COMMENTS
This should be standard protocol for startups -- I hope a lot of people read and implement it.
As someone that has to do a lot of hiring (especially recently), I like this idea a lot. Another benefit is that you get someone else in the company to feel "responsible" for the hire, not just the hiring manager. Often times, too much blame is put on the hiring manager for a bad hire. It needs to be the responsibility of the whole team/company.
More than anything this says about your company
"we dont know how to interview and hire" and we dont want to be responsible for hiring the right person.
Lots of misgivings. I'd blog, but it's off-topic for me. So here goes.
First and simplest:
The words "fair market value" in this scenario implies that you are paying your contractor ~30-35% more gross to account for FICA and health insurance (someone working full-time hours for you, but without benefits, is almost certainly paying ~600-900/mo in COBRA to cover a low-deductable insurance plan). So how do you gracefully handle the transition from contractor comp to FTE comp? My guess is, you don't, and you're simply (if inadvertantly) screwing someone for 3 months.
Second: you are clearly not a lawyer, and you should be aware that you don't necessarilly get to "declare" someone a contractor just because it suits you. In particular, for the purposes of FICA & payroll taxes, if you control the hours, location, and processes used by an employee, they may be an employee whether you say so or not.
On a similar note: startups work nights and weekends. Contractors get paid for nights and weekends. Paid extra, in fact.
Third: I don't know about your startups, but mine have IP and competition issues, and without declaring myself a Friend of the Noncompete Clause, how do you allow someone to do critically important work for you for 3 months without an employment contract?
Oh, you're going to GIVE them an employment contract? With an IP clause, a noncompete, and a nonsolicit? But you're not going to give them health insurance? Or start their vesting?
How do I feel about this process morally? Obviously, I think it's a cop-out. In the "employment-at-will" US market, you already had the ability to fire an employee that didn't work out. What you're describing is a short-cut that allows you to exercise this option without any of the troublesome "overhead" (like getting someone in and out of COBRA, or honoring the terms of your employment contract) of actually hiring someone.
The decision to hire someone has consequences. I've been involved in bad hiring decisions too, and I agree that they are extremely toxic, and I agree that they are cumbersome to escape. But I don't think making a practice of drastically complicating your new-hire process and potentially stiffing every new hire is a great solution to the problem.
Thomas,
Some very cogent arguments. Can't speak to the tax and legal issues, but will say that in my experience there is a degree of "self-selection" that happens. This particular recruitment model does not appeal to all people. However, there are people that are just fine with it (just like there are people willing to go through a barrage of interviews and other things).
In any case, you make some good points. Obviously, this model is not for everyone.
I can't get this out of my head. Some more reasons this is a bad idea:
Problem N: forget about relocating anybody. Oh, people you're going to relocate can work remote for 3 months. Great idea! You've put them at a disadvantage over anybody local. Oh, you'll account for that somehow? Wonderful. You used to have a recruitment/hiring quality problem. Now you have two problems.
Problem N+1: In every team I've ever worked with, there have always been fast-tracked recruits --- good companies will go out of their way to pick up a specific person they really want for the team. Reconcile this with your "probationary default deny" for "normal" employees. Do so without create a caste system in your embryonic company. Now you have three problems.
In the end, this is the best way. You need to determine if a person will be valuable to you. How can you come to that decision?
If you could create any imaginable test, what would that look like? A test is something that determines if you have succeded so the only way to actually test the persons capacity to succeed in the real environment.
Why would you trust third parties (schools, grades, recommendations) that know nothing of your requirements and conditions.
One thing that I can't get my head around is what motivates someone to work in a startup? If they just want a regular pay check and somewhere to show up every morning, why take the risk? The only thing I can think of that would motivate them is if they truly believe in the idea, so much that they would do it themselves if we didn't exist.
My company isn't even a startup and does that. Particularly for low-level positions, they will hire 2 or 3 people before they find one that 'fits'. Usually bad new hires will disappear within the first week- it's rare to find a bad one that makes it past the first month.
The company will generally only do a half-hour interview to find out if you are, indeed, alive, and then will 'hire' you and let the probationary period flesh out the rest.
I think they've determined over time that interviews are essentially useless and that it's better to figure out how someone actually performs rather than ask them what their biggest shortcomings are or whatnot.
It sounds like some of the advocates for this strategy are in larger companies, where you are hiring people in 3's, 5's and 10's.
It's a bad idea there too, but I'd like to hear someone with an actual startup (where a new hire changes the composition of their team by 10-20%) stick up for the process.
For what it's worth, there's obviously nothing wrong with simply bringing people on as contractors, if you're up-front about it and compete for contractor talent fairly. It's a pretty common experience for contractors to get FTE offers. The reason I don't think this is used as an audition is that many (most?) of those FTE offers are declined, and if your goal is to actually staff up, your "contract audition" leaves you treading water, and outsourcing critical business functions (good luck contracting a product manager).
Also: have fun running a "probationary" period for someone in a high-touch customer-facing role. Your customers will just love you for it.
I promise to shut up now.
Probationary period is actually built in most employment contracts anyway, in most cases they are for three months. The employer has to clearly define how does the employer will "pass" probation though. And if the employer, after three months, can't determine whether I as an employee has passed or not, I probably wouldn't want to work there anyway!
"What you're describing is a short-cut that allows you to exercise this option without any of the troublesome "overhead" (like getting someone in and out of COBRA, or honoring the terms of your employment contract) of actually hiring someone."
Having been a contractor for awhile now, all I can say is that most companies are schizophrenic when it comes to hiring full time "permanent" people. Managers need to realize that it is no easier on anyone but them: When someone is fired from whatever mechanism you set up to employ them, they are still going to suffer economically and miss out on other, potentially better, opportunities because of this self-centered, egotistical hogwash. Learn to do better interviews, idiots!
What startups really want is people who will work long hours for little money based on some (usually bullshit) promise of making it big if the company takes off. In biz parlance, this is known as having "some skin in the game." It is also known as "not having a life" and "being somebody's dupe."
Great ideas, Dharmesh!
On the legal front... A contractor can work full time with a set schedule and STILL BE A CONTRACTOR if it's a fixed term contract. I don't think there are any legal issues unless you did it on a permanent basis.
I think the SPIRIT of the idea is dead on. I think the implementation of it needs some work. If you implement it that way, you are going to turn some people off.
I'd suggest doing it the "old fashioned way", but keep your 3 month probationary period and your "default is NOT keeping them on" provision. That is, hire them as an employee (thus dodging the legal issues, insurance issues, relocation issues, etc) with a firm undestanding that it is a trial period.
Dharmesh, could you clarify what advantage you have by contracting versus hiring? The only one I can think of is reduced legal liability for termination and less hiring paperwork... The disadvantages of this idea seem to outweigh these.
But, again-- spot on. Being good at recruiting means you are batting .500 or so, at best.
Some excellent comments (both negative and positive) and likely sufficient material for a follow-up article.
A few quick points (given how much discussion this has stirred up):
1. At the risk of sounding trite, I will say that startups are not for everyone. Some people crave the thrill, excitement and adventure of a startup -- some don't. It's not always about the money.
2. The reason for not hiring (even though you have right to fire anyways) is that part of the objective is to send a "signal". The difference between: "We have the right to let you go in the first 2 months" vs. "We hope to bring you on the board the team after 2 months" is often very large. Part of the value is sending the right message both to the new candidate and the existing team.
3. I am not suggesting that this is a perfect strategy (or even the best one). There are definitely challenges, many of which Thomas has pointed out. But, I stand behind the fact that it *can* work and is often better than other methods.
4. Much has been written about improving interviewing skills and increasing the "hit rate" on new hires. However, this continues to be a challenge (at least for me).
In any case, my two cents. Thanks to all for the great discussion so far.
People who say "just screen your recruits better!" have lost the game before they even started. It's like listening to managers who wonder why software has bugs in it. "Just write your code better!" It doesn't work that way.
I've worked at places that have a variety of recruitment standards, some lax and some very strict. Even the strict ones let some losers in now and then.
If you think you're got a recruitment process that never ever lets in a loser, you're not admitting your mistakes. But don't feel bad -- failure to recognize (and live up to) your mistakes is a classic business blunder. Hey, you're just like GM now!
Firing people isn't easy. I think it's the absolute worst part of being a manager. I can see why people would avoid it, and I've avoided it myself in the past.
Now, the part of this article's advice that I'd have the toughest time following is paying the contractor a "market rate." Most start-ups don't have piles of cash around, especially those that are in the "nights and weekends" mode. Equity is the coin they use to recruit talent.
How do you offer equity to someone that you can let go of after 3 months? If the shares/options are entirely revokable, then the candidate will realize that as well. If not, then you're going to have a hostile shareholder in your midst at a time when you can't afford that distraction.
Isn't hiring obsolete?
By virtue of the 3 month contract - you're hiring a contractor plain and simple - if the contractor is good you move them over to FT.
BUT Are you willing to pay higher contractor wages? Are you willing to compensate for every hour the person spends on the job? No? then you're ripping your employees off! Good luck.
I disagree on the try before you buy idea, but I agree with the concept that you should have a better idea about the candidate before you hire them full time.
I've heard that Google will have spent 80 man hours interviewing someone before hiring them. That's probably a lot to do with the size of the Google, but you need to spend a lot of time with someone to find out if they fit the culture and work ethic of your business.
One mechanism that a lot of companies don't seem to use to their beneift is the probationary period. Companies hire you for a three month probationary period (usually on a contract rate) and at the end of that time offer you a full time position. From my experience of that scenario, you have to do something really bad to not be offered that permanent role - because companies are disinclined to go back out into the marketplace to start the hiring process all over again.
Instead there should be a strict process of performance reviews during the three month probationary period. This should be Coupled with a 360 feedback review at the conclusion of the probation to find out what the candidate's managers, peers and subordinates think of his efforts. Candidates should be notified up front about this process, and told that unless they receive a certain grade their contract will not be renewed and they will not be offered a permanent role.
There is nothing practical about the hiring scheme you propose. It is absurdly biased in favor of the company, and it dramatically increases the risk for startup employees to a point that borders on being outright unethical.
To reiterate my comments on the reddit post:
Furthermore, most California employees are hired ``at-will'' which means they can be terminated at any time for no cause. It cuts both ways though because it means a California employee can quit at any time, and is not obligated to give the customary two weeks notice.
That said, the at-will nature of California employment does not mean fired employees can't sue for wrongful termination. When faced with a wrongful termination suit, many companies will settle out of court because it may still prove cheaper than a costly litigation, even if they could win the case!
The proposed hiring methodology allows a company to conveniently skip the troublesome step of firing an employee, and thereby avoid the risk of a wrongful termination suit. To be sure, this is a good thing in the case of a bad employee filing a bogus wrongful termination suit. But it's a disaster for a good employee that gets pushed out for bad reasons. The sad thing is that the latter case can and does happen in startups. It's shocking how seemingly nice people can turn into greedy bastards when large sums of money are at stake.
Ok, so I accept a trial period because, buddy, I know I AM that damn good that someone ought to see that and speak up for me by the end of the period.
Now lets say that I notice a big problem with something the company is doing, but which is popular with the other employees.
For the sake of the argument, assume that I'm correct about this problem, and that it is a serious enough problem to kill the company if it isn't addressed.
So tell me, do I speak up and save the company, but ensure that I won't be around to see it because everyone hates me and refuses to be my advocate?
Or do I keep my mouth shut and my head down, integrate myself with the people I have to impress, while looking for another job so I can bail out as soon as I can?
You've just trained me to ignore problems if addressing them would make me unpopular. You've trained your super stars that fitting in is more important than doing whatever it is they do that made you want to hire them in the first place.
Congratulations
Wow! Had not realized this was going to be that controversial of a topic, but so be it.
Rather than sprinkle my thoughts here in the comments (which has turned out to be a discussion even more worth reading than the original article), I'll plan to do a follow-up article that captures some of the most salient arguments.
It should be interesting, stay tuned...
This idea is a small start but I think that companies can and should do more.
I'm always amazed that most companies make it very difficult or even impossible for employees to work for them. Why not figure out ways to make it easy for employees to work at your company?
Can you reduce the number and sophistication of the technologies that you use without impacting the product? Can you have clear expectations about what position you are hiring for? Can you have a clear idea about what that position contributes to the company? Can you have a clear idea about the "what", the "how" and the "when" of that position over the next year? Can you narrow the position to make it easier to fill?
It's unfortunate that so many companies (large and small) hire people without any idea about what the position really is.
Heh-- the best articles always stir the pot, Dharmesh. Good stuff!
I think the "signal" can be sent (quite clearly) without going through the confusing and potentially off-putting problem contracting stuff.
If you say, before they come on, something like "Please understand that our goal is to create an exceptional team. After three months, the default option is to terminate our relationship unless the consensus is that you are exceptional. This means that we sometimes let people go who are merely good." I guess my point is that good communication shouldn't require signals.
As you say, startups are not for everyone. But in our current environment there sure are lots of them, which means that you are competing with other startups for the best talent. The best talent loves the idea of startups and loves the idea of having "skin in the game". But they decidedly are not interested in doing their own quarterly taxes, trying to dig up some sort of short term health insurance solution for them and their family. They probably aren't real interested in generating invoices for you and doing recordkeeping associated with that.
I'm not sure if this is merely a UK thing, but the idea that some initial part of your employment is a probation period is taken for granted here. Some employers make more of an issue out of this than others but I cannot think of a single job I've worked in that didn't do this at all.
If this isn't the case in the US then this may be why this whole thing of casting about for fancy ways to say "probation period" sounds contrived to me. Here, the employer would just say it and the employee would just hear it, and it would be a normal day at work.
As I say, though, by putting the employment decision in the hands of the employee's peers, you've immediately made employment a 'beauty contest'. You've engineered a situation where it would be difficult for someone to make a choice that would prove unpopular with their peers, which is a problem if that unpopular decision is the best one for the business.
One more thing - Startups require total comittment from everyone involved, that goes without saying. A prospective new hire confronted by this scheme could well ask "Why would I offer you total comittment from day one if you're unwilling to show me the same?"
It's also a Dutch thing, one or two month trail period with both sides having the ability to cancel at any time.
However, this is mostly a construct for employers. The result is that at a certain point of quality, people don't accept such terms in their contract. Because in all fairnes, no high payed person will leave a secure job to risk being send to social security a week later, because someone didn't like the color of your socks, or the owner's dog didn't like you, or whatever.
The probation period is standard here in Egypt also, ranging between 3 to 6 months.
I guess the message Dharmesh was trying to send out, is the making the hiring decision a responsiblity for everyone in the team to share. From mere peers, leaders and manager.
This has the effect of having many view points (with different weights of course) on should the hire continue or disconnected.
A team leader might judge based on the obedience, manager based on taks over clearly thus far. Peers might judge based on how they like him.
Finally, the hiring manager can take the decision after formulating these view points with good weights.
Here in Sweden 6 months propation period is standard. I agree with. Your system sound fantastic, but for one reason. You need the best people. The best people are not on the market, they got contacts and skill to get them anywhere. How are you going to get the best people to want to work for you with this system?
Some of the younger ones might, but then again, they might want to have a safe career at a bigger corporation instead. The older ones are going to have kids and mortgages and will not be especially inclined to accept such an unsafe position.
You'll get enthusiastic people, not good people with this system.
