Start a Company with Limited Benefits

Before you hire your first employees, you have to think about what kind of benefits you’re going to offer. It’s a very important question. The job market is competitive. You want your benefits to be competitive, right?

In many situations, it’s better to start a new company with virtually no benefits or very limited benefits. The first set of hires that join your startup need to be fully on board with the startup vibe. By “startup vibe” I mean long hours, under market pay, and crappy benefits. But there is also a lot of fun! Generally, you have to be very frugal in the early days because money is scarce. There is no bigger boat anchor for your burn rate than benefits like full health insurance and 401K matching.

Deciding on what benefits you want to offer is all about trade-offs.

Would you rather have money to pay that top notch engineer the additional $10K he needs to join your company or have a robust dental plan?

Would you rather have money to ensure everyone has quality laptops or provide 401K matching?

Would you rather have that cool (and expensive) office location or not feel stressed about making payroll every week?

T-Shirts over 401K

You should stay away from benefits in the early days that are out-of-sight, out-of-mind. They don’t offer enough bang for the proverbial buck. For example, we didn’t offer 401K for the first four years at Automated Insights.

We had a pretty young employee base (average age was mid-twenties). They weren’t thinking about 401K. We’d send out a benefits survey every year to find out what employees wanted the most and 401K was at the bottom. This was a little surprising since many startups love to tout their 401K matching programs, but young people think they’ll live forever and aren’t worried about what their finances will be in 40 years.

We ran the numbers and 401K matching programs were the most expensive benefit we could offer next to healthcare. And it’s the type of benefit an employee would turn on and forget about. On the flip side, we could get new t-shirts for the whole company every month for a fraction of what 401K would cost. Everyone loves to get a new t-shirt. It’s a very visible benefit. Instead of having a 401K plan, we could be liberal with getting new shirts — for big projects, company milestones, anniversaries, etc. Employees would wear the shirts frequently, so you could think of the t-shirt “benefit” as us subsidizing employee clothing expenses. Not to mention the free marketing we get when employees wear their shirts around town.

Eventually we offered 401K as more of our younger employees approached their thirties, were getting married, and started caring about their long-term financial security. Had we started offering it early, it would have been a waste.

Only One Way to Go

Beside the financial reasons to start a company with a limited benefits package, it is helpful to set the bar low out of the gate. Many employees (for good reason) worry about the longevity of a startup. Showing steady progress is a great way to counterbalance this concern. One way to do that is periodically improve your benefits plan. Again, we’d do a yearly survey about our benefits. Because we set the bar very low initially, it meant we had a lot of room to add or improve our benefits over time.

We could add a life insurance benefit — while not very visible it was very inexpensive.

We added free drinks, then free snacks, then free beer, then free lunch food over a period of a few years.

We started with covering healthcare for the employee, then spouse, then family.

We started doing a big company outing each year like paintball.

Generally, we’d add one big new benefit each year along with a couple of smaller benefits. The employees felt we were looking out for them by constantly raising the bar every year.

After four or five years, our benefits package finally became competitive with other companies in the area, but we saved a lot of money early on by stretching out the period in which we implemented those benefits.

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