Paying employees when starting a small business often presents entrepreneurs with a catch-22. You need more revenue in order to hire employees, but you need to hire employees in order to get more revenue.
However, there are many alternatives small business owners can pursue to fairly compensate workers that won’t drain cash reserves. Consider these options to save money when hiring employees to get your small business off the ground.
Offer Competitive Stock Options
Paying employees with competitive stock options is a common method to attract the best talent when you can’t offer a large salary. If you hire people who believe in your company, they will most likely be more than willing to accept equity in lieu of market-rate wages.
- Offering equity can attract the best employees. When starting a small business, your first hires need to be passionate risk-takers who truly think your company has real value. If they are more than willing to accept stock options rather than a large salary, they are more likely to be the hard workers you need at the beginning to grow your startup. And if they aren’t willing to take equity then they probably aren’t the right fit for your company’s early stages anyway.
- Stock options are a great motivational tool. “Stock options tend to motivate employees more than cash bonuses at the startup stage,” says Covestor CEO and CircleLending founder Asheesh Advani. Rewarding hard work with equity gives employees incentive to invest even more of their time and energy into the company.
- But only for startups with investors. Offering shares in your startup will only pay off in the long run if there is a realistic pathway to cashing out, advises Business Insider. Thus, offering stock options usually makes sense only if your company is (or will be) backed by outside investors and is likely to go public or be bought by another company.
If you’re concerned about paying employees when starting a business, consider unpaid interns, says Advani. There are many hardworking, talented students who are willing to work for no salary as long as they are getting valuable work experience. Contact local college and university career offices to post an internship announcement and see if any applicants are good candidates to help grow your startup.
However, unpaid interns will only work for you if they are getting the opportunities they need to advance their careers. If you simply give them tedious busywork with little guidance, they are likely to quit. Meet regularly with them to make sure they feel taken care of and are getting the experience and mentorship they desire.
Hire Contractors or Part-Time Employees
Contractors. Outsourcing work to independent contractors is another great way to save your small business money and still get work done. Research shows that using freelancers for all aspects of your business is a successful and cost-efficient strategy to grow a company.
Part-time employees (especially stay-at-home parents). “Part-time employees, particularly stay-at-home moms and dads, are a secret weapon for startups,” says Advani. There are often many highly talented stay-at-home parents who are looking for part-time work. However, while you can often pay part-time employees less than half the cost of full-time employees, there are tradeoffs. Because you usually aren’t paying enough for health and child care, part-time employees cannot be expected to prioritize work responsibilities over family and personal obligations.
One way to save money when starting a business is to defer paying employees until certain established and agreed upon milestones are achieved. This can be in the form of a cash bonus or back-pay that isn’t disbursed until the company earns a certain amount of revenue or profit. You can also tie salary payments and raises to specific performance achievements to keep employees motivated.
- Consult an attorney if you choose this option. However, if you decide to go with deferred compensation, Advani strongly advises entrepreneurs to contract a lawyer to write the employee offer letter. Using the wrong terms in the employment contract could end up costing you more money than you save. “This is one of the areas where spending $200 for an attorney to provide you with a sample offer letter could save you thousands later,” he says.
Starting a small business and looking to save money when paying employees? Contact an UpCounsel employment lawyer for free proposals to help you vet all your options, write employee contracts and make sure you’re following all employment laws and regulations.