When you and your co-founder work in a one-room office, it’s hard to imagine a day when you need to think about the logistics of growing your hypergrowth startup — but that reality is gaining on you faster than you think.
Part of the fun of founding your own startup company is deciding how you will structure your organization. This is your chance to create a place where you love to work and foster the kind of culture you’ve always wanted to be a part of. But building a company culture goes well beyond dress codes and the occasional happy hour. That is especially true when you start to think about scaling up.
Planning to scale your team sets the growth stage — and proves to potential investors that you’ve thought about the future and understand what it takes. From the right technology to staffing and processes, scaling requires deep consideration and forethought. Having a plan in place may be the difference between success and failure. If this sounds hyperbolic, just imagine what would happen if demand tripled but you could not grow quickly enough to meet customer needs. Whether your sales team fails to keep up or you simply don’t have enough product to go around, the inability to scale when and where needed could ultimately hamper your success.
You need to consider many things to scale effectively — not all of them are obvious.
When you’re focused on creating a great product, finding a market fit, and securing funding, ignoring the “boring” stuff can be easy, but it’s critical to think ahead and ensure your bases are covered. With this in mind, we will explore the main points you must consider when scaling your team.
Finding the Right Organizational Structure — The Startup World is Flat
Despite what much of the corporate world would have you believe, there are many ways to organize your company. Most of us are familiar with the typical top-down hierarchical structure, defined by each employee reporting directly to one supervisor. Employees are often grouped by several obvious options — function, geography, or product. In other words, a marketing manager may report to a marketing director, who reports to the chief marketing officer — who may report directly to the CEO. A developer may report to the head of product, who answers to the CEO. This is just one option for structuring your business — and it’s not the best way to structure your startup.
The flat, or horizontal, structure is increasingly popular among startups, and for a good reason. According to Org Charting, startups that employ a flat hierarchy grow three to four times the rate of their contemporaries with more formal structures.
Perhaps flat organizations are best known for eliminating many — if not all — middle management positions. Small companies and startups love this option because it empowers employees to make quick decisions. The CEO oversees the crucial decisions but allows employees at every level to come to the C-suite with ideas.
More importantly, flat hierarchies tend to streamline the decision-making process, enabling early startups to grow better, faster, and more innovatively by creating an optimal environment for learning by experimentation and figuring things out on the fly.
As Optimizely’s vice president of product, Claire Vo said during a visit to Sutardja Center’s Berkeley Method of Entrepreneurship: “As an entrepreneur, experimentation is powerful from an emotional perspective. If you think about everything as an experiment, failure is not as scary.” But you can only achieve this flexibility with a team structure that empowers people to make decisions quickly and iterate on what they learn from the outcomes of their decisions.
In the early days of a startup, it’s imperative to be nimble. It’s equally important to realize your success is tied to your team’s success. Successful, high-performing startups tend to streamline the sharing of information openly across fewer reporting levels to make decisions faster. A horizontal structure naturally enables open communication and helps avoid the dreaded deadlock by putting the CEO at the helm for final decisions. Indecisiveness kills the speed advantage that an early-stage startup can exploit to shorten the runway to necessary milestones.
Of course, a flat hierarchy has its limitations. This model doesn’t necessarily scale. Sooner or later, the CEO must delegate the day-to-day operations and focus on the big picture. The hierarchy will evolve as your team grows. When a company reaches 50 employees, moving from a flat hierarchy to another structure makes sense. Here are some options to consider further down the road:
- Matrix Structure
- Network Structure
- Divisional Structure
- Line Structure
- Team Structure
The Power of Peer-to-Peer Review
Most of us who have worked in a corporate environment are familiar with the yearly review ritual. And it does feel like nothing more than a ritual—something we have to do but won’t likely have much of an impact on our actual performance. This method of performance review is antiquated at best and entirely impractical for startups. Annual reviews are a waste of time, and early-stage startups should encourage peers and managers to provide feedback in real-time to correct any issues quickly and avoid resentment or miscommunication.
Getting real-time feedback is essential to ensuring that every small team member is living up to their full potential and that you all work well together in cross-functional teams. Creating a proactive culture of giving and receiving feedback significantly accelerates each individual’s professional growth and helps create a supportive, tight-knit group.
How do you achieve this ideal culture that empowers your team to help each other be their best selves?
Start by encouraging every employee to provide feedback during 1:1 meetings on everything from their co-workers’ performance to product ideas and other areas for improvement. Just be sure they stay focused on professional development and growth, provide constructive feedback, and don’t take it as an opportunity to air grievances.
To help keep feedback focused, encourage employees to save a document to share with their peers, managers, and executives. A fully transparent culture across all levels in the company helps people accelerate their professional growth, which leads to business growth. Ultimately, a 360-degree feedback loop — where employees hear from more than just a manager — helps teams execute better because it builds trust and transparency.
This peer-to-peer feedback loop is especially well-suited to companies with a horizontal structure. Employees emboldened to make decisions should also be encouraged to report what they see and think you can improve.
Replacing Managers with Self-Starters
Companies with flat structures eliminate many middle management positions that often oversee the daily grind and ensure lower-level employees meet expectations and get the job done. Without that kind of supervision, startups must choose employees capable of managing themselves. There is no time for micromanaging — your team needs hands-on self-starters.
To start assembling this self-managed team, set a high bar when hiring. Place a strong emphasis on hard and soft skills, such as communication, integrity, resourcefulness, character, a can-do attitude, mental toughness, and the ability to adapt to changes in real-time. In other words, you need leaders!
Flat hierarchies can help foster leadership skills by allowing employees to take ownership of their projects and the company’s success. When you think like an owner, you give 110%, and everyone notices which people push others to raise their performance. However, finding these characteristics may mean looking beyond typical criteria to find the right candidate.
Start by defining the skills and abilities each role requires. For example, you may want a creative problem solver or someone adept at managing daily tasks. And maybe it’s equally important that this person is adaptable, honest, and organized. Unfortunately, determining whether someone has all these qualities is nearly impossible from a piece of paper or an interview.
However, data can reveal critical insights about your candidates, taking some pressure off when your team needs its next great employee. The Predictive Index urges hiring managers to use behavioral and cognitive assessments to understand a candidate’s true capabilities better:
Using data allows you to assess candidates on better predictors of on-the-job success, such as behavioral traits and cognitive ability. That way, candidates move to the next stage in the interview process because they’re a good fit for the role, rather than because of their age, gender, or alma mater
Questions that get to the heart of a candidate’s personality and give you an idea of how they might respond in new situations. For instance, LinkedIn Talent Solutions suggests asking when candidates were asked to perform a task outside their job description to assess adaptability.
To ensure the right people apply to your job, craft a detailed job description that explicitly outlines the expectations of the position, the requirements of the role, and even what methodology you expect to use. Eliminate unnecessary questions by providing the answers in your thorough job listing.
Startup teams are like sports teams; you need highly motivated people to manage themselves, where 1 + 1 = 10 because two high-performing, motivated individuals can accomplish much more than several average workers.
Why a bias to action matters
Amazon lists a “bias to action” as one of its 14 leadership principles:
“Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk-taking.”
And it’s a trait that can also be important in startup employees. Bias to action is vital because startups must figure things out with fewer resources, money, and people. In addition, a bias to action is a competitive advantage for a high-growth startup as it allows constant experimenting and learning to optimize performance and solve problems.
Take Your Time with Some Hires, Look Ahead for Others
Most startup investors bet on the executive team and less on the product or idea behind the company, so founders need to surround themselves with the very best people on the executive team to complement their skill set and help the business succeed. That’s why rule number one is never to rush the hiring process. In an employer survey, CareerBuilder found that 43% of respondents traded quality for speed under pressure, often leading to poor hiring decisions.
When hiring for a C-level position, you must look beyond skill sets and ensure your choice is the right cultural fit. C-level execs set the tone for your company, so set a high bar for these positions. Not only will this ensure you get the right fit, but it will also let others in the company know these are sacred and reserved for the best of the best—not given away cheaply or diluted in value.
While taking your time to find the right candidate may make sense for the top roles in your company, you will need to think far in advance regarding other functions. Forward hiring requires planning six months ahead and identifying hiring needs so you have plenty of time to find the right people.
Forward Hiring Tips
- Leverage board members, personal network, and recruiters to help you build a strong talent pipeline to hire the right people
- Always use backchannel references (e.g., LinkedIn to see if you can find people who have previously worked with your candidate to get feedback) as part of thorough due diligence on anyone you are thinking of hiring.
- Try to streamline the hiring process so that you can make faster decisions about making offers and closing on the best candidates—remember, speed is your friend.
- Prioritize hiring people who can do the job today and help the company grow that functional area for the next 12-18 months.
Attracting Candidates Through Culture and Compensation
Attracting the best talent — especially in the tech world — is increasingly challenging, especially in the ever-escalating arms war of employee compensation. So it’s critical to provide a fair, competitive compensation package that includes salary, stock, and flexibility — that in some cases is above market rate — to attract the best people for critical roles like engineering, product, executive team, and marketing. Including Employee Stock Option Plans (ESOPs), joining incentives, and the ability to work from home can help set you apart from the other companies looking to hire your industry’s best and brightest — but they aren’t your only options.
Having a team filled with great people can make it easier to attract new hires because you can tap into their network. After all, A+ Players know other A+ Players who always want to work with the best to continue learning and growing professionally. Consider implementing an employee referral program to encourage employees to recruit the best people they know. Likewise, your C-level team should have a similar network to draw from when recruiting and building a great team to execute the founders’ mission and vision.
All About ESOPs
One of the benefits of working for startups is the ability to help a new company grow — and to be rewarded for your sacrifices. Late nights, long hours, and sometimes, lower pay are all trade-offs people make to help a company grow. And they are often rewarded with ESOPs. Like a profit-sharing plan, ESOPs allow employees to reap the rewards of a growing company. And they are prevalent, with about 9 million employees participating in programs that provide stock options or other individual equity to employees.
You don’t want to hire people entitled to perks like snacks, beverages, and massages or prolong the salary negotiation process. As an early startup, you ideally want to hire people who value the ESOP and see it as an essential part of the overall compensation package, even more than cash. The motivation behind your compensation package should focus on the long-term payoff of equity and personal growth from being on a rocketship working with other A+ players to disrupt an incumbent.
Tips for Cultivating a Culture of High-Performance
Your company culture is as vital as your compensation packages when hiring the best people. So here are five tips for creating a culture people want to work for:
- Encourage genuine care and admiration for one another
- Create open, candid communication
- Emphasize leaving a legacy company and moving the startup forward
- Make it clear that startups don’t have to be a struggle; they have to be fun and exciting
- Build a healthy culture of giving feedback
Building Your Startup Team from the Top Down
The climate of your workplace trickles down from the top — and we’ll talk more about that in a future article. Whether we’re talking about founders, CEOs, presidents, or other leaders, choosing the right people to lead your company — or a team inside the company — is critical to shaping the office culture. But once you have that core team in place, it’s also wise to think about a founder’s agreement to align key stakeholders, improve internal communication, lay a foundation for decision-making, and prevent as many future issues as you can (you won’t account for them all, so don’t stress about it).
According to Harvard Business Review, an academic study that surveyed 10,000 startup founders revealed more than two-thirds of founding teams “decide on important issues at the outset of their partnership—without deep discussion.” They avoid conversations that could head off problems before they start, revealing misalignments about expectations. In the long run, a founders’ agreement can help you avoid disagreements, set the stage for the company culture, heighten trust, and keep founders focused on the difficult task of company-building.
Finding a partner who shares your vision is essential. Still, it’s easy to get carried away by big ideas without thoroughly exploring the small details that ultimately determine whether you sink or swim. Perhaps the most critical impact of a founders’ agreement is its ability to avoid and defuse future disagreements by establishing a formal and effective decision-making process. But it must also be flexible to allow for change and renegotiation as your company’s needs and circumstances evolve. A well-crafted agreement should cover each founder’s rights, responsibilities, liabilities, and obligations — but should be designed to be dynamic.
With the details hashed out early on, you can set the tone for a culture that people want to be a part of. It’s also worth seeking an executive coach to help you set boundaries and guidelines around conflict resolution to maintain healthy working relationships with your co-founders and team. An independent, empathetic ear is always helpful in the high-stress environment of a startup, where the impact of every decision or disagreement is greatly magnified and, speaking from experience, can feel like a matter of life or death if you don’t maintain some perspective. Coaches are great at helping you think through challenging situations much more clearly, with a healthy level of detachment.
Startup Founding Docs
This all brings us to the importance of your founding documents. You won’t need them until you need them, so ensuring you’re working with a knowledgeable, independent legal team is essential. For example, notable Silicon Valley law firms offer founder-friendly terms for early-stage legal work. Usually, they offer to provide help “on loan.”
The firm will help with corporate formation and advise you on related matters through the first fundraising round without sending you a bill. They do this in exchange for equity (sometimes) and a promise to pay back the bills you’ve racked up after funding comes in (always). The upside of this deal for the law firm is that it gets a chance to provide legal services over the life of the business — which can be incredibly lucrative.
These package deals can be a godsend for early cash flow. They generally include “plain vanilla” corporate documents, which are very founder-friendly and designed for a clean structure that makes it easy for an investor to do their due diligence. For the most part, this deal is just fine. But you should know that you’re just one client, but VCs represent a steady stream of new business for the lawyers and often get top priority.
This cozy dynamic impacts the advice you get, especially at contentious times. Oh, and the payback on those bills that the law firm has deferred? They want to get that back. Lawyers have been known to “advise” founders of potential pitfalls of specific terms in a term sheet or deal document but suggest that the likelihood of that scenario coming into play is so low you may as well concede the point to get the money.
There’s a conflict there, even if they won’t admit it. And, like we said, these aren’t nefarious offers or poor legal advice. We just recommend finding a lawyer you trust who isn’t baked into the local flow of startup creation in your area and isn’t afraid to help you push back on esoteric-sounding terms that can have a significant impact on your equity and the control you have (or don’t have) over the company.
Founder Go Fish
How do you divide up equity in the first place? What is it worth, and how does it work? These are negotiations that happen between founders all the time. A simple way to think about this is to look around the table at your co-founders and consider their relative worth and contribution. You might be an engineer with a super-sophisticated laser design in my mind – but without a founding CEO, you may not have what it takes to raise funds to pursue the project. So maybe as a founder, you’re worth three times more than your more business-oriented co-founder. Negotiate reasonably with one another until you have your relative equity split. Memorialize this and incorporate it into your founding documents.
Figuring out the initial equity split is usually straightforward (if somewhat uncomfortable). But how that split impacts control is another matter. Be sure to avoid future conflicts by knowing exactly how your voting structures work. Take time during your formation to understand those esoteric-sounding terms in founding documents, like “tag along” and “drag along” rights and voting rights. Also, consider how you’ll build founder-friendly (or management-friendly) voting coalitions in matters of extreme importance.
All the details in that corporate paperwork can be exhausting, especially when you want to get the money in the bank and start building. But prudence at this stage is always something you’ll value when the time comes — or regret if you weren’t careful. Be sure to read your articles of incorporation, by-laws, operating agreements, and anything else related to voting control or follow-on rights.
A clear outcome from a sometimes uncomfortable topic like founder equity splits and clarity on operating mechanics can avoid resentments that can eat away at your potential.
Bold Claim
- Processes, not rules. Rules are often hard lines in the sand that stifle creativity. Provide guidance through good processes, not limitations with rules.
- Co-founder disputes kill more startups than any failed strategy. So pick your partner wisely because Noam Wasserman says 65% of high-potential startups fail due to conflict among co-founders.
- Detach people from performance. Provide constructive feedback, and employees will thank you by staying with the business and growing their skill sets.
Pro Tips
- Iron out your recruitment process early on.
- Define what values you want your organization to embody.
- Try hiring all your top people right away and then let them build out their teams.
- If your organization was a ball of energy, what would you do to keep it glowing?
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