How to Hire Executives: A Startup Founder’s Guide

The Criticality of the First Executive Hires

As Y Combinator has it, a CEO’s first job is to build a product; their second job is to build a company. Ideally, they should get it right the first time to avoid mis-hires, which can be costly to come back from (but not impossible, and it’s more common than you think). But, just how important is it to properly build an executive team with narrow expertise, which is a critical skill for any CEO?

The Startup Executive Team’s Role

In a traditional startup team structure, the executive team sets the tone for every operational aspect of the business — the renowned C-suite roles like chief technology officer, chief operating officer (or VP), and even chief compliance officer in a highly regulated industry.

These leaders, with a deep understanding of their specific departments, steer the ship, in addition to partaking in joint efforts,  such as securing funding, attracting talent, and establishing company culture.

As key decision-makers, building a team that demonstrates rapid learning, understands the startup’s current needs, has domain expertise, and the founding team’s vision, and works daily to make it a reality, will define the company’s future. Undoubtedly, they’re the main players in a company’s success or failure, and they should be vetted as such, especially with the high-risk, high-reward nature of startups, where entrepreneurial talent can make a significant difference.

Thus, hiring the wrong executive can have many consequences for a startup, especially when they need to tackle more technically complex projects in new and evolving fields, from financial losses (i.e., salaries, severance, and subsequent replacement costs) to lost time and productivity, damage to company culture and investor confidence, and increased legal exposure.

Define Your Needs Before Hiring Executives

A mis-hire is often the result of not setting priorities straight before beginning the hiring process — how do you know who will fulfill certain needs if you don’t know what those needs are first?

Strategic Alignment

Although a founding team usually knows what they want for a startup from its inception, intentions might shift as the company scales. So, it’s important to clearly articulate its vision, mission, and long-term strategic goals that align with the relevant industry, including next year’s strategy. to ensure new hires align with these core principles and have the right toolset to achieve future plans.

Role Definition and Responsibilities

Just like you would do when recruiting for a new job post, outlining exactly what the role entails and the profile requires will make it easier to find the right fit. This includes listing specific responsibilities, reporting structure, and performance expectations, and it should go even further for an executive. For instance, it’s relevant to define their authority limitations, decision-making power, and accountability.

Risk Appetite and Tolerance

Risk appetite and tolerance define how much risk the startup is able to withstand in certain contexts. Regarding executive hires, teams should balance the desire for innovation with the need for stability — this is a great indicator of the profile you’re looking for, particularly in terms of the most valuable skill set. Is your company at a moment where risk-taking is more valuable, particularly in attracting entrepreneurial candidates? Or is it seeking financial safety above all?

This risk factor also evaluates the potential impact of a mis-hire on the company’s finances, reputation, and legal standing, which take time and effort to build.

Compensation and Equity Structure

Now we’re talking numbers. And these numbers will attract the right candidates to an executive role. As such, startups must develop a competitive compensation package that aligns their financial capacity with the executive’s experience. This package should also include an equity stake that incentivizes performance while protecting the interests of team members and investors, and account for the legal and tax implications of such equity and compensation structures.

The Hiring Process: Finding the Ideal Candidate

After knowing exactly what you need, it’s showtime. Andreessen Horowitz estimates the search takes 130 days on average, so brace for a similar timeline. Here are some essential steps you shouldn’t miss along the hiring process, potentially involving a hiring committee.

1. Sourcing and Identifying Candidates

Networking is perhaps one of the best ways to find the next executive team. As you approach others in the industry with similar experiences and needs as you, browse around for potential candidates or recommendations from peers or smaller search firms, including an executive search firm — they might know the one.

Organizations like accelerators and incubators are also a great place for sourcing candidates and getting hiring advice from seasoned experts. Plus, meet people from all walks of life there, finding a wider and more varied pool of candidates that can help reduce risks of bias to build a well-rounded team.

2. Screening and Initial Assessment

Once you begin to gather resumes, thoroughly screening candidates will make the interview and subsequent hiring steps a much smoother process as you’re weeding out the profiles that don’t quite fit the bill from the very start.

When you find the most attractive applicants, schedule phone or video interviews to assess basic qualifications and cultural fit, and ask additional resume questions.

Jack Altman, CEO of HR SaaS Lattice, says he likes to ask candidates how they would go about building a new team (since they most likely will as an executive). Questions range from the type of manager they’d be to how they’d convince people to join them, to truly assess whether they’re a good fit for the company culture and to identify great candidates.

Altman also recalled how, in the first year of founding Lattice, he questioned himself about finding the right marketer. As a fresh founder with a team of relatively the same age and work experience, he sought someone with a degree starting their marketing career.

While it might’ve seemed risky, Altman recalls how this person had an “enormous ownership mentality,” falling right in line with the leadership they were looking for at Lattice. He didn’t have the deepest technical expertise, but was also extremely eager to learn and had a very low ego mixed with high conviction in his ability — these personality traits convinced Altman.

This marketer went on to help the company’s brand grow, becoming a “manager of managers” with a four-year stay at the startup.

3. In-Depth Evaluation and Due Diligence

Following initial assessments, the team must get to know the new potential executive as well. So, plan for multiple rounds of interviews with key stakeholders, such as the founding team, board members, and other relevant team members. This is where other behavioral interviewing techniques will help you predict the candidate’s future behavior and inform you about their past performance.

This is also a new opportunity to ask probing questions to spot red flags, review work samples, verify credentials, and conduct a background check. Additionally, get to know candidates through other sources, such as peers who have recommended them.

For instance, work experience might not paint someone’s full picture. Joe Alim, VP of products and operations at employee management startup Compt, says he was initially turned off by a seasoned Verizon employee who reached out to him via LinkedIn. Although a legacy company wasn’t the experience he expected from a new hire at a disruptive company, this person’s “thorough and polished communications” made him continue the conversation.

Ultimately, it was their skills alignment rather than the “right” experience that made Alim take the leap with a hire that proved successful.

4. Legal Considerations and Contract Negotiation

If you’re set on your new executive, legal steps ensue. This is when legal counsel gets involved to draft an employment agreement that outlines aspects such as responsibilities and reporting structure, ensuring all stakeholders involved are clear about their roles. Plus, settle on a compensation package with benefits and equity, and define a termination procedure, severance terms, and any necessary confidentiality and IP agreements.

Also, complete the essential contract steps like ensuring compliance with all applicable employment laws, such as anti-discrimination, and then negotiate terms that protect both the startup’s interests and the executive’s rights.

5. Making the Offer and Onboarding

Finally, present the offer to the candidate, develop an onboarding plan to ensure a smooth integration into the company, and set clear expectations, goals, and performance metrics for the first three months and beyond. And don’t forget to make support and mentorship available as the new executive settles in, sharing both positive and negative experiences.

How To Hire Executives and Mitigate the Biggest Startup Risks

Before making the decision to hire an executive, it’s easy to get lost in a sea of questions:

• When is the right time to hire, and how much risk is acceptable — just a small dose?
• How will this change my company?
• Is it worth the trouble?

It all starts with knowing how to mitigate the inherent risks of a new hire, and answers will start to unfold.

Mitigating Cultural Fit Risks

Preserving company culture should be a priority when bringing a new team member, especially during the early stages , and it should also be an intuitive process when the founding team knows exactly what they’re after, aiming to find the absolute best team builder. Knowing the startup’s core values and culture will dictate the next hire and help determine whether someone is the right fit or not.

For practical measures, run behavioral interviews and ask situational judgment questions to get to know candidates better, plus acquaint them with other team members who can voice their opinions before making a hiring decision.

Mitigating Competency and Performance Risks

Past the attitudinal test, a candidate must also prove their skill set to reduce the risks of low competency and performance. While getting to know them, use skills assessments or presentations to evaluate their experience, and later conduct thorough reference checks to ensure the validity of their resume.

Developing a detailed job description and establishing clear performance metrics will also help attract the right candidates.

Mitigating Legal and Compliance Risk

Legal teams should also be involved in the hiring process to keep startups in check. That is, staying compliant with the law, training the hiring team on anti-discrimination laws and best practices, and ensuring all employment agreements are legally sound and protect everyone’s interests.

The more entrenched legal counsel is in the hiring process, the fewer the risks of employment-based litigation down the line.

• Mitigating Financial and Compensation Risk: Budgets are tight at the early stages of a startup, so the financial advisors should always be involved in the hiring process to help establish proper compensation strategies that fit the company’s runway until the next funding round. This should also fit industry standards to avoid over- or undercompensation, while carefully considering the dilution impact of equity grants.
• Mitigating Reputational Risk: This might be one of the least considered angles, yet it is still highly important. Knowing exactly who a startup is welcoming into its team is crucial to keeping the company’s reputation intact. This is why background checks (including social media screenings with legal boundaries) are more than just a formality.

And, when the time comes to announce the hire, choose the right time, wording, and medium to carry out internal and external communications.

The Insurance Factor: Protecting Your Executive Investment

Another critical step in mitigating risk is getting the right insurance for your startup to fall back on in case things don’t go as planned.

Foundational Insurance Coverage When Hiring

For example, the founding team might’ve hired someone on a whim, or simply because they knew them. This hire might unfold a set of unfortunate events for the company, with the current executive team being at fault. Directors and officers (D&O) insurance helps protect their personal assets from lawsuits related to their decisions — a breach of duty or errors of judgment.

Employment practices liability insurance (EPLI) is also a big lifesaver when making new hires. This policy, tailored to startups, covers them against claims of wrongful termination, discrimination, harassment, and other employment-related risks.

Other essential coverages include cyber liability insurance to protect against the financial and legal ramifications after a data breach (especially if it stems from action or inaction from executives), paired with errors and omissions (E&O) insurance for any negligence claims when services or products aren’t up to par.

Additionally, key person insurance alternatives are a surefire way to protect new and existing executives whose decisions have broad repercussions in the company.

Risk Transfer vs. Risk Mitigation

Bear in mind that insurance is an extra cushion to already existing risk management strategies and not a replacement for proactive measures. As such, brokers assess a startup’s ability to avert and handle risks when establishing premiums and coverage ranges — a well-crafted risk management plan should be the standard before acquiring insurance.

Startup teams should also familiarize themselves with brokers and make them active parts of their risk mitigation strategies to gain broader industry expertise and set proper insurance coverage for the company.

While hiring processes highly vary depending on the startup, its stage, and leadership team, following common risk mitigation practices should be a standard that everyone follows to avoid legal, reputational, and financial issues down the line. Sometimes it’s all about gut feeling, a trusted recommendation, or an impressive resume. Nonetheless, nothing beats conducting further research and the right due diligence to protect your assets, founding team, and employees, and hopefully get it right the first time.