08/01/22 | Founders, Leadership

Your Startup Grows Faster than Your People

Between my first and second MBA years at Stanford, I was an intern at a well known tech company. That summer, it celebrated its 10th anniversary and had been a tremendous, early innovator in the tech industry, setting the stage for much of what we recognize in today’s world.

All of the interns that summer were invited to a lunch with the company’s founder and we had an interesting discussion with him. We finished our lunch and I walked back to my cube. When I sat down, I saw in my inbox an email from this very founder – announcing his retirement from the company. He made some comments that have stuck with me for a very long time.

This particular founder seemed to lament in his email that he had not left the company earlier, explaining that the company had outgrown his skills. He even complimented the incoming CEO (although later descriptions of the transition imply that he lost his role in the company in a boardroom skirmish won by the new CEO!)

But I learned a lesson from what he said that I have never forgotten.

Companies grow faster than people.

Even if he didn’t completely believe it at the time, my experience has shown me that, in fact, fast growing companies always grow faster than people. There are a small number of founders who continue to successfully lead a hypergrowth company (try counting them!), and an even smaller number of early staffers who can keep those early roles.

For example, early in my career, before I was a founder and CEO, I joined a fast growing company as employee 351. It was fairly good sized, but was still on a tear in terms of growth. Throughout the company there was a management team in place, and I am sure they expected to be the VP’s in an increasingly growing company. But over the next few years, layers of management were added above those existing members of the management team. They didn’t get to keep their place in the hierarchy, which, at one time, had been reporting directly to the founders and C-suite.

Instead, the company needed to add executives who had already worked in companies of the size that this firm was growing towards. Basically the company needed people who had “been there, done that” in larger entities.

Because of this, my advice for early stage companies is….

“Never hire a VP at the earliest stages!”

One of the reasons this is such a challenge, is that if you hire someone as a VP, who would, in a larger company, be a Manager or Director level person, they will expect to keep the “VP” title, even though they won’t be able to grow their skills as fast as the company grows.

Often these early team members know a lot about the business, and have strong relationships internally and externally and are often considered by both founders and employees as a core part of the “original team”.

Unfortunately for their own growth, they haven’t previously had the opportunity to learn needed executive level skills in an established corporation, and they almost assuredly will not get that experience in your startup! They will get startup experience, but they won’t get bigger company experience, and very few people can just make it up, or catch up, in your company. 

Eventually, it will become clear to the founding team that someone with actual VP-level skills and experience has to be hired – and hired either as a replacement for the mis-titled early employee, or hired into their spot after they are demoted or fired. All of this becomes agonizing to the team and to the founders, not to mention the person who was mis-titled when they were hired.

Even if someone is hired at the right title level, there is a tendency in the early days to “be fair” to early employees – which often means continuing to raise pay and compensation far in excess of value delivered – again companies grow faster than people do.  People who have been with the company during its formative years should be evaluated against the “going rate” for their level of contribution and paid accordingly.  This can be very difficult to do when “back in the early days” we were all friends. 

The challenge that faces many startup teams is that a growth company simply cannot afford to be a welfare provider.  Every member of the team, every day, has to deliver the maximum value for fair compensation.  Anything else endangers everyone and everything everyone has worked for.

What to do Instead?

Instead hire Directors and Managers to provide that front line level of management, even if they are reporting directly to the founding team, and make it clear that that the long term plan is to bring in experienced executive level talent when the company needs it. Now, that doesn’t mean that a very small number of your management team might not be able to fill increasingly senior roles as the company grows, but in my experience it will be the exception rather than the rule.

Equity Matters

Remember, one way that early team members are rewarded for their risk contributions is through equity and that should be a priority for every modern founding team. There are ways to make sure that equity reflects contribution and managing that equity distribution is a crucial founder job.

A sad change in tech over the last 30 years is the decline in how many people become wealthy as early-to-mid stage employees because of far less generous option distributions. I remember when Apple was a much younger and much less valuable company, I had friends who worked there, so I was invited deep into the offices. At the desk of every Apple AA there was a whiteboard, and on that whiteboard was the Apple stock price (did I mention this was back in the day before smartphones and constant online news feeds?)

Everyone at Apple cared about the stock price, because so many people at Apple had stock and options, and I was told that was true even for the AA’s. This wide and deep equity distribution was true all across tech-land in the early days. A Washington post article from 2003 said “…an estimated 10,000 Microsoft employees became millionaires during the era of options…” including college friends of mine. ZDNet reported on the phenomena of AA stock option millionaires in the late 90’s, highlighting Netscape and saying, “Dozens of companies…boast millionaire secretaries.”

Return to that strategy of wide and deep options packages to reward early employees for taking a risk, but resist both title and compensation inflation.

Following the strategy, and ensuring compensation and stock grants are consistent with the hiring strategy, helps the company grow more smoothly, improves retention and reduces the likelihood of disgruntled early employees, who can undermine the team as they vent their resentment.

Nicole Davis

Nicole Davis

Nicole Toomey Davis is Co-Founder & CEO of Enclavix, a corporate director (Board Member), serial entrepreneur, innovator, entrepreneur coach and mentor, professional speaker and the President and CEO of AI-software company Enclavix, LLC, and Co-Creator of the VentureWrench Startup Coaching Platform.

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