Improve Your Financial Model With A Dynamic Hiring Plan
A key part of any financial model is the hiring plan. Your team is your most important asset and often your largest expense, so it’s critical to build a detailed forecast of the roles you’ll hire, when you’ll hire them, and how much you’ll pay them. Most models use a schedule like this:
That’s a great start, but there’s a problem: things rarely go according to plan in a startup. Startup life is unpredictable and your hiring plan probably won’t unfold as anticipated. It’s imperative to recognize that your model is “wrong” the minute you finish creating it and focus on flexibility and adaptability. If funding takes longer to materialize, you shouldn’t hire employees that you can’t afford. If revenue is slow to ramp, you may not want to increase spending on the team. With the schedule above, you’re left updating the start date assumptions every time actual performance deviates from your model.
There’s a better way. A good, but often overlooked, technique to make your model more robust and flexible to create a dynamic hiring plan. Instead of making explicit assumptions around employee start dates, tie hiring to commercial, financing, or other milestones. For example, instead of hiring a Frontend Developer on September 15, 2018 as shown in the example above, hire a Frontend Developer after closing $__M in seed funding. Instead of hiring a Sales Associate on December 23, 2018, hire a Sales Associate when MRR exceeds $__K.
This can be as simple or as complicated as you choose to make it. Let’s walk through a few simple examples.
Hiring Tied to Revenue Milestones
A simple option is to tie all hiring to revenue milestones. The figure below shows an example (Note: the specific hurdles chosen for this example aren’t meant as recommendations, I just picked some numbers at random to illustrate the concept)
In the example above, the Frontend Developer starts when MRR exceeds $5,000; the VP of Sales starts when MRR exceeds $15,000; the Sales Associate starts when MRR exceeds $25,000. And so on.
You can code this using simple “if” statements in Excel.
Salary Expense = if(MRR >= MRR Hurdle, -Salary / 12, 0)
Hiring Tied to Funding Milestones
Another option is to tie hiring to specific funding milestones. For example, hiring positions after the company raises a specified amount of money. The figure below provides an example.
In the example above, I applied a funding hurdle as well as a target start date. In this model, an employee starts when both the target hire date and funding hurdle are satisfied. For instance, the VP of Sales will start no earlier than 9/30/2018 and won’t start until at least $1M in outside funding has been raised.
You can code this using “if” and “and” statements in Excel.
Salary Expense = if(and(Cumulative Investment >= Funding Hurdle, Target Start Date < Month Ending), -Salary/12, 0)
Another option for a fundraising hurdle is to assume that given positions are hired a fixed number of days or months after a funding event. The figure below provides an example.
There are probably more elegant ways to code this, but in order to illustrate the concept I introduced an extra column called “Start Date (Calculated)” to calculate the start date based on the aforementioned constraints. This model works in two steps. First, calculate the Start Date based on the funding milestone and delay:
Start Date = if(Funding Hurdle > 0, sumifs(Month Ending, Investment,
“>=”&Funding Hurdle)+Days After Investment, 0)
Then calculating the salary expenses is simple.
Salary Expense = if(Start Date <= Month Ending, -Salary / 12, 0)
In this example, the VP of Sales starts 60 days after closing $1M in funding.
Hiring Tied to Multiple Hurdles
We can also get more complicated and combine funding and investment hurdles. The figure below provides an example where hiring is subject to both revenue and funding milestones.
In the figure above, I assumed that that employees start when the company meets both revenue and funding hurdles. The VP of Sales starts when the company is generating at least $15K MRR and has raised at least $1M in outside funding. We can code this in Excel with “if” and “and” statements.
Salary Expense = if(and(MRR >= MRR Hurdle, Cumulative Investment > Funding Hurdle),-Salary / 12, 0)
Alternatively, we can be less restrictive and assume that employees start when the company meets either revenue or funding hurdles. The figure below provides an example.
In this example, the VP of Sales is hired when the company generates at least $15K MRR or raises $1M of outside funding (subject to the Target Start Date discussed above), whichever comes first. We can code this using a combination of “if”, “and”, and “or” statements in Excel:
Salary Expense = if(or(MRR >= MRR Hurdle, and(Cumulative Investment > Funding Hurdle, Month Ending >= Target Start Date)), -Salary / 12, 0)
I could geek out on this stuff all day, but I’ll spare you. There are dozens of different ways to configure a dynamic hiring plan and it doesn’t have to be limited to funding or revenue milestones (though they generally make the most sense). I hope this gives you some ideas of how you can make your model more dynamic and robust with limited extra work.
You can find the models described in this post in a Google Doc here. I also included a sample using some slightly more advanced coding to calculate the specific dates yielded by the different triggers.
Note: I recently published an eBook on financial modeling called The Founder’s Guide to Financial Modeling. It provides a step-by-step guide to building a financial model and includes a sample Excel model to illustrate concepts.
