Building your team is one of the most exciting parts of being a startup leader – but it’s also one of the most difficult.
This is because many founders have the technical skills to build a great product, but they lack the fundamental HR skills needed to build a business.
Too often, they fall back on ideas about successful company cultures they’ve heard from famous founders (sleeping under your desk, anyone?).
But without a strong HR strategy – one that takes you from the scrappy seed stage all the way through to maturity and a dedicated HR team – you’ll struggle to attract and keep a team that can launch your company the right way.
In this blog, we walk you through how HR for startups works, complete with a checklist to tick off as you go.
Table of contents
- Do startups really need HR?
- What should HR do in a startup?
- Should you outsource your startup’s HR function?
- A 7-step guide to setting up HR for startups
- 1. Work with the leadership team to define and document company goals and HR budgets
- 2. Lay down the legal foundations of your HR process
- 3. Use skills-based hiring to support bias-free recruitment
- 4. Evaluate your compensation and benefits packages and streamline payroll
- 5. Set up systems to track and support employee development
- 6. Collect continuous feedback from employees and candidates
- 7. Build your HR tech stack to optimize your processes
- HR for startups: A handy checklist
Do startups really need HR?
The short answer to this question is yes.
You might think success is all down to your product, but when startup news site Failory analyzed their interviews with startup founders, they found 34% of startups fail due to a lack of product-market fit, and 18% fail due to team problems.
To give your business the best chance of survival, you need to build a team that excels because even the best product in the world would struggle to get off the ground without the right team in Mission Control.
That means not only hiring the right people, but also supporting them to succeed both collectively and individually throughout their time at your organization.
If you fail to do this, the consequences could be costly – or even scandalous.
The Harvard Business Review attributed startup giant Uber’s 2017 sexual harassment scandal to senior management’s neglect of the non-recruitment elements of the HR function, which led to a toxic culture.
It’s also important to establish these processes early to protect yourself against legal issues and to prepare for your future as an employer.
Today you’re a startup, but in a few years, you’ll be a major employer; you need to lay the right foundations to prepare for that responsibility.
This means that, yes, you do need someone whose job it is to think about your team and manage its growth.
At the seed stage, this might be a dedicated member of the founding team, perhaps your chief executive officer. They manage the HR department alongside their other responsibilities, handling your hiring and crafting your employer brand.
After a Series A round of funding, or once you’ve grown to around 20-30 employees, consider hiring a dedicated HR professional to do the job.
TestGorilla discovered how valuable hiring a HR professional was in scaling up the team.
Otto Verhage, chief operating officer and co-founder of TestGorilla says:
“The first role we needed to fill on the HR side was in recruitment. Once we got traction, we had to grow our team and you don’t want to solely rely on expensive recruitment agencies. The ROI was a no-brainer, but besides that, having our own recruiters helped in scaling our culture.”
What should HR do in a startup?
HR, as you already know, is about the management of human resources. It’s all about managing the way people move through your organization.
HR for startups covers tasks like:
- Creating basic HR policies and processes
- Keeping employee records and documentation
- Ensuring compliance with the law
- Hiring process and recruitment
- Onboarding and offboarding
- Payroll and benefits administration
- Building the company culture with the founders
- Managing wellbeing and health initiatives
- Creating a culture of inclusivity and diversity
Should you outsource your startup’s HR function?
HR takes up a lot of time, particularly when it comes to hiring. According to research by the Society for Human Resource Management (SHRM) in 2017, the average time-to-hire in the US is 36 days.
However, this could be even longer depending on the function you’re hiring for. Research by LinkedIn in 2018 found specialized functions like engineering can take a median of 49 days to fill.
|Job function||Median time to hire (days)|
This disparity has likely only gotten larger in the past few years.
Skills shortages reached a 16-year high in 2022, with 75% of companies worldwide reporting them.
IT and data were the most in-demand functions, so it’s no surprise to see IT has one of the longest time-to-hire figures in the research above.
As a startup leader, this probably makes your heart sink. There are already so many demands on your time, and the idea of spending up to 49 days trying to hire new employees is discouraging.
It’s natural to look into how you might outsource your HR function, especially if you’re at the seed stage with only a few employees to your name.
Outsourced HR for startups usually happens through recruitment process outsourcing (RPO), which typically works in one of four ways:
- End-to-end full-service RPO, which covers everything from sourcing candidates to managing the onboarding process
- Project-based RPO, which applies only to a specific project, like creating and staffing a new team
- Selective or hybrid RPO, which is targeted at a certain aspect of recruitment, such as screening candidates
- Recruitment on demand, in which one or two recruiters have a contract with your organization to fill recruitment needs as they arise
What are the pros and cons of using RPO as outsourced HR for startups?
The pros of outsourced HR for startups
There are many obvious pros of outsourced HR for startups:
- It’s efficient. It takes hiring responsibilities off the plate of your existing team, leaving them free to focus on finding investors and driving growth.
- It can be cheaper. You usually pay a recruiter a percentage of the new hire’s salary instead of the full salary and benefits you’d pay an in-house employee.
- It may yield better results. Hiring an expert rather than trying to learn new HR concepts yourself could stop you from incurring the most pointless of all expenses: the cost of a bad hire.
- It could deliver a better candidate experience. You would have to fit hiring activities around your existing duties, but a good recruiter could focus on connecting with candidates and keeping them in the loop.
The cons of outsourced HR for startups
However, before you run off into the sunset with your new recruiter, there are also some cons to outsourced HR for startups:
- A recruiter may not be familiar with your nascent company culture and may therefore struggle to make hires that help shape it for the better.
- Outsourcing recruitment may also encourage leaders to forget about the elements of the HR function that are not focused on hiring such as employee development and conflict resolution. As we’ve seen in the case of Uber, this could cause issues down the road.
- A good candidate experience is not always guaranteed. Some recruiters ghost candidates once it becomes clear they will not earn them their commission, which could be catastrophic for your growing employer brand.
Combining these factors together, outsourcing recruitment in the short term could inhibit the long-term development of not only your culture but also key HR processes and institutional knowledge.
A 7-step guide to setting up HR for startups
Whether you choose to pursue outsourced HR for startups or build your own HR strategy from scratch, you need to go through some foundational steps first.
This checklist shows you what you need to set up a comprehensive HR strategy and also gives you concrete instructions on how to get started.
7 steps to setting up HR for startups: Summary table
If you’re itching to get started, here’s the short version of our list below.
|HR strategies for startups||Example actions|
|Work with the leadership team to define and document company goals and HR budgets||Outline your key business goals; Describe the culture that will help you reach these goals; Identify the key HR initiatives to support this and the pricing associated with them; Calculate your HR budget as a percentage of your yearly revenue; Document all of your processes|
|Lay down the legal foundations of your HR process||Check federal and local regulations to create a basic employee contract that is compliant; Add any necessary stipulations (e.g. a non-disclosure agreement)|
|Use skills-based hiring to support bias-free recruitment||Replace resumes with skills tests to screen candidates; Hire for culture add instead of culture fit|
|Evaluate your compensation and benefits packages and streamline payroll||Consult industry benchmarks to create the most attractive compensation package possible; Explore additional incentives like stock options and remote working|
|Set up systems to track and support employee development||Use skills testing to create a skills inventory of all your employees and to track their skill development|
|Collect continuous feedback from employees and candidates||Regularly solicit feedback on HR processes through surveys and face-to-face feedback; Implement feedback promptly and emphasize the changes to employees|
|Build your HR tech stack to optimize your processes||Use HR tools like Applicant Tracking Systems to automate low-value HR tasks; Prioritize employee experience when selecting recruitment tools to ensure streamlined processes|
1. Work with the leadership team to define and document company goals and HR budgets
Whether you’re a founder yourself or a startup team member who is taking on HR responsibilities until you can hire someone full-time, the process of HR for startups begins with defining your:
- Business goals
- Company culture
- HR budgets
Your business goals are likely very clear: You’re probably focused on securing your next round of funding or honing your product. With those established, it’s time to dive deep into your culture.
It can be tricky to describe your company culture, particularly in a startup when your team is only a few people.
Try not to focus too hard on how the individuals in your current team do their work; instead, focus on the underlying values driving your team and set your intentions for how you want to grow.
For example, do you believe innovation is driven by a learning mindset? Is it important to you for all employees to be constantly seeking new information and challenges? You might label learning as one of your company’s core values.
With your business goals and culture defined, it’s time to move on to your HR budget. Your HR budget usually includes:
- Recruiting costs (which also deserve their own dedicated budget)
- Salaries and benefits for employees
- Costs associated with payroll, like HR and payroll software
- Legal fees
- Office costs and supplies
- Training costs
Many organizations choose to set their HR budget as a small percentage of their total revenue, such as 6%. In this case, if your business made $100,000 last year, your budget for HR initiatives this year would be $6,000.
Using the business plan you’ve drawn up and the values you’ve discussed, you can now define the particular initiatives you want to direct this money toward.
In the above scenario, you might identify that in order to meet your long-term goals, you want to provide a learning and development budget for each employee. At TestGorilla, we give each employee a development budget of 3% of their annual salary.
Documentation is key here. Make sure you’re noting and storing all of this information and following a process for doing so.
This is worth having on your mind throughout the rest of these steps, too, because it forms the basis for all of your processes and key documents like your employee handbook.
2. Lay down the legal foundations of your HR process
Next, it’s time to lay down the legal foundations for your HR process. This is sometimes known as “HR hygiene.”
If you’re operating in the US, you should get familiar with the following federal regulations:
- Wages and the Fair Labor Standards Act. This act establishes key rights like minimum wage, overtime pay, record keeping, and youth employment standards.
- Affordable Care Act. This makes affordable healthcare available to households between 100% and 400% of the federal poverty level.
- Equal Employment Opportunity. This prohibits certain types of discrimination in different categories of workplaces.
- Occupational Safety and Health Act. This ensures safe and healthy working conditions for employees.
You should also check your state regulations to make sure you’re compliant locally.
At the end of this process, you should have a basic employment contract that is in line with regulations and includes any additional clauses to protect your organization, such as a non-compete clause or non-disclosure agreement.
3. Use skills-based hiring to support bias-free recruitment
Now that you know:
- The kind of company you want to create
- The goals you’re pursuing
- The budget and initiatives you’re focusing on
- The legal foundation to grow your team
… it’s time to look at hiring.
When approaching recruitment for startups, efficiency is key, and this is where skills-based hiring methods can be especially useful.
Skills-based hiring practices like pre-interview skills testing and structured interview processes are becoming well-known for making hiring quicker and more accurate.
In fact, our State of Skills-Based Hiring 2022 report found after switching to a skills-based hiring approach:
- 89.8% of organizations saw a reduction in cost-to-hire
- 91.4% of organizations saw a reduction in time-to-hire
- 92.5% of organizations saw a reduction in mis-hires
When used properly, skills-based methods also support you in making hiring decisions that are free of bias, chiefly by replacing traditional screening tools like the resume with skills testing.
The resume is a weak spot for unconscious bias in hiring. One 2021 survey found recruiters were less likely to call back candidates who had “ethnic”-sounding names, particularly if they were women.
By anonymizing candidate data and testing candidates’ skills directly, skills testing ensures that only the most capable candidates are invited to interview. Their test scores also offer a data basis for further hiring decisions.
This means recruiters aren’t left to rely on a “gut feeling” about which candidate is the right pick – a feeling they might not even realize is informed by bias.
Reducing bias is an essential step to creating a diverse, innovative, and happy workforce.
Having higher levels of gender diversity and HR policies focused on workplace equity is linked to lower employee turnover. Deloitte research shows having diversity of thought within your teams increases innovation by about 20%.
Another important step to promote diversity of thought is to use pre-interview tests to hire for culture add rather than the more traditional (and flawed) concept of culture fit.
Using the company culture you defined in step one, you can shortlist candidates for roles based on their compatibility with your company values and mission, rather than superficial similarities to your other startup members.
This helps ensure your work environment does not become toxic or cliquey as it grows, and it helps you to stay true to your organizational values even as you scale your hiring.
You’ll be richly rewarded for your efforts. Startups have a retention problem: Research shows one in four employees at hyper-growth startups leaves within a year.
However, there is ample evidence employees hired with skills-based methods stay longer in their roles. In a study of 300,000 hires, employees who were hired with job testing stayed 15% longer in their positions than those hired without.
4. Evaluate your compensation and benefits packages and streamline payroll
You know the kinds of people you want and how to find them – but what incentives will you give them to join your company? Offering the right compensation, perks, and benefits is essential.
Of course, what you’re able to offer depends on your budget and what stage of funding you’ve reached. However, it’s still worth looking at benchmarks.
According to Payscale, the average startup salary is $106,000 per year, with an average bonus of $6,000.
It’s important to be realistic here about the attractiveness of your offer.
Candidates know joining a startup is a risk, especially at an early stage, and this perceived risk doesn’t go away if you’ve made it through a round of funding. Just under 67% of startups fail to “exit” or raise follow-on funding, and candidates are aware of this lack of security.
With this in mind, if you can’t offer a competitive salary, you need to offer other incentives for candidates to join your team.
One of the most effective nontraditional employee benefits to offer is a guarantee of remote working. More than one-third of workers are willing to take a pay cut of up to 5% to be able to work remotely.
The professional development budget we mentioned above can also be considered an incentive, as can other offers like:
- Stock options
- Work-life balance options like unlimited holidays
- Paid family leave
5. Set up systems to track and support employee development
So far, we’ve mentioned employee learning and development as a possible feature of company culture and as a potential incentive. Now is the time to start taking it seriously as one of the best HR tools for startups to attract and retain top talent.
Almost half of American workers say they would switch to a new job if offered skills training opportunities, and 65% believe upskilling from their employer is very important when evaluating a potential role.
Employee development initiatives foster employee engagement and make employees more likely to stay with you long-term. In 2020, workers reported they would be more likely to stay at a company if they were involved in its learning and development programs.
Your skills-based hiring methods give you a head start here because skills-based hiring and employee development go hand in hand.
Use the skills tests you administer during hiring to create a skills inventory of all your incoming employees. As your organization grows, this inventory forms the basis of an internal talent marketplace that shows you the skills available within your company.
This strategy helps you remain agile when responding to business challenges by showing who in your workforce has the skills to tackle the problem.
It can also help you prepare development plans and opportunities for your staff, as well as set up performance management systems and progression frameworks that are more comprehensive than typical performance reviews.
It’s no wonder skills-based organizations are almost twice as likely to retain high performers and more than twice as likely to innovate.
6. Collect continuous feedback from employees and candidates
Being such a small team can certainly be a disadvantage at times. There’s always too much to do and too few people to do it. But being part of a small startup also has its advantages when it comes to listening to employee feedback.
Unlike in a big company whose policies and processes are ancient and entrenched, you have the ability to respond to employee feedback about everything from culture efforts to recruitment strategies.
Doing this creates a culture of workplace empathy and demonstrates to your employees that you put people first. It’s also important for building an agile company culture in which broken processes are proactively recognized and updated.
Finally, soliciting continuous feedback pushes forward the essential startup mindset that failure is nothing to be afraid of.
Failure is inevitable as startups grow, but Harvard researchers found creating a culture of shame around failure stopped employees from learning from it. They turned away from analyzing their failures to save their egos, and as a result, they didn’t learn.
By remaining open to feedback, you role model the mindset that critique is not necessarily a judgment on an individual’s worth, but an opportunity for growth.
7. Build your HR tech stack to optimize your processes
We’ve touched on efficiency a few times in this blog. Especially if you’re in that very early stage of HR for startups, you need to ensure the time you spend on HR is dedicated to high-value tasks like sourcing and signing candidates, not low-value time-sinks like:
- Data entry
- Resume scanning
- Copy-and-paste emails
One way to do this is by using HR software for startups. There are many options out there, and choosing your HR tech stack can be a daunting prospect. Here are a few key examples of recruiting tools out there:
|Applicant Tracking Systems||A central hub for all your recruiting activities, organizing all candidate information|
|Candidate Relationship Management tools||Software to help you track and engage candidates throughout the employment process|
|Recruitment marketing platforms||Marketing automation systems designed specifically for hiring|
|Talent sourcing tools||Recruitment platforms that enable you to identify and source candidates for open roles|
It can be daunting trying to choose HR software for startups because of the pressure you’re under to save as much time and money as possible during recruitment.
With this in mind, we recommend that you prioritize a good user experience when choosing between HR tools for startups.
Ask yourself questions like:
- Who will the main users be? What do they need from this?
- Does this system have enough features? Or, are there too many features, making it difficult to find the ones I need?
- Can I do everything within one dashboard, or do I need to juggle different programs?
HR for startups: A handy checklist
Implementing HR for startups is no mean feat, but it is manageable when it’s broken down into smaller jobs.
We’ve translated the above guide into an easy HR checklist of key tasks for you to tick off as you test out HR strategies for startups.
|Outline your key business goals|
|Describe the culture that will help you reach these goals|
|Identify the key HR initiatives that will support this and the costs associated with them|
|Calculate your HR budget as a percentage of your yearly revenue|
|Document all of your processes|
|Check federal and local regulations to create a compliant employee contract|
|Add any necessary stipulations (e.g. a non-disclosure agreement)|
|Replace resumes with skills tests to screen candidates|
|Hire for culture add instead of culture fit|
|Consult industry benchmarks to create the most attractive compensation package possible|
|Explore additional incentives like stock options and remote working|
|Use skills testing to create a skills inventory of all your employees and to track their skill development|
|Regularly solicit feedback on HR processes through surveys and face-to-face feedback|
|Implement feedback promptly and emphasize the changes to employees|
|Use HR tools like Applicant Tracking Systems to automate low-value tasks|
|Prioritize user experience when selecting recruitment tools to ensure streamlined processes|
The next step: Use skills-based hiring to build your workforce
No more falling back on hearsay about how founders before you have done it.
With this guide, you have a checklist for expanding your startup team that can be tailored to any industry.
If you’re ready to get started with growing your business the right way, read our guide on how to recruit a team for your startup.
If you want to know where to start with skills tests, read our blog about the skills every employee should have.
When you’re ready to hire a dedicated HR professional, use our HR Management test to hire the best.
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- “SHRM Customized Talent Acquisition Benchmarking Report”. (2017). Society for Human Resource Management. Retrieved April 4, 2023. https://www.shrm.org/ResourcesAndTools/business-solutions/Documents/Talent-Acquisition-Report-All-Industries-All-FTEs.pdf
- Anders, George. (August 4, 2021). “Can you wait 49 days? Why getting hired takes so long in engineering”. LinkedIn. Retrieved April 4, 2023. https://www.linkedin.com/pulse/can-you-wait-49-days-why-getting-hired-takes-so-long-george-anders/
- Bourke, Juliet. (January 22, 2018). “The diversity and inclusion revolution: Eight powerful truths”. Deloitte Review. Retrieved April 4, 2023. https://www2.deloitte.com/us/en/insights/deloitte-review/issue-22/diversity-and-inclusion-at-work-eight-powerful-truths.html
- Hoffman, Mitchell, et al. (November 2015). “Discretion in Hiring”. NBER. Retrieved March 22, 2023. https://www.nber.org/papers/w21709
- “In The Front Door, Out The Back: Attrition Challenges At High Growth Startups”. (2022). Founders Circle. Retrieved April 4, 2023. https://www.founderscircle.com/high-startup-turnover-rate/
- “Venture Capital Funnel Shows Odds Of Becoming A Unicorn Are About 1%”. (September 6, 2018). CB Insights. Retrieved April 4, 2023.
- “State of Remote Work 2019”. (2019). Owl Labs. Retrieved April 4, 2023. https://resources.owllabs.com/state-of-remote-work/2019
- “2020 Workplace Learning Report”. (2020). LinkedIn. Retrieved April 4, 2023. https://learning.linkedin.com/content/dam/me/learning/resources/pdfs/LinkedIn-Learning-2020-Workplace-Learning-Report.pdf
- Cantrell, Sue, et al. (September 8, 2022). “The skills-based organization: A new operating model for work and the workforce”. Deloitte Insights. Retrieved April 4, 2023. https://www2.deloitte.com/us/en/insights/topics/talent/organizational-skill-based-hiring.html