When to Make Your First Hire

Experts agree: Take your time before making that all-important first hire for your small business. Here's what you should consider

It is probably the most crucial early decision that a new business owner makes: When to hire the first employee. The entrepreneur who delays too long risks losing momentum as mundane tasks steal time from marketing and selling. But hiring too soon tacks a fixed expense onto the startup balance sheet and loads a mountain of red tape onto an entrepreneur ill-equipped to handle it.

Adrienne Becker, founder and chief executive officer of IDEASTOX, a Los Angeles startup consultancy, urges caution: "I can tell you from my experience in starting and running startups that the more you can delay a first hire, the more productive that milestone will be."

Delay as Long as You Can

Most experts agree that waiting is the smart strategy. "I caution my clients to think long and hard before adding their first employee," says Carol R. Losee, president of Workplace Dimensions, a human resource consulting firm based in Richmond, Va. "The longer you can wait to hire somebody, the better off you will be," says John Uprichard, president of FGP International a human resources and temporary placement organization based in Greenville, S.C.

Why wait? Obviously, taking on the fixed costs and administrative management for an employee eats up cash and time—two things most startups have in short supply. But there are other reasons to hold off, including the fact that supervising an employee divides an entrepreneur's focus when it should be concentrated on building business, Uprichard says.

Hiring an employee not only profoundly changes the dynamic of your company, but an early, hasty hire runs the risk of being a bad one. "How many entrepreneurs have a background in hiring? Even if they have gone to business school, they didn't take a class in hiring," Uprichard notes. Entrepreneurs in a hurry to get someone on board sometimes neglect crucial tasks such as background and reference checks, much to their eventual chagrin. "I find that a lot of times, the entrepreneurial person hires somebody they know—a friend of a friend—without doing due diligence. It can be tough if you hire somebody from your social circle and then you have problems with them or you have to fire them," Uprichard says.

Another reason to hold off is simple clarity, Becker says. "The clearer your picture of your business, the greater the likelihood your first employee won't be your last," she says. Seeing how your concept evolves into a business and how your business model performs day-to-day allows you to determine exactly what you'll need in a first employee and what tasks that person will take over. "The more you have considered how you want to execute your company, the easier it will be to manage employee No. 1 and steer them toward accomplishment," she says.

Can You Afford It?

Do a careful evaluation of your cash flow after your business takes off, then have your accountant do a realistic projection of revenue for the next several years. The numbers that result will tell you when your company can support an employee's salary. But of course, a salary is not the only thing you'll need to provide a full-time employee, Losee says.

"You may have to—or want to—consider any number of these things when making a hire: Benefits, workers comp insurance, I-9 employment eligibility verification of immigration status, and payroll tax reporting obligations on the federal, state, and local level," she notes.

Consider Alternatives

Because of all the extras that accompany a full-time employee, startups should explore alternatives once the business is too much for one person to manage, Losee says. You can start with outsourcing tasks such as marketing, bookkeeping, publicity, customer service, and even administrative duties. Talk to your accountant about the tax rules that govern independent contractors so you avoid trouble with the IRS.

Another possibility is hiring an intern from a local college. "A lot of students in various fields need practical experience before they graduate," Losee says. Or you can hire a temporary employee, something that's ideal if your business revenues fluctuate seasonally. Many temp agencies allow for a temp-to-perm contract, so your company has several months to evaluate whether this person is the right fit before bringing him or her on permanently.

Try to hire on a part-time basis at first, Uprichard says. Someone working a few days a week can remove substantial burden from your shoulders, but won't eat up a full-time salary or expect benefits, he says.

Room to Grow

Once you know that your company can support a full-time employee, make sure you bring on a person who performs at the same high level your customers have come to expect from you, Uprichard advises. You also want someone smart enough to brainstorm with you about the company and bring added value beyond just doing his or her job, says Jim Geiger, CEO of Cbeyond, a high-speed Internet provider based in Atlanta.

"I love collaboration. When I hired my first employee, I knew I wanted to work with smart people that I liked for a company that I'm proud of. It's important to have shared commitment and values with your first employee, since a small business is a family-like situation," Geiger says. "The more mutual respect you have around that conference table, the better."

He says he keeps a rule of thumb in mind: "Hiring people is like buying shoes for kids—make sure they're two sizes too big for the job."

More elements of this special report are available in the related items box on the upper right side of this page.

Before it's here, it's on the Bloomberg Terminal.