Startup Growth: Why Early Employees Leave
Why do early employees often leave prematurely or become troublemakers?
I read this on twitter the other day and it struck a chord:
Especially this part:
The people you hire today are likely not the same people you’ll have around in later funding rounds
Launch, growth, and consolidation are very different stages in a company’s lifecycle. Success at each stage requires different skills and mindsets, which early teams might lack. Failure to acknowledge this leads to problems.
People in startups accept that times of accelerated growth are troublesome, but don’t always understand how and why. Culture change, disorientation, overhead, politics, are all expected consequences of team proliferation and hierarchy changes, but a bigger problem is when the very core of the company, its early employees, grow disgruntled. They either leave, taking valuable knowledge with them, or stick around and cause trouble.
Today I’m going to leave out the problems of stalled compensation and career progression. Let’s look at something more fundamental:
People who are great at creating new things are not always the best at growing them into maturity and beyond.
This statement seems counter-intuitive. Those who built the company from scratch are its greatest experts. They should be in the best possible position to take it through all growth stages.
There are a few reasons why this is not always the case.
Differences of Vision
Startups need to able to adapt to customer needs and market conditions. That can necessitate significant changes to what it does. Employees might be less willing to accept this than founders.
Imagine you were employee number 3 somewhere.
Maybe you joined a food delivery startup to work on your vision of healthy and sustainable eating for everyone. But as it grows and gains market share, it needs mainstream appeal to be competitive. It decides to add alcohol and processed foods to its catalog. Your goals no longer align with the company’s need for growth.
Or perhaps you’re a pure-blooded programmer, out to bring cool technology to the masses. You join a self-service SaaS with a great free plan and try to get all your developer friends to use that product. One day, the company turns its focus to big enterprise customers to boost revenue. The company is taking very logical steps towards its goals, but they’re no longer aligned with yours.
Let’s say you’re a very altruist person, trying to make the world a better place through technology and socially responsible entrepreneurship. You believe in volunteering and join a startup whose product helps volunteers connect and organize. Maybe it turns out that there’s no money in that, so the company turns to processing donations on behalf of nonprofits instead. Now you might as well be working at Stripe or Paypal for better pay.
I could go on.
The most skilled and respected professionals, having the luxury of choice, get to pick what they work on.
The best people join startups for the mission. When that mission changes, they can feel disappointed at best and cheated at worst.
Misaligned Incentives
People also join startups for accelerated professional growth, to learn new skills, and for a chance at a large financial windfall upon exit.
As an employee, success at the first two motivations depends mostly on yourself. Your attitude and determination are the main factors influencing how much you learn, which in turn boosts your chances of career advancement.
Despite your best efforts, however, financial rewards are mostly out of your control. Here’s what needs to happen to get them:
- The startup finds its most profitable activity, market and pricing model
- You stick around until all your stock options vest
- The startup exits via acquisition or IPO
Finding profitability nearly always means significant changes to what a startup does, who it sells its product to, and how it prices it. A typical vesting period is four years. That means an early employee is gambling not only on the startup’s chances of success but also on themselves staying aligned with the company’s motives and methods for four long years.
When a startup breaks its alignment with early employees, and they have to stay for financial reasons, resentment follows.
Those employees can leave, but at the expense of their unvested options and the time they’ve already sunk. That’s a hard pill to swallow.
Boredom
Trouble doesn’t stop at later stages. Startups that make it all the way through to their IPO and grow into well-established companies often become prisoners of their own success.
These companies have very strong incentives to keep executing the winning formula. Change is risky and no one wants to pull another Pepsi Crystal.
How ironic that tech startups, renowned for driving innovation, can grow so stale. Early employees certainly think so. Some go so far as to leave and found competitors.
Disgruntled people make easy pickings for headhunters. Most of them do leave for new jobs eventually. Until they do, though, things can get ugly. Admired and respected for their experience, they wield a lot of influence. Their opinions matter.
Sabotage and Rebellion
Even the most diligent of professionals fall victim to the vicissitudes of emotion and motivation. Their productivity goes down. Expecting a certain level of performance, their teams might find themselves unable to deliver on time when their star performer stops delivering.
If such employees are particularly vocal and passionate, they can galvanize others and begin counter-movements inside the company. These are almost always malice-free, well-meaning efforts to “go back to our roots”, but they are disruptive to a startup’s ability to execute their current plans.
Such disruption might be a good thing. In 1983 Steve Jobs famously hoisted a pirate flag and soon after his mutinous crew produced the original Macintosh, which revolutionized personal computers and launched Apple to new heights.
Better ways
Unhappy early employees are both a problem and a missed opportunity. I’ll wrap this up with two suggestions on how to address the issue.
Compensate differently
The industry can move to acknowledge that early employees contribute differently to later ones, to accept it as a normal part of a healthy startup lifecycle, and to adjust compensation accordingly.
As Geoffrey Moore puts it in his book Crossing the Chasm:
(…) improper compensation wastes dollars and demotivates people. To be appropriate to high tech, compensation programs must take into account the differences between desired performance in the early market and in the mainstream market, as well as the types of people that can be called on to achieve these performances, and the likelihood that some of these people will need to leave the company long before it achieves significant profitability.
We already have all sorts of compensation plans and stock option variants. Coming up with an early employee compensation plan and a late-stage employee compensation plan is probably within the realm of possibility for legal and finance teams.
Let them innovate
Later stage startups often struggle to deliver on their roadmaps, so they prioritize efficiency over innovation. It’s all hands on deck all the time. Unable to experiment and innovate, early employees leave. Churn is the elephant in the room here. As new hires take time to come up to speed, the quest for efficiency counter-intuitively sabotages itself.
Early employees do know a lot about the product. They know its merits, flaws, and potential better than anyone. When they leave, they take all that knowledge with them. At best that knowledge is lost, at worst it feeds or spawns a competitor.
Meanwhile, Digital Transformation is showing that autonomous product teams can be trusted to deliver quality work that performs well.
Modern managers, particularly those in Product and Engineering, would be well advised to account for the inevitability of early employee churn. Giving them time to experiment and innovate might be a better option than letting them go entirely. The cost of hiring is so high that there’s probably a high threshold for how much time to allow such employees for those projects.
You might just get the next Macintosh out of it.
