Total Rewards Quarterly

‘Startups’: A View from the West

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Marie Brinkman is an Associate Partner for Radford, a group within Aon Hewitt's Talent, Rewards & Performance practice focused on technology and life sciences companies. She is based in San Jose, California.

Marie has extensive experience in both corporate and consulting environment. At Radford since 2006, Marie is a global relationship manager for key technology industry clients and is responsible for providing support for all their survey data needs. She also provides training and guidance for global compensation and Total Rewards consulting engagements and the application of Radford’s workforce analytics database for organizational staffing and labor cost analysis. Prior to joining Radford, Marie held consulting positions with Bowker Consulting International and Right Management and was responsible for executive compensation at Visa. She frequently presents on global compensation issues and trends at client conferences in the US and Asia. She earned an MBA in finance and a BA in psychology from the University of California at Berkeley.

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Kyle Holm is an Associate Partner for Radford, a group within Aon Hewitt's Talent, Rewards & Performance practice focused on technology and life sciences companies.

He is based in San Francisco, California.

Kyle Holm has nearly 20 years of compensation consulting experience covering executive, broad-based and Board of Director pay. His work covers all elements of compensation including base salary, annual incentives and long-term incentives. He consults on the design of cash and stock-based compensation programs for a varied range of public and private companies with a focus on high growth organizations in the technology and life sciences sectors. Kyle has been an instructor for the Northern California Human Resources Association's continuing education program. His work has been published in WorkSpan and he co-authored a chapter on initial public offerings in the recently published Understanding Executive Compensation – A Practical Guide for Decision-Makers. He earned a bachelor's degree in finance from Santa Clara University.

 

Q. In the initial phase of a start-up, what are the top five priorities for a CEO from a talent perspective?

A. Radford: That's easy – and almost unanimous: in a technology company, the first four priorities from a talent perspective are engineering, engineering, engineering and… engineering! Technical talent rules the day, because that's who provides the product. Hiring and scaling up are the key HR activities at this stage.

Securing talent requires a great job opportunity and compensation package. Startups look for talent from multiple sources: new college graduates, other startups, and established market leaders. Often employees at publicly held technology companies in particular, are locked in with high cash compensation, big stock grants and generous benefits.

Q. In the entire lifecycle of a startup, from VC funding to pre-IPO to listing, how frequently do you see the HR and talent priorities change? Please shed light on a few of these changes.

A. Radford: Companies typically start from the top and then fill in below. Initially, senior talent is brought on board, is tied to the mission and given a sizeable ownership stake. The next 50 or so employees get in on the ground floor. At this point, for junior folks, it might seem like just a job. But by the time you get to 100-200 employees, employees start expecting development opportunities.

An early priority – but one that shouldn't change – is trying to create a brand and culture around the company mission. Why come here? One practical reason for doing so is social media. Employees will spread the word on social media as to what it's like to work for your company so you want this to be positive.

Q. In your experience of working with new age organizations, what are some of the things that they got wrong?

A. Radford: For some, it's wishing they had put in place at least some minimum guidelines so hiring managers were not working in a vacuum when it came to making job offers. This means providing managers with data for market pay ranges, for example, so they don't have to rely on hearsay or what the last offer was. You don't want to be in a legacy position later on, wrestling with internal equity issues. Ironically, though, you don't want to move too quickly to formalize some programs. Although speed to market is absolutely critical for business success, rushing to formalize incentive plans by, for example, pegging to metrics too early can be a disaster. It can hem you in, preventing you from adjusting quickly and can create adverse consequences.

Q. What are these organizations getting right this time as compared to the pre 2000 dot com boom?

A. Radford: A lot has changed, back then (in 1999-2000), there was no business plan, no revenue let alone profit, and the company kept going until they ran out of money. Now, it's less about clicks and eyeballs. The fundamental changes are that:

  1. The money got more disciplined

  2. Entrepreneurs got more realistic, and

  3. Companies know they have to have a real product

The support structure is better. Venture Capitalists are doing more to build out their human capital capability and to support the companies they invest in. They might have a head of HR on staff do a residency in one of their portfolio companies to develop compensation programs and to help establish broader HR policies. They sponsor events and provide networking opportunities so companies can learn from each other.

Q. Are the talent practices for unicorns any different from the startups? If yes, what are they doing right?

A. Radford: Since unicorns are, by definition,very large private companies with a valuation of $1 billion+, they are much more evolved than a startup company with a handful of employees. Since revenue is largely driving the valuations, that means they generally have a healthy product or pipeline, good financial performance and prospects, and a fairly well-developed infrastructure.

One emerging practice that is different in the unicorn than in a typical, smaller startup is what's happening with employee stock. Typically, with pre-IPO stock, it's hard to quantify a value and employees are anxious for a "liquidity event." That means an IPO or sale of the company. With unicorn, companies are postponing going public or being sold – sometimes indefinitely. To provide an opportunity for employees to cash out, some unicorns are giving employees restricted stock (instead of the traditional stock options in a privately held company) and allowing them to cash out when vested at subsequent rounds of financing. This essentially creates an internal, private market.

Q. How do the HR strategies mature and evolve as the organization scales up?

A. Radford: As companies scale up, we see the compensation programs mature by adding in additional components such as a salary structure or an annual incentive plan. From an overall strategy perspective, companies emphasize attracting key/top talent in the early stage and as the company scales, the emphasis will naturally shift to retention and motivating employees along the business strategy.

Q. In the ‘pre-revenue’ stage of a startup, what role does ‘pay at risk’, both in the form of LTI and STI, play?

A. Radford: In the 'pre-revenue' stage of a startup, the emphasis is generally on salary and LTI. LTI is in the form of equity – i.e., an ownership interest in the company. Short-term cash incentives are minimal since at this stage the company may need to conserve cash until they bring their product or service to the market. However, having said that – in highly competitive markets like the Silicon Valley, often if you are competing for talent with public companies, then the amount an employee at a startup or private company can earn in STI might be similar to the STI opportunity in a public company. The plan design, however, might be very different – far less formulaic, broad parameters for determining success, and more discretion in determining bonus pool funding and individual payouts. Quarterly goal setting may be a more agile approach. A "fully competitive cash program – base salary and STI" is reflective of how fluid this environment is in the US, where engineering talent can go anywhere, and often does bounce back and forth between established, public companies and startups.

Q. It is widely acknowledged, that the kind of talent hired by startups is different in terms of attitudes and competencies as compared to established organizations. Does the ‘talent profile’ change as the organization scales up?

A. Radford: It's true that some people are just "startup people by nature."They prefer being part of a more undirected environment and don't like being part of a public company and the rules and scrutiny that go with that, or increased bureaucracy. As a company scales up, some senior employees who were happy at heart with being individual contributors and are now pressed into being managers may not thrive in management roles. So you need to look at who can and wants to scale with the organization.

Where an employee is in their lifecycle plays a big role. Employees with young families may find that the demands and relative uncertainty of a startup is more than they want to handle during this phase of their life. It may also simply depend on the company environment – its mission, culture, and the career opportunities available that matter – whether in a startup or established company.

An early priority but one that shouldn't change – is trying to create a brand and culture around the company mission

Q. Is it common to see high levels of attrition as the organization scales up, especially at the senior levels? Have organizations been able to identify measures to retain and engage this integral group of employees throughout their evolution?

A. Radford: Actually, it is not common to see high levels of attrition at the senior levels as the company scales up, as the senior levels are generally more locked into the company's success, either because they care passionately about the company's mission or because they have a considerable financial stake.

Also, companies have a lot of time to plan an IPO. So, for example, they would typically hire a CFO who is someone that is qualified to both lead the company to the IPO and lead it afterwards as a public company.  The head of engineering or a CTO/founder, however, may leave to build the next thing in a new venture.

Q. Given the investment and rise of startups in India, what learnings do you think HR managers can take from the developed markets in terms of setting up agile policies and practices which can evolve with the organization?

A.Radford: This is the challenge of balancing efficiency and process in a creative environment. We would suggest that they hold off things that feel too corporate, try to put in structures that are not too rigid, not hem themselves in, with HR leading these efforts.

Venture Capitalists are doing more to build out their human capital capability and to support the companies they invest in
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