Do Startups Really Need HR?

This question always brings me back to one of the first cohort groups I was mentoring many years ago at the local business incubator. A couple of tech bros gearing up for their latest venture were chatting with me after a presentation I gave on the importance of establishing foundational HR components for startups and small businesses. “We appreciated what you had to say”, one of the bros remarked, “but we don’t really need to set anything up in terms of HR structure because all of our hires have been family members, so we aren’t at risk.”  I thought to myself ‘because no one has ever been sued by a family member or had nepotism affect their culture.’ I often wonder what became of those guys and their business venture after I moved out of the area.

 But it begs the question: do startups really need HR?

 In short, yes. And there is a myriad of reasons why so let’s start with the first:

 1.) Founders need to focus on strategy and growth – not the minutiae of people management and compliance. Building foundational human resource elements takes time and expertise and establishing those key components are central to the growth of the business. Building an employment brand, recruitment, hiring, and performance management have major impacts on that growth. Done well, the business is poised for innovation and growth; done poorly, the business can be impacted not only in terms of scaling upward but in terms of reputational damage. And turnover is expensive – but I’ll get to that in a bit.

2.) HR ensures compliance with labor laws and helps prevent lawsuits and penalties that can break a young company. Employment law is a dizzying array of rules, regulations, and precedents that encompasses both federal and state laws and on occasion, even county-specific laws. According to King & Siegel, defending a case through discovery and summary judgement can cost between $75,000 - $125,000 which increases significantly if it goes to trial. The average settlement ranges from $5,000 - $25,000 for low-severity cases to over $150,000 for more severe cases such as wrongful termination or harassment (King & Siegel, 2021). Additionally, some statues dictate that the losing party has to pay the plaintiff’s legal fees as well and certain states such as New York City and California do not cap payout for damages. I always remind clients that is costs nothing for an employee to file a complaint with the EEOC (Equal Employment Opportunity Commission) and if the employee’s complaint is found to have merit, the EEOC provides counsel for the employee as the plaintiff. So while some complaints that come through are found to not have merit, you as the employer will still be spending significant time and money to defend yourself.

3.) Smooth Scaling. A common theme I hear from clients is wanting to guard their culture as they grow. The people you hire – from entry level to executive leader level – directly impact whether your culture stays healthy or becomes toxic. And once a culture becomes toxic, it’s very difficult (and costly) to bring it back to a healthy one. I am a firm believer in well written job descriptions and believe they should be able to perform a number of functions including advertising your brand in addition to the role you are recruiting for, recruit the right fit for your organization, build strong interview guides from, manage employee expectations, and equip managers with what they need to successfully performance manage their team. “One person can wear many hats” is common in early-stage startups. It’s still worth defining roles, responsibilities, and decision rights to avoid chaos as you scale. Not every potential applicant is going to be a good fit for your company and that’s fine. Painting an accurate picture on the front end is key to attracting the talent that will align with your mission and overall strategic growth plans. Additionally, poor onboarding is the #1 reason new hires leave within the first year. A seasoned HR professional can build and execute an orientation and onboarding experience that helps start-ups and small businesses avoid incurring this statistic because culture isn’t just soft; it’s measurable. Alignment on values, performance metrics, and consistent onboarding can be tracked and adjusted.

4.) Structure, Efficiency, Retention. It’s one thing to hire good people, but it’s just as important to identify your top talent and nurture your employees. Providing clear policies, expectations, and paths for development are central to making this happen. HR not only ensures the foundational components for these practices are in place but works directly with leadership to ensure they have the tools and training to lead rather than just manage and that employees have the ability to flourish and want to stay. And why is that so important? Because turnover is costly. In fact, the average cost to replace an employee is roughly that employee’s annual salary. So, if you lose two employees that make $80,000 a year, it’s about $160,000 to replace them. Numerous factors go into that number including loss of productivity, cost of replacement, time spent interviewing, and then getting a new hire up to speed. That’s why good hiring, onboarding, and retention practices are vital. Additionally, turnover costs you in terms of brand reputation and word travels fast in our culture of social media and the countless outlets people have to vent their frustrations with an employer. HR can help you establish and maintain a positive culture to mitigate the cost – both actual and intrinsic – to your business.

5.) Conflict resolution is probably the most hated component of leadership and working with others. There is certainly an art to managing it well. It’s important to understand that people bring their issues, dysfunctions, preferences, and habits with them wherever they go – including your company. The larger your organization gets, the greater the chance that personalities are going to clash. How these are handled will either impact your culture and the relationships that comprise it positively or negatively. In fact, in all my years in HR, I would say poor communication and conflict management are the main reason for employees filing complaints and contacting outside counsel. Having an experienced HR professional that understands how to successfully address disputes and grievances can prevent these inevitable situations from escalating into major disruptions. Ensuring your organization has a well-written employee handbook is key in addition to training your leaders how to handle employee conflict not only within the boundaries of your company policy but also within the parameters of employment law is something a savvy HR executive can ensure.

Founders should focus on strategy, not people administration. HR builds scalability: hiring processes, onboarding, performance management, and culture. HR has certainly received its fair share of bad press and negative feelings from employees and a great deal of it is certainly warranted. But I also think it’s important to find HR that fits your organization – one that is both operational and strategic. For most businesses, the most expensive part of your operational costs are your people, in both salary and benefits. Those costs increase exponentially if you incur a lawsuit from either a former or current employee. Having an experienced HR professional build a startup’s foundational people structure from the beginning and allowing them a seat at the table helps not only mitigate risk, but ensures your dream as a founder is poised for growth. Even if all your employees are family members.