Why the first person you hire should be your HR person

This is actually something I learned while working at a then Series C Silicon Valley startup Branch. I was there and the CEO mentioned to me his background in electrical engineering, how he had done another startup before he founded Branch. At the time Branch was around 200 employees. It sounded like he learned a lot from his first startup experience prior to this one. I asked him about how that company went, and he says “we don’t talk about that company” and everyone around him gave him an acknowledging nod. After some general discussion on startups he said explicitly: “one of the first people that you should hire in an engineering company is actually Human resources”

Author: Ling Qing Meng

Before I joined Branch I always wondered what it would be like joining a legit startup. I’m talking taking a company from 0 to 100’s of millions in revenue. I figured that the operational processes within that startup would be miles ahead of every other random startup stuck in Seed stage purgatory.

Why you should continue reading

First, I’ll explain why HR is the first role you should hire and most important role in any startup. We also have an awesome community tg group dedicated to provide founders valuable alpha on HR best practices.

Second, knowing HR is complicated, I’m giving you a comprehensive guide on decision making so that you are fully prepared in 80% of all HR related situations. I’ve dialed the content in the flow chart to be the most concise, succinct data model on the matter. For those familiar with the Pareto principal another way of thinking about this is this article is it contains 20% of knowledge for HR that will equip you with decision making that is optimal for 80% of all situations you may face.

And a bit about our company. I’m the founder of Lucia Protocol and I’ve grown my team to 10 highly competent individuals. You can read more about our team here. We’re a venture backed startup creating a turn-key process for loan origination!

No one really shares this information

For example, you wouldn’t be able to figure out how to run a Bank by Googling or Youtubing. You would know how to run a bank by working in one. And the only way to work in one is to pass their interviews. Same concept applies to tech startups. As good as YC videos are, they are incomplete and insufficient for any founder who wishes to acquire the skills necessary for taking their startup from Seed to Series C and beyond.

Getting first-hand knowledge from your VP in a Bank setting

I’ve joined a lot of random startups, small teams of 3–6, people with good intentions. Sometimes the small ones work well, other times it’s like watching a chicken a run with its head cut off. I saw that the longer a startup survived, the more likely it was to continue surviving. However, I also knew that there was a difference between a SMB and a venture backed startup that has potential to be a unicorn. Which is why this blog post is specifically for those that want to run product companies — you sell SaaS, you sell a crypto exchange or crypto protocol, you want to take your company from $0 to over $100,000,000 in valuation.

The biggest limitation in a startup is manpower. I see so many startups where the CEO tries to do everything. There is a cost to context switching. [1] [2] Each person should be focused on executing on their strengths. Everything else should be on the backburner. If you could magically find 10 talented people with complementary skillsets and put them together in a room for a few months a lot of magical things can happen.

Blockers preventing your startup’s success, dealing with entropy, etc

If the startup has good form, has the right people, it’s only a matter of time before the company builds up enough momentum necessary to close out a round of funding. Why? First and foremost if you look at the data, VC’s value TEAM the most. Also because revenue generating startups are like houses. They both generate predictable and recurring income. To investors, this automatically attractive and because of that consistent revenue they know how to put a price on that.

But real life is a lot more messy. There are times when your star employee gets hit by a bus, or suffers a major health condition out of nowhere that could pose existential threat to your business. [3]

Bus factor: can your startup survive if your CTO gets hit by a bus?

Examples: People can be delayed — something personal in their life. Someone you hired may have fronted on their CV, or got lucky during the coding interview. The interview process is well designed for hiring tech talent but its not perfect.

Now the tricky part is finding a good HR person. Most people think an HR person is just a secretary 😂. No they are much more. In a startup they must know how to pitch, they have to understand how valuations work in a company. When a prospective employer asks about how much their shares of the company is going to be worth, the HR manager must speak eloquently about it as if the recruit was hearing it straight out of the CEOs mouth.

By following this framework, you massively reduce the risk of your company failing due to an internal conflict between co-founders, or internal conflict between a co-founder and a star employee. Here’s a story that’s happened to me. I used to work with a jerk. This hasn’t happened to me in quite some time but I remember the first time I launched a blockchain auditing firm. I was a complete noob at accounting. I met my cofounder at the library in San Jose, CA. This was well over 7 years ago though. She botched my tax return, and had no accountability when I was asking her to redo them. The IRS wouldn’t accept them and was blocked on practically all aspects of hiring (government websites will ask you to submit your past year tax returns before letting you continue). She incorporated a C Corp but didn’t explain any background knowledge required such as understanding the difference between issued shares vs outstanding shares. I was paying her $1800 every 2 weeks for part time work.

But the most painful part of this relationship was that when I needed help the most, she wasn’t there. I had the tech background, she had the accounting background. Realistically, there was no way for myself to learn her entire 10 year accounting skillset on the job. Equally unlikely for her to learn the decade long experience in tech that I had.

I knew that it I wanted to hire someone to take over her accounting work, but I couldn’t source enough candidates. And the ones that were coming in my social channels were definitely not skilled enough. These were time sensitive filing deadlines too, so the thought of taking 2 weeks to hire someone, plus 2 weeks to train them in was completely unrealistic for an urgent problem that needed a 10 day turnaround time. Essentially I was pinned against the wall with no good options

However, recruiting talented people is a skill set. A lot of startups that have mediocre people end up being mediocre forever. Based on conversations I’ve had with VCs, sometimes they will go through a deck, see a team without an Ivy League background and no pedigree and will instantly pass on the deal.

Startups are built on trust, in a team setting one poor performer can hold the entire rest of the team back. Basically, everyone else pays for those losses. With my method, you have a compass, a roadmap essentially to methodically cull people intentionally performing poorly and dragging the rest of the team down, and be able to add in star performers that value the efforts of their own work as well as the work everyone around them.

It’s hard to find a competent HR person

I think the biggest challenge stopping an organization from having an effective HR process is education. There are too many variables to consider. Onboarding a new employee sounds like a straight forward process, but once you as a co-founder go into the nitty gritty details, such as which forms to fill out, what deadlines there are, when to make compliant filings, it all becomes a huge mess.

During our fundraise we often have to report metrics to various VC’s. I measure metrics obsessively because this skillset is what separates the good from the great. We’ve tested different approaches to our HR process and the one I’m showing you has led to the greatest gains in new user signups and user interactions within our communities.

When you recruit a person, first you have to think about are they going to be a contractor or an employee? That changes the nature of the relationship, and you as the founder will probably want to ensure that expectations are aligned for the role so that both parties are satisfied.

Then you have to think about if they are a US citizen or not?

Then you have to think about if they are going to work onsite or remotely?

Then you have to think about if they’ll be spending their time domestically or abroad?

Version 1.0.0. Can also view the Figma version

Thankfully, we’ve created a diagram that’s free for everyone to use. 🔎 If the image is too blurry → Click on this Figma Link 🔍What this diagram does is effectively captures 99.99% of all decision edge cases for when a person gets hired. Instead of having to research an endless array of permutations, you can just use our flowchart to get the 90/10 of the decision making done.

By following the steps you ensure that your organization is full of high performance individuals.

Now the Solution

I’ve organized this section as follows

• Each person must bring more value to the table than the costs they accrue
• Control groups: How the first principle can work for roles that don’t directly provide value
• How to build with a budget
• Example of a successful implementation

Each hire should pay for themselves + the value they contribute

Now the solution to have in place is to have HR as an ongoing process rather than an ad-hoc task when you realize your company urgently needs to hire.

This looks like you writing job descriptions in advance. Each job description should match a full description of what “an ideal candidate” is. When I say ideal candidate, the idea is if you get 10 ideal candidate in a room, you as the CEO literally cannot fail in your endeavor for taking your product to market.

In a tech or crypto company it’s actually quite simple determining price point of what to offer people. First, you’ll need to figure out cost of production, and cost of sales.

I’ve talked to an experienced VP of Sales with experience at many startups Chloe Warnock. The CEO is responsible for getting the startup to the first $500k in sales. Then during this process, and the sooner the better, the CEO decentralizes this sales process and creates a turn key system where a new Account Executive (AE) hire on Day 1 is equipped with all the proper training and closing strategies so that they would be at least 80% as effective as the CEO at doing that job. As more and more AE’s join the company, the CEO can now focus his efforts on scaling the company exponentially while each AE that joins furthers the revenue of the company by $200k to $700k each year.

Control groups

In tech, engineers are a core part of the equation. This is why you need to put your engineers and salespeople in the same control group.

A control group, or basically a department, refers to way of organizing your organization such that all costs within the control group are tallied together, while the costs of other control groups are calculated separately.

So that means you’ll need to split your organization into two departments.

Sales and Product

• Engineers work here
• Salespeople work here

Marketing

• Marketers work here

Marketing has the ability to generate revenue beyond just the product you are selling. They can make revenue off of side events you host, sponsorships. They can also bring in additional capital if you are raising from the public or from VC’s. See SEC Exemptions list for more information. Counting capital contributions, your marketer

Types of roles that fall in the Engineer category (if you use a remote development team, you would factor in those costs in this category)

• Software engineer
• DevOps
• VPE

Types of roles that fall in the Salespeople category

• CEO
• Account Executive
• SDR (we don’t actually have SDR’s in our org)

Types of roles that go under the Marketer category

• Director of Marketing
• Head of Community
• VPBD or Investor Relations

Each person’s role should be designed so that if everyone does their job, hits their KPIs, then the company is guaranteed to make money.

Let’s say you’ve budgeted your MVP, which is designed to generate revenue, at around $1M (next section will detail how to derive this number) to build in terms of engineer or contractor cost. That means the product should reasonably be able to generate around $100k to $200k a year in revenue, once you’ve executed your go to market successfully.

Important takeaway: If you can’t find a feasible scenario where you aren’t capable of generating $100k to $200k in monthly revenue after 6 months post launch, you must go back to the drawing board and come up with a new idea. Another way to look at it is, if your CEO and perhaps an extra Account Executive is unable to generate $100k to $200k in MRR, then your business model is going to be way too hard to execute, and chance of failure is high.

However, if you do this job successfully you’ll be able to make a strong case to a VC. You’ll be able to tell him how high your gross contribution is (north of $100k) which then would mean you raising at your present valuation would be a great deal to the VC to consider.

You’ll say after financing, engineering costs will stay the same, but each time you hire a sales person the revenue of the company will increase dramatically, again pumping the Gross Contribution number

How to build with a budget

First before you can design your control groups and create most cost efficient business model ever, you’ll first need to figure out what your product is and how much that’s going to cost.

The equation is simple. You just ask your engineers how long it will take, have them list out all the features in a matrix, and write down how much time it will take them. Then you take each product feature time cost, multiply by the per day cost of each dev, and sum up all the products for your total budget.

• After that you’ll have to account for scope creep and “you don’t know what you don’t know”.
• A heuristic is just to multiply every engineering time estimate by 2.

You could also have conversations with multiple service providers in parallel, and ask each of them to provide you a proposal and engineering budget, but this is a really dark triad method and we don’t recommend you do this. Unless… you’re already a banker 😈

Main equation:

MVP Feature scope budget = cost of feature n * time of development of feature n * average hourly rate of developer

Cash balance = Projected amount of sales for MVP Feature Scope + Capital invested in Company — MVP Feature Scope budget

For those that are in engineering roles

You figure out the budget by first scoping in all the features. Then you work with your engineering team on creating a time estimate for these features. Furthermore, you engage in live conversations with your actual customers to get to the bottom of what features are truly a “must have” while which features are simply “nice to have” in relation to the problem you are solving for the customer.

For those in marketing roles

The job of marketing is largely leadgen. An example is a company that sells a SaaS products typically needs CEO’s or other C-suite contact information, since those people ultimately are the purchasers. Leadgen means contact information: email address and phone number submitted via form. There are a number of ways to do leadgen. For us, we host a podcast. We also do a number of events and conferences. We’re active in many MEV trading groups, and Crypto VC Signal channels.

There should be enough leads where the CEO and the account executives in the company always have a list of people they can reach out to, to make a sale.

Now let’s do an example & remarks

Once you have the HR process that we defined here down, it actually makes operating your company really simple. You’ll realize that all the problems you used to worry about aren’t problems anymore, and running your business starts becoming enjoyable again instead of having an endless amount of sleepless nights.

Your HR person’s goal is to ensure that every week a new employee joins the company. Each employee contributes more value than the cost they accrue. Once you have a good balance of those who generate revenue (salespeople) mixed with those that are involved in value production (engineers) your goal is to figure out how can we maximize revenue while minimizing cost and thus scope creep.

Let’s say your company sells a SaaS product. It has 2 pricing tiers, enterprise and premium. Enterprise tier you make $20k a month on a contract. Premium tier you make $45 a month.

Let’s also work with the understanding that sales can be a numbers game at times. By doing more volume, in the long run you will inevitably get more sales revenue than doing less volume.

You start with 12 enterprise customers and 2000 premium customers and work backwards

Your revenue is now $3,960,000 = 1,080,000 + 2,880,000.

Your options here are endless. You can raise more capital, where you showcase to investors how your company is a recurring cashflow machine. You can cut costs and keep the company private, automate it more and it becomes a recurring yield generating machine.

Now I understand that this is a perfect scenario, and real life can be much more messy. That’s okay, because this is simply an article, and I’m trying to make the charts and numbers as easy to understand as possible. Feel free to comment or ask any questions regarding the math and we will be more than happy to clarify!

Conclusion

Disagreements between cofounders can cause huge delays in work. Sometimes it could cause the entire company to fail.

Before having a HR manager, you had existential dread wondering how you’ll ever be able to keep up with all the work involved in starting a startup

Before having a HR manager, you would have to wait 2 to 3 weeks before you can find someone else to fill in. After having a HR person you’ll have candidates that are on the 3rd round interview so instead of waiting 2 weeks before you can hire, you can hire them instantly.

Hiring does increase overhead, but it also increases your company valuation. If you know what you’re doing when it comes to pricing your product, and scoping your product so that its capable of generating hundreds of thousands of dollars in revenue, managing overhead is simply a matter of letting people play to their strengths and having a plan to expand to larger and larger markets, and being able to justify valuation metrics to an investor.

By doing HR in this methodical fashion, growth in your startup is both predictable, and a simple equation you balance. By doing HR in a methodical fashion you create an anti-fragile team and an awesome culture which is the baseline requirement for a company to grow and become a unicorn.

If you do all this you’ll reach a point where the product is mature, complete & provides tons of value, all you have to do is hire more account executives. They are effective money trees where the more you have the more profit the company makes. Rinse and repeat until the company is worth over $100M.

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