options. It was actually to compensate executives and employees for the risk they were taking when joining a company with little history, that could not match the salaries they received at their previous job. In today’s world, it looks more like an additional perk on top of a comfortable remuneration, for a low level of risk. Do not fall in that trap!
Ongoing incentives make sense to retain go-getters who carve their own utility in a firm and further the deployment of its innovative products/services.
6. The case for appointing mature executives at a later stage.
Tech companies that reach the scaling stage hire proven executives who generally leave a well-paid job from a company, the success of which they influenced. Many enterprises fail at integrating these top-brass into their culture. Often, I have observed the newly-hired executives trying to impose their views, inherited from past success at Company A, disrupting the culture of Company B. Inevitably it creates a level of dissatisfaction that ultimately brings resignations from old-timers. Though there is value in adopting some methods and practices from enterprises of a tier above yours, as part of the growing process, it is paramount that new executives melt within the culture of their new employer and not attempt to alter it significantly.
In parallel, CEOs and their board, must heed a good balance when attracting such heavy hitter (s) with an incentive package. The package must indeed attract a recognized talent. It should also not be looked upon as too generous from the start for an executive who has not proven his/her value within your team yet. Because of the fierce competition for this layer of employees, many employers feel obliged to offer outrageous immediate benefits. It rarely serves its purpose. Titles should have no bearing on the issue. Contributed value and level of risk are the two main issues. Thousands of people are known to hop from one place to another, optimizing their total “return” without delivering the consistent value they were hired for. Big Tech employers bear some responsibility in this unproductive game.
7. What we consider useless and why.
Last, we feel compelled to mention three common practices that we consider useless, if not perilous, in startups.
a. Automating the recruiting process using key words.
This is the best recipe to hire run-of-the-mill, uncreative employees. They check all the boxes, but how can you be sure they would not jump ship at the first crisis? Beyond expertise, a consideration for the type of personality will provide hints for the potential individual’s stamina necessary to resiliently execute on an ambitious vision. Successful innovative startups are not necessarily built through recruiting executives and employees who have done it. Their credentials are the result of many factors, not the least of which is the type of leader under which they performed so well in the past. I have memories of a Vice President Marketing recruited with a flawless resume, a top-notch college degree, 15 years of a successful career at a Silicon Valley iconic company, who fell flat on his face in our startup. We had relied too much on checked boxes and failed to investigate the non-expertise field, the character field.
b. Granting diva-like perks requests
You shall not reward employees/executives achievements by showering them with extraordinary praise and incommensurate perks. An overachiever star performs as a member of a team. One should not encourage “loners” in a startup. A tech startup is different than a supermarket where honoring the employee of the month may stimulate all employees.
c. Job performance annual review
The bureaucratic annual performance review does not fit with a startup pace. When something apparently goes wrong with an employee, you or the team leader responsible for the employee must immediately find out through a one-on-one interview whether the problem is fixable or not. If it is not, it is better to reassign the employee in a different role if there is one where her talent can best be employed, otherwise let the employee go and learn from your mistake.
In the same token, promoting an employee is not a Christmas time activity. It happens on an as-needed basis.