Management - Hiring In Small Companies

All the [start-up] advice is like this: "You know, it's really important to have great design. Design always wins. Except Craigslist didn't have very good design and neither did eBay. So sometimes it's fine to have no design. But make sure its very scalable, ‘cause you don't want to be the next Friendster. Except that Facebook wasn't very scalable and it was fine.

So make sure you have good design and design doesn't matter, and that it's scalable, but not too scalable. Also make sure you raise plenty of money, but not too much money. Make sure you have the right kind of people, but not those other kind of people, but actually, sometimes those other kinds of people are fine.”

– Eric Ries

Finding advice is easy – finding good advice is difficult. We don’t claim to be experts on anything, but we do abide by Charlie Munger’s mantra: to understand a topic, one should know the experts’ arguments and counterarguments. In that spirit, we are compiling experts’ opinions on a wide variety of topics. As we continue our own learning journey, we will add, replace, and refine select quotes to build a concrete resource that provides a well-rounded view, complete with nuances and disagreements. In short, we’ll transcribe and summarize countless YouTube videos, blogs, and books and find the key 1% of content, so you don’t have to!

This guide focuses on hiring, in the context of very small companies.

Hiring – How do the Greats do it?

"Let's hire great people." I find that [quote] really disturbing because I've never actually had a start-up come in to me and say they're only hiring bad people.

– Vinod Khosla

A company becomes the people it hires – it is one of the oldest clichés in the book. But anecdotally, we have all seen it in workplaces. There are certain people who can inspire teams to excellence, and there are others who kill morale and cause talent purges. What would Berkshire Hathaway have been without Ajit Jain? How about Google without Eric Schmidt? …Enron without Jeff Skilling?

At the same time, advice without concrete and actionable guidance is about as useful as pizza without cheese. But how do you actually know if a candidate is great? What should you look for? How do you evaluate them? How do you keep them engaged? How do you avoid mistakes? We will look to expert opinions from Charlie Munger to Vinod Khosla to answer these and other questions on Team Management – Hiring.

Hiring: Overview

The importance of a company’s key team has been well-documented, but is still worth mentioning and frankly we feel it is underappreciated, because very often, especially in small businesses, the team or owners say “I need someone good today” not “I need someone great and am willing to wait for it”. These initial hires are extremely important because:

“There's a huge path dependence, and the path depends so much on the people you hire. Your starting plan becomes much less relevant than the people you hired initially - especially the first 10 people. Those 10 people will then go on to hire the next 50, and they will then hire the last 100. You can fire the original team, and its gene/DNA stays in the company. So that's why it's so important, and why the people you hire determine the company it becomes.” (Vinod Khosla, Khosla Ventures and Sun Microsystems co-founder)

“You have to imagine the tree of all of the people that this person will hire.

Rather than just thinking about it as, ‘Do I want this person or not?’ [You should ask yourself,] ‘Do I want this person and the 50 people who I think they will hire?’

Because even if they don't literally hire 50 people, they will be so influential in determining the self-selection of those 50 people, and so you're really picking this giant branch of a potential future organization.” (Patrick Collison, Stripe co-founder and CEO)

Co-founders and critical team members: How long should I spend trying to find them?

It’s fine and dandy knowing a company’s founding team will eventually create its long-term culture, and success or failure, but the next logical question is, to what extent should you go out and find great people? The answer is: just short of a restraining order! Stripe, the payment processing company, now has over 900 people but it started out slow in 2010, as explained by their co-founder:

“The received wisdom is to work really hard to hire the best people. It’s like, ‘Gee, thanks, I was going to do the opposite, but now that you've said that, I'll work really hard to hire the best people.’

In practice, it means being OK waiting a really long time to hire people and having to be painfully persistent in doing so. It took us six months to hire the first two people.

[Airbnb also took about nine months]

So [we hired one] person per quarter, even though we already had a network and knew all these people. We still only managed one hire every three months. And then in the six months after that, we maybe hired another three or four people.

…when you're trying to hire the best people, you can filter first by expressed interest, and then you can secondarily filter for which candidates are good. Or you can first look for the good ones, and then try to sort of convert them to expressed interest. I think that the latter is the more effective way to go about it, but then that means you have to turn this aircraft carrier (being the candidate) …and to consistently try to rotate [aircraft carriers] just takes a real long time.” (Patrick Collison, Stripe co-founder and CEO)

This seemingly-irrational persistence was no different in PayPal’s founding team. Max Levchin, one of PayPal co-founders, spent months flying to different states to recruit Russel Simmons and Yu Pan, who would later become the founding engineers critical to PayPal’s future success.

“Yu Pan was actually working in Minnesota for IBM. Russ was doing a Master’s degree in Champaign-Urbana [in Chicago, Illinois] in computer science. I had no idea how to recruit people into software companies…and I actually had to recruit people to move to California which is a really serious thing. I had just moved to California myself. So, we actually flew out to visit them. The key objections they brought up were not that this was a crazy idea, or that we weren’t funded yet.

It was, ‘I feel really bad dropping out of my Master’s degree because my advisor might really not like me very much for it’ – which is understandable.

Yu Pan had an even better excuse. He said he didn’t want to leave his Ultimate Frisbee team. He said he hated his job and Minnesota is freakin’ cold, but a couple days out of the year you get really nice weather and we have this neat frisbee team going, and we really like playing.

Skipping through a few iterations of, ‘Please, please, please drop out of school or quit your job and come to California,’ these guys actually showed up at SFO on the cheapest airline. The entire company came out to meet them. [PayPal had] 4 people, and these last 2 guys became the founding team.” (Max Levchin, PayPal co-founder)

If the amount of time it might take to attract great co-founders or other key employees seems ridiculous, well – it shouldn’t!

“And the idea that, when you're so early in the company's history, you should be kind of investing in people for whom it might take that length of time to hire. It seems kind of crazy, right?

I think the big thing that people have to keep in mind in early stage company recruiting, is you have to be way more persistent and be okay with it taking way longer than any sane or reasonable person could think it should take.” (Patrick Collison, Stripe co-founder and CEO)

People who have mortgages to pay, degrees to complete, hobbies to fund, and kids to feed, typically will not leave a well-paying cushy job overnight. Heck, even if they don’t have any of the above, there is still inertia at play. However, that is not to say they will never leave their jobs – you must just be mentally prepared to hound top talent for months before they sign on the dotted line.

As is common in all workplaces, hiring usually happens when there is an immediate need. In a small, but fast-growing company, however, it may be difficult foreseeing what kind of needs a company might have 6 months down the road, when the company itself may only be 12 months old. Is it worth the pain of waiting a few months to hire a “great” person, when you can easily get “good” people now? The short answer is yes.

“To hire a critical person in a start-up – whether it's a technologist or a senior executive – can easily take 6 months or longer. Then they take 6 months longer getting up to speed. If you've made a mistake, you lose a year. And they will have hired other crappy people during that time, so it is very expensive.” (Vinod Khosla)

Co-founders and critical team members: What should I look for?

There are plenty of fish in the sea. In fact, scientists estimate the total fish population at 3.5 trillion. Therefore, a company looking to hire will need to narrow the possible list of candidates. One could look at top academic graduates or job titles as a screening tool. But Google’s former head of HR, Laszlo Bock, admitted GPAs are worthless criteria as they have nil predictive power. Then how about fancy titles like Vice President of Sales at a blue-chip company? Well, that assumes structured experience at a large company will translate into the fluidity of a small company.

Everyone theoretically knows there will be countless disagreements, some of which will be critical to the company’s future. At large companies, strategic discussions are typically held at the Board of Directors level where most individuals have little economic alignment with shareholders. Compare that to an early-stage company, where founders and key team members have poured their time, money, and sweat into the business. Constructive brainstorming and problem-solving is critical when the stakes are high. It is no wonder that Sam Altman and Paul Graham at Y Combinator (accelerator that funded Airbnb, Dropbox, Twitch, among others) noted the severe disadvantages in starting companies with co-founders which do not have a history together:

“You can't expect a startup to be perfect, because many things will go wrong. The advantages of hiring people that you know and like are far greater than the small disadvantages of having some monoculture.” (Paul Graham, Y Combinator)

“We had one YC batch where 9 of about 75 companies added on a random co-founder between when we interviewed the companies and when they started, and all 9 of those teams fell apart in the next year.” (Sam Altman, Y Combinator)

We think this topic requires more nuance. Even for people you know and like, having similar movie interests is different from being in the trenches. How do you know how a candidate reacts under extreme stress and uncertainty? Common pieces of advice are to simulate work environments, before you actually hire them.

“Try to work together on a project for a day or two” or have “week-long trials with people. [You’ll find] some of them don’t work out.” (Sam Altman, Patrick Collison)

What if you need someone who is out of your immediate network, and must go through referrals instead? This might be necessary, as Vinod Khosla recommends companies try to engineer the company’s gene-pool, which can be particularly helpful in markets or engineering efforts that have never been done before:

“Find your top 5 risks. For each of those risks, who are the companies that have dealt with that risk? Where does that expertise on that risk lie? Make a list of 3-5 companies. If you've identified the 5 companies that have dealt with that risk, then you have at least the places that can reduce your risk.

Within each company, identify 3 names. Now you have 15 names for risk number 1.

If you do that for your top 5 risks, you essentially have a library of names that will help you reduce the risk in your business.

That is risk-oriented management. For start-ups, after you've decided what space you're going after, it is all about risk management.” (Vinod Khosla, Khosla Venture and Sun Microsystems)

For example, if you were looking for engineers involved in oil sands tailings pond management, perhaps you could start looking at the obvious candidates, yes – Suncor, Syncrude, Canadian Natural Resources and the like. It might also make sense to look outside the industry, such as companies like Epcor. But then maybe you are also trying to use big data sets as part of your tailings pond management (birds migration patterns, toxicity levels, etc), and instead of looking for data scientists already working in oil and gas, maybe you could look at data scientists working in other industries such as meteorology or quantitative hedge funds.

“If you have a bunch of PhDs, how many are experienced PhDs and how many are fresh? How many are from within your area, and how many are from completely outside your area? Every dimension of diversity will help because they'll bring a different point of view. As long as they have this ability to think from first principles - not say, this is done this way because we did it this way before.” (Vinod Khosla, Khosla Venture and Sun Microsystems)

[When Ajit Jain joined Berkshire Hathaway to start up its reinsurance business,] he didn't have any experience in insurance at all. He was an honors graduate of the main technical institute in India - he was a very smart man. But he came in and created our whole reinsurance business - it's the only big business we created from scratch, and Ajit did the whole damn thing. Of course, he talked with Warren every night and so it was like father and son.

This is a very Confucian company, but that was unbelievable. We hired an executive recruiter who brings us an Indian with no experience at all in insurance, and he talks about it with an old man every night, and it's now by far the biggest reinsurance business in the world. That's been a gold mine. There's at least 60 billion dollars in Berkshire of net worth that Ajit has created, that we would not have created without him.” (Charlie Munger)

This requires countless hours of LinkedIn snooping. Don’t worry! This time it is not for creepy purposes. But once you compile a candidate list, how do you predict whether they will work well with you?

“If you are going to do an interview, you should ask specifically about projects someone has done in the past. You'll learn a lot more than just doing brain teasers. And also, call references. You really want to dig in - is this person in the top 5% of people you've ever worked with? What specifically did they do? Would you hire them again? Why aren't you trying to hire them again? You really have to press on these reference calls.” (Sam Altman, Y Combinator)

What about Reference Checks? Do they work?

Reference checks have long been part of the traditional interview process. Done wrong, it is useless, but done right it can be even more useful than simply being friends with someone.

“Sergey [Brin, Google co-founder] called me up to do a reference on somebody I worked with at Sun [Microsystems], who Google subsequently hired.

Normally when you get a reference check, people ask, ‘Did they work for you? What were they like?’

Well, Sergey talked to me for 45 minutes about this reference. And I had discovered they had been talking to him for 4 months and were scheduling to make a decision in 1 month, because they had more references to check.” (Eric Schmidt, Google former CEO)

Ultimately, any self-aware person will acknowledge that it is extremely difficult finding and assessing people – even people you think you know well. This is because certain characteristics (sometimes admirable, sometimes awful) are amplified under stress. People change. You make mistakes. In fact, the first thing to acknowledge is that even the “best” interviewers often make mistakes.

“Everybody thinks you can judge people by an interview - and of course you know who you like, and you know you don't like - but everybody overestimates how much you can tell in prediction by meeting somebody. We all like to think that we have [the capacity to accurately judge people], but it's a vastly stupid type of overconfidence.” (Charlie Munger, Berkshire Hathaway)

Given the inherent difficulties in hiring the great candidates, what is one thing you can do as a fall-back option?

“I probably do hundreds of interviews a year - I have a success rate of about 65%. I'm wrong and I find most people less experience are wrong more often. Usually if you're a founder, the people you're interviewing are more experienced than you at fooling you.

It is really not possible to get behind the scenes [of someone’s work experience] and dig deep. I always tell my teams, if you want 4 people on your team, hire 6. Even make up a title you don't need. I always overhire, because you're never always successful and hiring is a long process.” (Vinod Khosla)

The bottom line?

By (i) being ridiculously patient and persistent to sell the best candidates to join your team, (ii) working on formal or informal projects and/or week-long trials prior to hiring candidates, (iii) conducting extensive reference checks, (iv) hiring to reduce risks as opposed to hiring for specific tasks, and (v) over-hiring for positions where appropriate, a company increases its odds to assemble the strongest team.

Figuring Out Pay and Equity for Co-Founders and Critical Team Members

If you accept the argument that a company’s core team often determines the business’ success or failure, then a founder should not only spend a lot of time recruiting, but also be willing to give up large amounts of equity to key team members.

“I like to say start-ups are not about dilution, they are about the probability of success. If you can increase the probability of success by hiring great people, by asking a lot of questions, by finding your risks early, by having people surface problems, you're going to increase your probability of success. Either you're successful or you're not. It's about probability. People worry way too much about dilution.” (Vinod Khosla)

Ok, so how much equity should you actually give? As quick rules of thumb:

“Sam [Altman at Y Combinator] said at least 10% of the company should be reserved for the first 10 hires and I think that number is too low. I flip it around and say, when a company has 50 people, the founders should have 1/3 of the common, their direct reports should have - say 5 or 6 direct reports - should have 1/3 of the common, and everybody else, the engineers and worker bees, should have 1/3 of the common. If you do that, people don't leave. People stay with you.” (Vinod Khosla)

“You have to make sure employees feel happy and feel valued – this is one of the reasons big equity grants are important. People, in the excitement of joining a startup, don't think about it much, but if they come in day after day and year after year, resent will build if they feel like they've been treated unfairly.” (Sam Altman)

Either way, it is critical that these discussions take place in the beginning to avoid foreseeable disagreements.

“For some reason, a lot of founders like to leave [discussing the equity split among co-founders] off for a very long time. This is not a discussion that gets easier with time. You want to set this very soon after you start working together, ideally in the first few weeks. And it should be near-equal, or they probably should not be a co-founder.” (Sam Altman)