What Works Best for our Startup? Employees vs. Contract Workers

Woman ThinkingIn every new business venture, resources are very thin, and for this reason the decision to hire employees or outside contract workers is not an easy decision. The wrong decision can definitely lead to the failure of our project.

With this very reason in mind, I would like to share what we have learned in these past 8 years, using 3 simple and essential points, because no one expects a founder to be an expert in paying salaries and human resources.

1. What is the desired functionality?

The most important point here is determining from the beginning what is the exact work that a person will perform and taking into consideration the length of time their work will be carried out.

For example, if this new human resource will be in charge of our channel for customer service, we are definitely talking about a long-term and stable (recurrent) job over time. In this case we recommend investing in, without doubt, a fixed employee that understands in detail our work ethic.

But on the other hand, if we need someone to develop a new module for our system, which will take on average 2 to 3 months work from start to finish, then the best option for this situation is to seek an outside contractor.

This last option is what frequently happened to us for our technological business venture, eMT. Being programmers, we decided to hire an external designer that could help us. We certainly did not need a designer on a continual basis for our company, but from time to time, approaching an independent contractor is an excellent option.

The same thing happens with online marketing specialists, developers specialized in databases, or front-end programmers for mobile applications, but also when talking about accountants, lawyers, etc. For a startup, the possibility of counting on outside contractors, with whom we agree beforehand on a job and the fixed amount to be paid, is a great ally especially when we have very few resources at our disposal and we are trying out a new idea until we can reach the stage known as “Product/Market Fit,” when we have the possibility of efficiently demonstrating that our product can successfully satisfy the great demand of the market.

Note: Even more importantly, we can assure that that this is the best way to find a new employee in the future because we will continue to hire an excellent consultant, from the time we start a small job, then a middle-sized one, until eventually we decide to bring them on full time to work as a fixed member of the team.

2. How do we hire them?

Once we determine what function we need based on the point above, it is time to hire this person.

The first thing we should do, whether it be an employee or outside contractor, is sign the appropriate documentation which establishes that the Intellectual Property that is generated is exclusively owned by our company. This document can vary from country to country, but thousands of samples are available online, such as this example.

The differences between an employee and a contract worker are the following:

  1. Contractor: Define their own working hours, decide where they want to work from, are assigned a project where the final result is clearly defined but how they get there is their own decision. Lastly, the resources that they use in order to achieve the results (computer, Internet access, desk, etc.) will be provided themselves (not by our company). On the other hand, they will have no influence on the strategy of our project. This contractor will have a signed agreement with us specifying them as an outside contractor and it will state the total to be paid without needing to withhold taxes. It is their obligation to account for their own taxes.
  2. Employee: It is the complete opposite of the contractor; we as a company should withhold and pay their taxes monthly. Furthermore, we must provide them with all the resources necessary for them to be able to achieve their set forth goals.

Note: Even if our business venture compensates the first employees with shares in our company, they should definitely be paid what the law at least requires in each state or country (in the United States this can be found on the IRS website). No one should work for free; it is illegal. I share this so that as founders we can avoid problems in the future such as when a co-founder leaves our project and present a legal complaint that their minimum salary was not paid correctly in exchange for shares in the company.

3. What system to utilize?

The best thing we can do is NOT to save and think that we can do everything ourselves; a good investment in order to avoid big headaches in the future is hiring a service provider for paying employees and the corresponding taxes so that we can focus on what is most important: the business venture.

In the case of being in the United States, 2 services we recommend are PayChex and ADP. For other countries it is best to ask a friend who is a more experienced entrepreneur or an angel investor which is the provider they recommend instead of just doing a Google search.

Recommendations:

  1. Always verify that our employees have worker’s insurance and that it is currently valid.
  2. Let us not forget to ask a person for their permit to work in the country before hiring them.
  3. In order to get the best talent regardless of the geographical location of the engineer, designer, etc., the best is to work by hiring an independent outside contractor.

Conclusion

As we have stated throughout the length of this article, it is not necessary that we as founders know in detail or be experts in the paying and administrating of employees, but is our duty to now the basic principles and furthermore respect them as required by the law.

But even more importantly is utilizing the method of hiring contractors at the beginning, thus we can see how they work (quality) and later, only in the case that they show excellent performance, why not keep them on as full time employees? This is definitely the best path in order to shape and expand our start-up in the long run.


This is a guest post from Cristian Ángel Rennella. Computer Engineer Cristian Ángel Rennella, Co-founder of MejorTrato. Currently is professor at the Universidad Tecnológica Córdoba (Argentina) and angel investor with a focus on the development of mobile technology for Latin America.

2018-02-16T09:58:39-07:00 February 19th, 2015|Categories: Ongoing Management and Protection|Tags: , , |

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