Startups that seek funding and hope for a successful exit spend a lot of time focusing on growth and the areas that drive it, like business product development, customer adaptation, and marketing.
By Bob Cerone
But any investor seriously considering putting money into your business will also spend time evaluating some of the less visible but equally important areas of your business like the quality of your third-party agreements, IP protection, financial record keeping, and human resources (including compliance, payroll, and policy).
If you haven’t spent much energy on these areas, now is the time to start. As Shark Tank star and venture capitalist Robert Herjavec said, “We poke holes, look for gaps in processes, and really try to understand what is driving the decisions that are being made.”
Take care of these details, and you’ll impress investors during the due diligence phase. Here, I’ll highlight three ways you can improve the HR side of your business to make a positive impression on potential investors.
1. Make an employee handbook.
You might think no one ever reads an employee handbook, but as a home for all company policies and procedures, it’s an important document for your business.
Handbooks define and hold everyone accountable for what they’re expected to do. At a minimum, yours should include the company’s working hours, PTO policies, expectations for conduct, a harassment policy, a dress code, and benefits your company offers.
All business owners inevitably encounter performance or behavior issues, so investors want to see that you’ve put some thought into how you want your employees to behave and have an action plan for dealing with any situations that arise. Once you’ve got the handbook, make sure your employees sign off that they’ve read it. This can help protect you in the event of a lawsuit.
If you’re not sure how to get a handbook started, consider talking to an HR consultant or lawyer, who can help you write one.
2. Have clear and well-documented expectations for job performance.
A well-documented performance review system helps employees understand what they should be doing and shows investors that you’ve thought about how each position contributes to the company’s larger goals – and that you have a plan for what to do if an employee gets off track.
That’s important for two reasons: first, underperforming employees cost money. They hurt you in the short term (for obvious reasons) and can cost up to 200 percent of their salary if you have to replace them.
Second, a performance review system provides you a clear path for letting someone go if they don’t meet expectations. Even in right-to-work states, where an employee can be fired for any reason, improper termination lawsuits happen.
In those cases, documented evidence of why the employee was let go will make the firing process safer for your business by reducing the likelihood that your company will be found liable of any wrongdoing. Investors will appreciate your efforts to proactively reduce risk exposure.
3. Classify (and pay) workers appropriately.
Startups often try to save on taxes and benefits by classifying employees as contractors. But if a worker is expected to be in the office every day and you consider the employment relationship to be ongoing (i.e., not temporary with a known end date), there’s a good chance that they are legally an employee, not a contractor.
Classifying employees correctly can cost a little more upfront. When you convert someone from a 1099 to a W2 employee, you’ll have to pay federal and state unemployment taxes as outlined by FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act). You’ll need to buy workers’ compensation insurance and withhold money for Social Security and Medicare.
But it also helps you avoid improper classification penalties and makes your business look more legitimate to investors. They see a payroll of full-time employees whose workloads are overseen by the business owner as a signal that you’re serious about growing your business and managing risk, which makes your business a more attractive potential investment.
Details Matter During Due Diligence
By establishing clear HR operations, policies, and procedures, startups can make the due diligence part of the fundraising process much easier for themselves and their investors, and ultimately make themselves more attractive to potential investors.
If you don’t have time or money to dedicate to HR, develop a plan for how you’re going to build out these three areas of your business. One option: outsource it all to an HR consultant or PEO. That gives you access to deep expertise and experience so you can rest easy knowing your business is in compliance and protected from many major risks.
Bob Cerone is the president and CEO of Cognos HR, a Chicago-based PEO and HR consulting firm that specializes in serving small and midsize businesses. He is an active mentor for leaders of early-stage companies and the Midwest Leadership Chair for the National Association of Professional Employer Organizations (NAPEO).