The One Thing About “Startup Hiring” That Prevents $100K Mistakes

Salary is the biggest cost for startups, especially tech companies. To scale your business, hiring is unavoidable. But when you hire employees and it turns out to be a failure, you easily lose $100k per employee and a significant amount of time.

The risk is huge. Should you hire now? There’s one thing you should consider before you hire. Today I’ll share what that is.

Startup Staff Are Generalists

In a startup, you hire generalists who can handle multiple roles simultaneously—like product development and design. They have to cover several roles to reduce salary costs. Many startups simply can’t afford specialists, who are very expensive and whose annual salaries often exceed the company’s annual revenue.

You can teach these generalists what to do and then delegate your tasks to them. However, generalists don’t create new strategies for you. This means you must have specific tasks to give them—tasks you already know how to do.

The Most Common Way to Lose Money When Hiring

The typical reason to hire people is that you’re too busy. You want to delegate your tasks to reduce your workload. But simply reducing your task load doesn’t increase cash flow or revenue at all. Only the cost of a new employee increases.

Even if you’re lucky and the person you hired is suitable for the role, that’s not enough. You need a cash return on your investment.

Or maybe you hire because you found a talented person and feel you must hire them now before someone else does. But being talented and a great cultural fit isn’t a good enough reason to hire. As I mentioned, generalists don’t create new tasks that contribute to your business growth. Generalists don’t invent new revenue sources for you. So if you don’t have a task that will certainly generate cash flow, hiring is just a waste of time and money.

The One Thing to Care About When Hiring People

What’s missing here is a cost-and-return perspective. You should only hire people when they will bring in more cash than their salary costs. And you must know exactly how much they’ll bring.

There are two situations where hiring brings in more cash than salary costs:

By delegating your tasks, you can focus on new activities that will surely generate more cash inflow than the person’s salary.
You already have profitable opportunities to reinvest in—like hiring a salesperson who will close deals worth much more than their salary.

Of course, the new hire must fit your corporate culture and be capable of accomplishing their specific role. But you must calculate exactly how much cash they’ll bring in before you hire them.

Hiring people is risky. You should set a trial period before actually hiring them. Do they really bring in the cash you expected? It’s not enough that they seem to be doing well—you need evidence in numbers. If they don’t meet expected efficiency levels, you can let them go.

Example of Cash Flow-Based Hiring

Suppose you hire a customer support/customer success person who is supposed to prevent cancellations and upsell your products.

For example, that person can manage 250 customers, and the monthly cancellation rate drops from 5% to 3% thanks to their work. Your customer acquisition cost is $1,500 per customer. You save on acquisition costs when fewer people cancel. The cost savings this person generates is: 250 × (5% – 3%) × $1,500 = $7,500/month, or $90k/year. If their salary is way less than that, they’re worth hiring. Customer success roles also handle upselling, creating additional cash inflow beyond the cost savings.

How to Set Priorities

Who should you hire next? You have limited cash, so you must hire for the role that will generate the most cash flow. For example, if a sales rep brings in $500k and a marketer brings in only $200k for the same salary, you might feel like hiring a marketer to cover all your bases. But hiring a sales rep clearly brings more cash and contributes more to growth. So the correct choice is the sales rep.

Conclusion

Hire people only when they bring in more cash flow than their salary and other personnel-related costs (including the bigger office rent that comes with more employees). You must calculate how much you can save or how much revenue you can increase before making any hire.