Many startup founders are likely experiencing a problem not faced in years—departures of key talent.
Given the current fundraising environment and negative investor sentiment, some employees are seeking out a more certain future, which typically goes hand in hand with a larger, likely profitable employer.
While it is true that founders may be looking to cut costs given the current environment, and some turnover may actually be beneficial—there is a significant difference between nonregrettable turnover and regrettable turnover. Regrettable turnover typically causes strain on the company—it could be a time strain as it takes someone else twice as long to do the same work, or it could be a knowledge strain when only one person is trained in a particular area. Either way—the organization feels the impact of the departure.
What can founders do to prevent this regrettable turnover in today’s market environment?
There are a few steps founders should take:
• Determine which employees are essential. Every company has employees who, if they departed, would negatively impact the business. It can be someone with a very specialized skill set or someone who has historical knowledge of the company that is very valuable. Either way, identifying who these employees are is the first step. These would be your regrettable leavers.
• Create an incentive plan to retain essential employees. Given that startups are trying to cut costs, giving cash bonuses right now is probably not feasible. Think of other incentives. A strong one is likely equity refreshes. Granting your key employees equity will show them that you value them. If they still believe in the future of the company, these grants may really move the needle in retaining them. Then, try to go beyond equity refreshes. If you have an essential employee that wants to relocate, it may be worth allowing them to move to retain them. It is okay to ask your key employees what matters most to them. Where it’s possible, accommodate them.
• Formalize education tools that show employees what their total equity could be worth. One of the biggest issues with equity grants is that employees often do not fully understand their value. Provide them with tools to understand what their equity could be worth at varying valuation levels for your company. This can be as simple as an Excel spreadsheet that does the calculations for them. Make sure to encourage managers to have these conversations with their direct reports.
• Share a plan for future grants or cash bonuses. One of the beauties of being a private company is that the number of ways you can incentivize your employees is unlimited. Socialize a plan with your board. For example, if your company hits certain goals, the board will agree to increase the option pool further. Or, if the company is able to raise a certain amount of capital, the board will approve cash bonuses. Let your employees know you are working with the board to solidify future retention plans.
While the steps above will help retain key talent, founders should also be sure to prepare for departures.
Here are three ways:
• Review employment agreements. Founders should know if essential employees have noncompete language in their agreements or language protecting their IP. It could also be a good time to revisit all future employment agreements.
• Create redundancies. Assess all critical work streams and ensure that multiple people are able to complete them.
• Document institutional knowledge where possible. Institutional or historical knowledge about the firm or a process often gets lost when people depart. Try to document this information so that it can be shared more broadly.
As the economic environment changes, founders must incentivize and retain employees that are critical to the business whenever possible. When it is not possible, there must be a plan in place to limit the negative impacts of knowledge gaps or time sinks created by departures. Be proactive now, and it will benefit your company later.