Few entrepeneurs start a business relishing the opportunity to deal with the nitty-gritty of bureaucracy – in fact, avoiding it is the reason many choose the startup life in the first place.
But a growing business brings with it complexity, and it is necessary to grapple with some of that if you want to win the war for top talent.
The longer employment issues are left untended, the greater the risk to the business. And when the time comes to make senior hires, there is no escaping the importance of having the right documentation in place to protect vital areas of the business.
It is also imperative to put in place the right incentives to attract people with the skills needed to grow and scale the business.
Top talent can be demanding – even before they join. Senior hires will often look over the draft contract meticulously. Securing the right people is likely to involve much more than a simple negotiation over base salaries. It’s vital to be explicit about bonuses – what is guaranteed, what is discretionary, and the basis on which a bonus may potentially be awarded.
Employees may also want to renegotiate notice periods. Employees aren’t protected against unfair dismissal until they’ve been in the post for a minimum of two years, so some may want to extend the notice period, thereby giving themselves more of a financial cushion if it doesn’t work out. However, others will want the opposite, preferring flexibility over security, so founders may themselves want to press for a longer notice period to provide greater stability and certainty.
Restrictive covenants are increasingly considered essential for many businesses, but may be seen as a nuisance for ambitious prospective employees. Entrepreneurs need to be prepared for these discussions, and they need to know where their red lines are drawn, as well as what the courts are likely to enforce, in order to protect their business.
Potential recruits will also be keen to understand when any equity awards will vest, as well as what they will need to do in order to qualify for those and, once vested, retain them.
Ahead of these conversations, entrepreneurs need to think carefully about how much equity they are prepared to invest in securing a critical hire.
The vesting period ought to be tailored so that it dovetails with the business plan and any exit provisions will need to be agreed up front. Entrepreneurs will generally need to have thought through, and drafted, some form of long-term incentive plan which reflects their commercial proposals, so these can be presented to the prospective hire for review.
Any related tax structuring issues should also have been investigated and addressed ahead of time.
Along with access to finance, securing talent is one of the top concerns for entrepreneurs. But unlike finance, where entrepreneurs tend to be more scrupulous, many founders put employment issues too far down the to-do-list.
But people are critical to any firm, and securing the right talent at the right time, in the right way, can make or break a fledgling business. As the war for talent heats up, and the challenges of attracting and retaining talent increase, expect this to become the hot issue for all founders.