Stop Recruiting, Start Uniting

Please stop giving people the wrong reasons to join your company

A friend who is an investor recently told me about a startup founder he met that was able to recruit people to come work for him at about half of the compensation they could make elsewhere.

My investor friend said that the founder will “definitely raise a round” because this ability to recruit people for far below market rate is absolutely critical in the startup game. The investor then went on to explain to me that he considers early employees the “first investors”, and that their belief and commitment is a huge indicator of the founder’s ability to persuade people to join the fight.

But what does this really prove?

From an investor’s perspective, the notion of recruiting people to work long hours for very minimal compensation is quite compelling for a few reasons.

First, it’s essentially talent arbitrage. Regardless of the job, hiring someone at below market rate while you are still able to get “market rate” quality work out of them is a good deal. This is like buying a printer that can print the same number of pages but with half of the ink as any other printer on the market.

Second, it puts a resource strain on the founder which gives the investors more leverage when it comes time to make a deal.

If you are a founder who signed up a team to work for 50% of what they could make elsewhere, you probably promised that salaries would increase in the future. This means that there is an urgency to raise money to keep your team. This is a horrible position to negotiate from because there really isn’t a BATNA (Best Alternative to a Negotiated Agreement) to fundraising.

The options are; raise, or lose the team — very risky at a time when the founders job is to systematically find and minimize risk.

The third, and probably biggest, reason investors probably find this type of recruiting attractive is that it gives the investor a good story to tell themselves and partners about the company. ie “They were able to get 3 guys to leave Google and work for 50% of what they made before, so the opportunity must be good”.

This is a mental shortcut called “the authority bias” which is a technical name for the fact that we tend to overvalue people who we assume are the authority on a subject. The problem is, what do “3 Google employees” really know about assessing an early stage company?

Learn more about this and other biases with this free course

The ability to recruit people for less than they can make elsewhere doesn’t prove much except that the founder is able to set high expectations that they probably won’t be able to realize.

These expectations are typically:

  1. Join my company and you will get rich
  2. Join and work with some of the best people
  3. Our mission will change the world

Mission is a great reason to join an organization and I’ll get more into that later, but first let me walk you through the first two.

Play this while reading the rest of this section

This company will make me rich right?

I can’t really think of a company, outside of the one that I own (and have control over), where I would take a 50% salary cut to work at in place of equity. The expected value of the payoff in the startup world just isn’t worth it.

Let me explain.

Imagine that you are being recruited as one of the first 5 team members of a company called Unicorn.co. Since you are a particularly valuable employee you have the opportunity to own 5% of the company. Over rounds of financing, let’s say that ~25% of your position gets diluted away. Lets also assume that there aren’t any crazy liquidation preferences.

It’s tempting to just look at the exit value of the company and calculate how much you think your ownership percentage will be worth at sale.

Let’s have a look (thanks to Numi.io)

$37M isn’t chump change at all. This is just over $9M per year — assuming that you stay for 4 years. But this calculation only tells part of the story because you aren’t taking into account the chance of failure and with early stage companies, there is a real chance of failure that can’t be ignored.

Only 0.2% of companies who seek funding ever receive it and a mere 1% of the founded companies achieve unicorn status according to CB Insights.

This means the company recruiting you only has a 0.002% chance being a unicorn. For the sake of argument, we will assume that all unicorns will sell at $1b in valuation — which isn’t always the case.

Adjusted for the extremely low probability of success, today your equity has an expected value of $75k (or ~$19k over a 4 year period).

Assume another company comes to you which you think has a 1 in 300 chance at selling but only for $50 million. When compared side by side to the unicorn company it would be a better to take a stock + lower salary deal from the $50M company because chance of success is higher.

This makes your expected value at exit $625k over 4 years. Thats a nice bonus for 4 years of work, but its not exactly f*** you money.

I understand this math which is why I don’t really like trying to convince people that the equity will make them a millionaire. Options will end up worthless in most cases.

This doesn’t mean that I don’t believe in my company. This just means that I am pragmatic about the potential outcomes since making a boatload of cash cash is rare.

So convincing employees they can get rich is an overstatement in most cases. Next, let’s examine an appeal to their social status.

The Glory

I have another friend who was an engineer for a company that I advise. The company (let’s call it LA LLC) is still relatively small (engineering team of 5) but bootstrapped its way to 8 figures in revenue. My friend recently left LA LLC for a startup in the bay area tech scene. He was hired as one of the first engineers at the company and I estimate, based on subscriptions and pricing data at the time, the company was doing high 5 figures in revenue.

What’s most interesting is my friend’s perception of the startup. In his mind, the startup is doing better than LA LLC despite LA LLC’s profitability and positive cash flow. The startup on the other hand is burning cash and has yet to turn the corner to become a profitable (thus more stable) company.

When pressed about why he made the move, my friend says:

“The company is amazing. The founder was one of the first employees at {REDACTED} and we have {REDACTED} as investors. The company will sell and the founder really loves entrepreneurship so I’m sure that he will invest in a company I start.”

When I talked to him recently, he was telling me about how he was making well over $300k a year in total comp. This was salary and stock options he valued (without taking into account failure) based on the last round of financing in which a “blue chip VC” participated.

At LA LLC my friend was weeks away from receiving equity which was a stable company with years of experience operating in the market because he thought that the startup was less risky.

Talking to my friend it became obvious that the startup’s recruitment is more about selling glory than the business itself.

What my friend was after was the association with people who appeared to be successful in the startup game already. This association would validate him as a player in the game and allow for him to accomplish more when he decided to set out on his own.

Glory is a social motivator that requires the esteem or reverence of others and falls far up on Maslow’s hierarchy.

To tap into this motivator, the founder worked hard to establish what the ancient romans called Auctoritas. He then used this influence to craft what I like to refer to as the “Mom story.”

That is, the story that recruits would be able to tell their Mom when if the company is struggling.

“Hey Mom, I’m working with the guys who built {Insert well known company here} and sold it for {amount} I’m going to hit it big soon.”

For the recruit, telling Mom that they are toiling away for an unknown company in a basement somewhere doesn’t hold the same esteem and would no doubt trigger a lecture at Christmas.

The Mom story is also good for wives, friends, and anyone else that the recruit would need to convince that they are not making a mistake by joining the company.

So when selling new recruits on joining the company, it’s helpful to think that its probably more about selling everyone surrounding the recruit rather than selling the recruit themselves. The best way to do this is by telling a compelling story that the recruit can then decimate to the stakeholders in their life.

Don’t Let Stories Fool You Startups Are Risky

There are two issues with the Mom story though.

The first problem is that it inflates expectations. Early stage companies are saddled with unknowns. Eg. Will the mainstream market like the product? Will the team stay together long enough to execute? Will Google start doing what we are doing? Etc.

Startup = risk and using a story to make the risk more easy to digest is dangerous.

Potential employees and investors should have the courage to look at a company for what it really is and make a decision based on the actual available information. Not rhetoric invented by the founders and distributed through networks.

Otherwise, every time there is a setback the founder will need to resort to a new story to rally the troops.

Early teams need to be like Spec Ops who can adapt to situations that improve or deteriorate. Not a group of people who need to be sold at every sign of adversity.

The other big issue with story based recruiting is that innovative ideas don’t hold up to the mom test.

New ideas always looks like a crazy (or bad) initially. The founder can spend time trying to doctor the idea up for a story to tell Mom but even if you put lipstick on a pig, its still a pig.

Elon Musk’s friends, for instance, thought he was crazy for forming a rocket company. It got to the point that the same friends sent Musk a compilation video of rockets exploding to try to convince him to let the idea go. Musk persisted despite the naysayers and SpaceX leaped past the established players in its industry a couple of weeks ago by autonomously landing a rocket on a floating platform.

It doesn't sound so crazy now but before Elon Musk was the legend of “Elon Musk” he was just another guy running around trying to do something crazy.

Musk is an amazing storyteller, but really what I think people are most attracted to is his mission.

Mission is the only reason to join any organization

“Six hundred marchers assembled in Selma on Sunday, March 7, and, led by John Lewis and other SNCC and SCLC activists, crossed the Edmund Pettus Bridge over the Alabama River en route to Montgomery. Just short of the bridge, they found their way blocked by Alabama State troopers and local police who ordered them to turn around. When the protesters refused, the officers shot teargas and waded into the crowd, beating the nonviolent protesters with billy clubs and ultimately hospitalizing over fifty people.” (blackpast.org)

Mission is the reason why civil rights activists marched from Selma in 1965. “Unicorn” riches did not await them, nor did the esteem of working with a “word class team”. The only thing waiting for these people was violence and they knew it.

Yet they went anyway.

Because they believed in a truth: all men are created equal.

The protesters took it upon themselves to make it their mission to spread this truth. They knew there was a chance that this mission would not be accomplished in their lifetime and they knew that spreading this truth would have a price.

But together they were willing to pay it.

The folks from Selma and other marches teach us that “changing the world” isn’t an objective, it’s a byproduct of understanding and fighting for the truth.

Despite what the dominant narrative says, as founders, we shouldn’t be trying to convince recruits they will get rich at our company, or selling them a story that will “work with the best team in the world”.

We should be helping people understand a truth. And that the truth is always worth spreading.

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