How founders can manage employee turnover

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No matter how you slice it, there’s a shakeup in the labor force. Nearly four million people in the U.S. quit their jobs this July, up from just over three million in July of last year. Whether you call it “the Great Resignation,” “the Great Discontent,” or “the Great Attrition,” one thing is clear: Employees are reevaluating their priorities when it comes to work.

According to a recent Gallup analysis, nearly half of all U.S. employees are considering a job change. With quit rates on the rise, employee turnover has become a top concern to business leaders across the country, including early-stage startup founders.  

Turnover has a high impact

Turnover refers to employee attrition in roles an organization plans to refill. Smaller companies are particularly vulnerable to turnover-related turmoil because a single departure can cause significant problems. “When you’re ten people, you don’t have a backup,” said Nate Elliott, chief of staff at Peachy, a medical bill payments startup. “If we were to lose somebody like one of our core team members right now, that would be hard to recover from.”

Larger startups tend to see turnover rates increase as they grow. New aggregated and anonymized data from Carta Total Comp shows that startups with 25 employees have typically already had at least one employee leave the company. That figure jumps to six employees when headcount reaches 50 people, and 16 employees when companies hit 100 people. This means that to grow to 50 employees, founders should plan to hire 56 total employees, and that 100-person firms should expect to have made 116 total hires. 

Companies lose time, productivity, and resources when employees decide to leave. The costs associated with losing talent can be steep, ranging from half to more than twice an employee’s annual salary. Although managing turnover is an inevitable part of doing business, many founders are uncertain about how much to expect—and what they can do to minimize it. 

Three strategies for limiting turnover 

Talent is a market like any other. Staying competitive doesn’t end with a successful hire—and it isn’t just about salary. Successful founders know they need to compete to retain their employees, not just recruit them.  These three strategies can help you limit turnover as you grow your business:  

1. Offer competitive equity 

Compensation is critical to keeping employees on board. Competitive pay can motivate people to stay, but it’s not the only tool you have to work with. Early-stage startups with smaller budgets can compete with larger enterprise companies by offering flexible hours and other incentives, such as remote work and unlimited PTO. 

Offering attractive equity compensation is another way to compete. “To hire really good people, you need to have a compelling total compensation package, which means you may have to benchmark higher than a peer set with your equity; for instance, at the 75th or 90th percentile,” said Luke Beseda, talent partner at Lightspeed Venture Partners. 

Especially in the early stages of a company’s growth, employees can be willing to trade more equity for a lower base pay if they’re convinced the equity will pay off down the line. This payoff usually comes in the form of a liquidity event: an IPO, acquisition, tender offer, or other event that would allow employees to unlock the value of their equity by selling shares.

Offering your employees more equity compensation can stimulate their long-term commitment: The better your company performs, the more their equity will be worth. “To me, it’s all about aligning incentives,” said Elliott. “If you don’t have skin in the game, what’s the point of staying if you get a better offer?”

Rachel Lanham, chief customer officer at Voodle, an enterprise video messaging startup, points out that “mission and equity go hand in hand.” By offering equity to your employees, you’re giving them the opportunity to buy into your company’s mission—and employees who have a sense of purpose at work are more likely to stay

2. Create clear paths to growth

You can also reduce turnover by properly leveling your employees. A leveling framework is a set of job expectations that stay consistent across departments and align with salary bands. These levels help you hire and compensate everyone fairly. They also establish a shared understanding of each role’s value to the company and show clear career-growth paths to your employees.

Getting started with leveling can be tricky, especially in small startups where responsibilities shift frequently as teams grow. But starting early with a scalable leveling plan can help your company grow more efficiently while limiting confusion around compensation and career growth—which is connected to turnover.

That’s why Beseda advises Lightspeed’s portfolio company founders to establish a compensation architecture—“a fancy way of saying, ‘when I am interviewing candidates, I need to decide what level they will be at in my company,’” said Beseda. “For instance, a junior software engineer, a mid-level software engineer, or a senior software engineer. That translates to different levels of salary. The way that you construct those levels and tie compensation to them is your compensation philosophy.” 

Over time, promoting your employees to roles with better pay and greater responsibilities higher in the architecture, also known as upleveling, can entice them to stay at your company—but only if there are systems in place to help them succeed. 

“In certain cases, it may make sense to uple\vel someone even before they’re quite ready as a way to keep them engaged and challenged, and so they see a clear path to growth,” said Jana Rich, founder and CEO of Rich Talent Group, a boutique executive search firm. That’s why she believes it’s important for startup managers to invest in their employees by offering outside coaching, classes, and mentoring relationships within the company.

3. Foster a culture of connection

A healthy employee culture that makes your team feel connected can also help limit turnover. But first, you have to define what culture” means. For Lanham, company culture is “your values, how work gets done, and your mission—not coffee and ping pong.”

One way to figure out your company’s culture is to write it down. Eighteen-person Voodle, for example, has its own Culture Book, a document that outlines how the team works together—including its mission, shared values, software development process, weekly meeting schedule, and philosophy on work-life balance. Having a central place to refer to your culture and values as a north star keeps everyone on the same page and helps communication. It can also help build a culture of autonomous decision making—which is linked to retention.

For many founders, an engaged company culture requires careful attention to employee inclusion. For Tosh Dutt, founder and CEO of ChargeNet Stations, an electric vehicle charging software startup, a commitment to diversity is integral. Before he was a founder, he said, “I’ve faced latent discrimination, I’ve faced pay inequality, I’ve faced blatant racism—you name it, it’s happened,” said Dutt. “For a long time, even though I was a subject matter expert, I was dismissed.” 

A pillar of ChargeNet’s  culture is “empowering underrepresented talent to be able to show their expertise—and to grow professionally as a result.” That’s reflected, Dutt said, in the company’s leadership: Two-thirds of the founding team are female, and two-thirds are people of color.

Culture isn’t just what your company stands for, but how it connects people. Employees with positive coworker relationships and a strong sense of organizational support are less likely to consider leaving—and this has proven especially important during COVID-19 pandemic.  Startups need to find creative ways to help their employees feel connected while working remotely. “I don’t know if companies have ever been this challenged to make connection happen,” Rich said. “I would argue that during Covid, there’s zero spontaneity. There’s no bumping into each other. I think founders sometimes underestimate how important that is for culture and for retention. The more connected you feel to your team members, the more likely you are to stay.”

Employee turnover is bound to happen as you scale your company, but it’s manageable if you treat it as seriously as winning candidates or setting growth goals. To limit turnover, give your employees a stake in your company’s success by offering meaningful equity-based compensation, a clear path for professional growth, and a culture that connects your team.

DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”).  This communication is for informational purposes only, and contains general information only.  Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2021 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.

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