This is the first of a series of five blog posts about how to grow your agency. Jeff Allen and I are hosting Agency Growth workshops in Portland and London. Learn all about how we’ve grown Hanapin from a $2000 investment to an Inc 5000 company and an Indiana Best Places to Work honoree. For more info, read the About page and our FAQ.
(Hat tip to Kirk Williams for the idea for this blog post.)
When to hire your first employee is an extraordinarily big decision on lots of different fronts. You’re no longer responsible for just feeding yourself. You now have another person to manage. Is there going to be enough work for them to do? Will you enjoy working with them, moving away from a schedule where you like you’ve likely been able to do whatever you want and whenever you want? Not to mention, there’s lots of rules and regulations you now have to follow. Taxes, W-2s, 1099s, HR posters, minimum/living wage, etc., etc.
This post will touch on the specifics of when to hire the first person and tangentially many of the related decisions you have to make and consider as I mentioned above.
To take a step back, the decision on when to hire that first person may actually need to be done months ahead of the actual need for that person. Not only because you’ll need a little bit of time to find the right person (and you may need to conduct a second search if the first search doesn’t yield a good candidate) but also because you don’t *have* to hire an employee and you’ll need time to get comfortable with that concept.
Just because you may have enough business or because growth is what you stereotypically do when you run a company, you actually don’t have to grow it if you don’t want to. You don’t have to have employees, and you don’t have to add more clients than what you’re capable of.
When I first started Hanapin, I actually didn’t know whether I wanted to keep it as a “lifestyle business” or grow it like a “real” company. I was making 75% of my salary for my previous employer with about 25% of the hours and life was pretty good. I eventually made the decision to figure out how to get the best of both worlds, having a “lifestyle business” and growing it like a “real” company by simply making work/life balance a priority. I’m always at home by six for dinner, most of the team doesn’t work more than 40 to 45 hours a week, folks can work 4.5 days a week, and company-wide, we don’t have meetings on Fridays.
But, if you make the decision to hire an employee, make sure it’s based upon the fact that you really want to grow into a large company, and it’s not simply because you may want or think you need more money. If you’re covering your current bills and you have a good lifestyle, you don’t need another employee, even if there’s more business on the table that you could potentially service.
Now that that’s out of the way and you’re still reading, I’ll assume you’re planning to hire that employee. If you’re growing an agency, you likely have not taken venture capital. The reason I say this is because most venture capitalists will not want to fund a service-based business. It doesn’t scale as much as or as quickly as a software business, for example. While there’s nothing inherently wrong with a service-based business, it’s just not a good investment for venture capitalists when they can funnel their dollars towards businesses that scale faster.
So, that means you’re bootstrapping your business, which means you’re paying for everything yourself either out of the revenue you’re generating or your savings or seed money you’ve set aside for the business. That means you need to pay extra attention when making that first hire because he or she needs to already pay for him or herself on day one.
Whatever your revenues are, they need to be enough to pay for your salary, any expenses you have, and the new employee’s salary. Your own salary shouldn’t be extravagant; you’re building a business after all. But it shouldn’t mean you eat Ramen noodles either. Just like The Three Bears, somewhere in the middle is appropriate.
As for your expenses, they should be pretty minimal as your COGS (cost of goods sold) is really just salaries. You’ll likely have some expenses in terms of a laptop and software but “normal” things like a landline phone or office space aren’t necessary at this point.
It’s very common and reasonable to use cell phones and for people to work remotely from their home or at low-cost co-working space. You could even meet up at Starbucks, so it’s only $4 for a table for the afternoon. When I first started Hanapin, part of my pitch was that I would always visit the client, not just because it was good customer service but also because I didn’t have office space and never wanted them to come visit me and see that.
How much revenue should you have in order to cover the employee? At a minimum I think you need enough monthly recurring revenue that you can cover monthly salaries for you and that person and your monthly recurring expenses. If you’re working only on a project basis, I would recommend that you have at least six months worth of revenue, just in case there’s a rainy day.
If you do have monthly recurring revenue, I would still suggest a buffer as well, but it only needs to be a small one so that you can still operate as normal even if clients don’t pay on time. The way I would figure that is to have enough cash on hand to last you 90 days if something unexpected happens, like your largest client leaving.
One thing I would consider when hiring my first employee is for them to have as broad of a skill set as possible. While you want to hire them for a very specific job, and you should absolutely have a specific job in mind not just “they can help out,” in a small company, there’s always lots of things that pop up. You need somebody that can handle anything that comes your way. Having a jack-of-all-trades as your first hire was crucial for me (thanks Joe Kerschbaum!). And this person “must be really, truly, great at Googling things for themselves.”
What salary should you offer this magical human being? When starting off your company, you simply don’t have a lot of cash to pay folks. I would recommend trying to find the best person you can for the least amount of cost.
Some folks are comfortable paying someone below market rate. If you’re not, just realize they won’t accept if they can’t make the salary work for them personally. Make them an offer, and if they don’t accept it, they don’t accept it. Continue your search and find somebody who likes you as much as you like them.
What I would recommend is that the salary you offer them is 1) one that you can cover with your revenue and 2) a salary that is very close to their current salary level. You don’t want to find yourself in a situation, because the person is coming to literally spend eight hours a day with you, where they resent you because you weren’t able to match their last salary from their last employer and so they’ve had to make some personal sacrifices.