Startup leaders have the arduous task of balancing their creativity, agility, and core values with their financial responsibilities to their board and investors. While many founders didn’t create their businesses with quarterly board meetings in mind, these meetings are a non-negotiable part of ensuring fiduciary obligations to investors.
However, many startup leaders still struggle to properly forecast their cash and equity burn rates during these meetings. And nine times out of ten, the cause comes down to a misalignment of cash and equity distribution likely due to the lack of an over-arching rewards philosophy to guide such critical people-related decisions.
Even as startup business goals primarily focus on how best to optimize funding and increase valuation, many startup leaders are not former HR leaders, so they may not fully appreciate how their people strategies can have an outsized influence on their overall business strategy and long-term goals. When more than 75% of a startup’s funding is spent on its people—via salary and wages, commission, equity, benefits, and additional perks for employees—it’s vital this people investment is intentionally considered in terms of how it fits into a company’s overall business goals.
Let’s take a moment to unravel how aligning your comp and benefits strategies with your startup business goals can lead to a thriving culture, positively impact your valuation, and impress your board.
The Link Between Comp, Benefits, and Startup Business Goals
Your comp and benefits strategy is the philosophical north star that underpins how your organization will reward its employees. It’s vital to get it right from the beginning. A company is only as good as the people who work there, which means your total rewards philosophy (including compensation, benefits, recognition, career development, and wellbeing) should support and enable your business to achieve its stated business goals—the ones you’ve committed to with your board.
For example, if one of your business goals is to retain 95% of your current customer base because most of your new customers come from referrals, you may consider rewarding your customer success and sales teams with a short-term incentive scheme that aligns company and individual performance.
If one of your business goals is to decrease turnover rates by 20%, you may consider conducting a rewards benchmarking exercise (focused on compensation and benefits) to understand how you stack up to other companies your size. Knowing that employee turnover is often a massive cost to any organization, ensuring you have market-competitive rewards can improve your talent retention to meet your goal.
Why a Strong Comp and Benefits Strategy Can Help Startup Leaders Secure Their Next Round of Funding
Entering the fundraising arena with investors demands more than just an innovative product or service. Startup leaders need to demonstrate a plan for overall business health, potential for growth, and most importantly, a solid rewards strategy outlining how your organization will attract, motivate, and retain industry top talent to set your business up for success. By marrying your rewards strategy with your business goals, you signal to investors your commitment to long-term success, value toward your team, and your capacity to manage precious financial resources efficiently (which is the responsibility of every startup CEO and CFO).
In other words, gaining visibility into how your organization will manage overall comp and benefits and evolve over the course of inflection points will impact your valuation and provide a positive story to encourage new partners to consider adding you to their portfolio.
How Startup Leaders Can Align Comp and Benefits Strategies to Business Goals
Following the vestige of Silicon Valley giants, some startup leaders might feel compelled to lead with inflated compensations or luxurious benefits. However, a myopic view can considerably derail both your company’s reserves and your board’s trust. That’s why comp and benefits shouldn’t be arbitrary, but rather an extension of your startup’s mission to arrive at the next inflection point in the strongest position possible. Each tactic within your overall people strategy should be intentionally created as a building block that helps you get there.
To ensure your company, investors, board, and leadership are all on the same page when it comes to comp, benefits, and business alignment:
- Evaluate your total rewards philosophy – A total rewards philosophy should evolve as your company grows and changes. Regular assessment of its desirability, affordability, and effectiveness is vital to ensuring it remains aligned with your board’s objectives. At its core, a total rewards philosophy is a commitment to employees and clearly outlines what an employee can expect in return for working at your company and delivering results that propel the business forward. It underscores the value that’s placed on an employee’s contributions and an organization’s dedication to rewarding them competitively, fairly, and transparently.
- Analyze your current business performance – Using analytics tools, you should be able to determine, at any point in time, how close you are to reaching business goals and how far you must go.
- Review your headcount plan regularly and ensure employee pay ranges are set and within industry standards. This is where compensation and benefits benchmarking can come in handy, should you not already have standardized jobs and set pay ranges.
- Establish performance metrics that align with business goals and help determine salary adjustments during your merit planning and review process.
- Determine if overhang is harmful to investors – Ensure your overhang isn’t so high that it is diluting your valuation. Define how to split shares based on role responsibilities or hierarchy.
Manage burn rate – Your board and investors want to know how you’re responsibly and strategically managing their funding. Are you moving through the cash too quickly or not fast enough? Do your projections match your current cash flow? - Evaluate your benefits offerings. Are your employees utilizing your entire benefits suite or only certain perks? Are they fully aware of all the benefits you offer them and how to take advantage of these benefits?
- Create board-ready reports – Using your comp and benefits management systems, develop dashboards and reports that clearly display how you’ve used and plan to use your funding. Startup leaders can waste countless hours spinning their wheels, trying to find real-time and accurate information on their people spend. Having these board-ready reports that update in real time is invaluable.
- Hire comp and benefits advisors – At the end of the day, rarely do startup leaders have in-house teams who specialize in strategic comp and benefits plans. And in many cases, startup leaders don’t have to ability to juggle mission, vision, HR, comp, benefits, employee engagement, and business strategies themselves. Choosing the right comp and benefits advisor not only helps you reach your startup business goals faster but ensures you’re fully prepared for any question your board throws your way regarding your people spend.
Implementing the Right Strategy from Day One
When a startup effectively aligns their comp and benefits strategies to their business goals, they optimize the largest part of their spend and better manage their burn rate. They ensure their projections match their real-time data and create a positive impression on their board. However, aligning strategies is nearly impossible without the right partner and total compensation and benefits management system by your side.
Sequoia One is the The Most Referred PEO in Tech because it’s specifically built to help tech companies thrive in and out of the board room. See how Sequoia One’s PEO can help get your comp and benefits strategy on track and ensure you’re optimizing your largest investment—your people.
