How Do Startups Pay Employees?

In the early stages of a startup, founders often go through hard-hitting financial challenges. Many startups will do anything to make it work through those first days. Business owners may find themselves doing everything rent-free in their backyards. 

Challenges arise when you begin to need employees. It’s time to delegate specific tasks and pay a workforce, but it’s possible the business hasn’t started making any income yet.

So, how do startups pay employees? If it’s essential to recruit, a startup can offer stock options to key staff members. That way, employees can get bigger payouts when the business starts generating revenue. 

At this point, however, business owners should be wary of liquidation preferences. Liquidation preference references a contract that determines the shareholder’s pay upon company liquidation. Let's get into more details about how a new enterprise can keep its payroll manageable.

Efficiently Allocate Funds 

A new business must implement budgetary strategies such as the 70-20-10 rule to streamline expenditure and manage its funds. This tactic is a concept that companies use to prioritize how they utilize their resources. 70% of the company’s funds are channeled toward core operations, while 20% percent is put aside for future growth. The remaining 10% is for unique and potentially lucrative ideas that can move the business forward. With a proper budget, it’ll be easier to pay employees.

Hire Interns

Founder mentoring is an excellent way for any business person to learn about entrepreneurship. And if experts with vast industry knowledge are known to be behind the running of a startup, the founders will quickly get trainees, due to the fame of their mentor. Many young minds out there, who are still trying to figure out what to do with their lives, are willing to work for free and get exposure to those with more industry experience. While interns may not perform at the highest level, the company can still save money. The direct benefit for the interns is that they get to grow into their careers, while learning key business skills.

Stock Options

It is common practice for newly launched businesses to supplement critical employees’ salaries with equity. Startups usually work with people who’re willing to work for a fraction of their usual pay if the company shows the growth potential to reach great heights. The founders should, however, keep track of how much stake they are giving away. Be that as it may, if the business takes too long to take off, some valuable employees may jump ship. Still, this is one of the most effective ways to get your business off the ground.

Get Part-Time Workers And Pay On Commission 

When your payroll covers full-time employees working from 9 to 5, Monday to Friday, it means that you must always pay the total wages. That’s even when there aren’t too many tasks to perform or when sales are low. A practical solution for this is to employ a commission-based or part-time team to only work when the need arises. This plan helps startup owners stay ahead of their expenses.

Compensation In A Nutshell

New business owners will usually face challenges when it comes to compensating employees. Startups typically need a team of skilled professionals to get off the ground quickly. However, skilled talent doesn’t come cheap. How do these businesses find a way around this? You could hire some interns who will gladly work for free since they need to learn the ropes. Some companies may also offer stock options to top employees. Another strategy is to hire part-time workers and pay them on commission. No matter the process, it is crucial to compensate your workforce.