October 1, 2019
Over the next year or two, a new strategy for building out the early team at a startup will become popular. This strategy stands in contradiction to a lot of the startup advice that has dominated the past ten years or so.
Namely, I'm talking about hiring people as contractors during the early product building phase of a company. Typical startup advice is that all core product development should be done by founders and full-time employees, and that you should never outsource this work. And while hiring contractors isn't the same as outsourcing, it clearly goes against this standard rule.
The reason this is changing today is that this rule is in direct opposition to another core rule of startups: "Move quickly." Due to the abundance of venture capital and the competition for talent, founders today frequently must choose between moving quickly and working only with full-time employees.
The startup environment today is different than a decade ago. There's more venture capital going into startups, especially at the seed stage. This means more funded startups trying to hire talent.
All the leverage in hiring has therefore moved to the side of the employees. Employees can now maximize optionality, as the demand for talent far outweighs the supply. Talented employees can spend more time deciding or waiting for the perfect offer before joining any company full-time.
This leaves founders dealing with the strategy dilemma mentioned above: Move slow waiting for full-time employees, or move fast with contractors.
That dualistic phrasing is helpful for framing the main tradeoff, but ignores another dimension: talent quality.
Due to the same emergent leverage mentioned above, it's often the case that working with contractors unlocks higher quality talent, in addition to moving quickly, because top talent is difficult to recruit for full-time work.
Since very few startups want to compromise on talent quality, this makes it is even more difficult to stick to the "full-time only" rule. Today, it means moving slower and potentially lowering the quality bar for who is building the product.
Anecdotally, I'm seeing more and more founders opt to work with contractors, even in the super early phases of core product development. In a single sentence, the thinking comes down to this: "I'd rather move quickly with the best talent on contract than move slowly with average talent hired full-time."
And I think this is a good decision.
Before I go any further, I want to clarify who I'm talking about when I say "contractors." It's not offshore dev shops. It's not people you've never heard of. It's not agencies.
When I talk about contractors, I'm talking about talented people that the founders of a startup personally know. The day to day working relationship with these contractors is not much different than with regular employees, besides the fact that the contractor has not committed to join the company long-term. I'm using the word "contractors" here, but other terms like "consultants" or "freelancers" can also apply based on the type of work being done.
Two basic rules to define the kind of contractors I am in support of working with in the early stages:
Now that we have some constraints for the types of people a startup might want to work with on contract, I can address remaining issues with this strategy, and how I think they will change.
Even under the constraints above, there is still a bit of incentive misalignment between founders and early stage contractors. Namely, startup-contractor relationships face the principal-agent problem. One could look at contractors as people with no long-term incentives and no skin in the game, who could potentially try to pad their hours and make more money without caring for the end results.
However, the same environment that gives employees more leverage does the same for contractors, changing the way they can think about projects. Because there are more startups with capital to hire, contractors, just like employees, can be more picky about who they decide to work with.
I can speak for lots of people I know when I say in this environment, the best consultants and contractors only want to work with the best companies. Accepting startups as clients is a bit like choosing to invest in them. You wouldn't want equity in a failing startup, and you wouldn't want a bad company in your consulting portfolio either. The quality of the companies in a contractor's portfolio is a signal for their reputation.
So, let's get to the important points. The current capital environment means that many contractors can afford to put a high level of scrutiny into their client selection process. Combined with an environment where contractors are not just ancillary help, but builders of core products for early stage companies, it follows that many contractors will prefer to own some equity in the startups they work for. I think this will becomes a popular and successful path for early startup hiring.
Some details of what this looks like: A founder of a funded startup finds the top people in their network and hires them as contractors. They issue equity to the contractors in addition to pay, and they build the core product of the company together. After a few months, or until the product has made more progress, the founder can offer those contractors to transition to full-time employees, with an increase in equity to mirror that transition (it would probably make sense to have a retroactive start date for the vesting schedule on this). They can also begin recruiting more effectively now that their product has a strong foundation.
This strategy is better suited to today's environment. It's a combination that can avoid sacrificing on talent while maintaining quick development speed, and it also solves the incentive alignment issues sometimes associated with contractors.
An interesting change in the labor pool could happen because of this. If this does become the norm, the line between "employees" and "contractors" as we know them today will begin to blur. We'll see contractors converting gigs into full-time employment. We'll see full-time employees start to try out contracting when in between jobs, before committing to join a startup full-time. This could represent not only a change in the "startup playbook," but also a change in the way all startup employees move from one company to another.
This kind of large-scale change in the way people work would not be as extraordinary as it may sound. Hiring at startups is obviously competitive right now, and other macro trends are emerging to adapt to the same challenges.
The clearest example of this is transition to remote work and fully distributed companies. In fact, startups building distributed teams and startups working with contractors are actually two versions of the same strategy: offer employees a less risky hiring path to compensate for more hiring competition.
Each approach de-risks a different part of the decision to join a company. When hiring remote, a startup removes the risk of moving to a new location. When hiring on contract first, a startup removes the risk of a long-term commitment before knowing what it's like.
Obviously the most competitive version of this hiring strategy to do both: Hire remotely on contract, then convert your best contractors to full-time employees whenever you can.
The best strategies for startups will always be a result of the larger environment. No rule is too holy, except maybe that founders should maintain control. My point is not that classic startup advice has been wrong, but rather that the environment has changed and hiring strategies must adjust.
Obviously, startups with famous founders, hyper-growth, or tons of capital can continue to hire full-time without much issue. But to hold onto that strategy as the only option is to ignore the real day-to-day challenges that 90% of founders face. Founders, hopefully this essay opens your mind to new ways to be nimble and operate effectively.
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