When it comes to hiring for your startup, adding to the team can be an exciting yet unnerving process. Perhaps you’ve lost some sleep wondering: “Will I run into cash flow problems?” “Am I prepared to manage a team?” “How can I find someone competent and qualified?” and (most important for today’s discussion)…

“Is my startup ready to hire?”

Whether you’re looking to bring on your first full-time employee (FTE) or just adding to your growing team, here’s Matthew May with a few key tips to keep in mind as you hire:

In the fast-paced world of startups, a CEO is often the number one recruiter for the company and handles the majority of hiring (and firing) decisions. The process is much like entrepreneurship itself: “Taking on a new expense, like hiring an employee, is simply an investment on which you expect a return. People who are successful return 10 to 20 times over on their investment,” says Craig Jennings of Powhatan Consulting.

Many startups initially rely on contractors and part time employees to get their business up and running. But as you’re looking to hire those first few full-time employees, take a look at your revenue and make sure there’s an actual demand in your business. Like the majority of business decisions, determining when to hire should be a data-driven endeavor.

Here’s the formula we use to determine what additional salary a startup can afford:

[(New MRR) * (gross margin)] / (100% + benefits load)

MRR is a common metric for startups to use when determining when it’s time to hire, but it’s important to keep your margin in mind. For example, say you’re a software company with $10K in new MRR, running at about a 70% margin, and you offer benefits of about 25% (don’t underestimate the hidden benefit costs, by the way) – that would mean you’re ready to bring on on a new employee with an annual salary of $67,200 that could really help you scale.

Here’s the breakdown of the math for this example:

[(New MRR) * (gross margin)] / (100% + benefits load)
[$10,000 * (70%)] / (100% + 25%)
$5,600 /month

= $67,200/year

As you grow your team, don’t make the mistake we see so often in the startup community – forgetting to hire on the manager/director/VP level. When you stuff your team with entry-level employees and forgo true management, you’re creating a recipe for an unstable, unproductive environment. You’re likely not an expert at all aspects of business, and without these higher level leaders, you’re at the whim of your entry level, core, tactical support in any given function.

If you didn’t catch our recent webinar with Zenefits be sure to check it out for more tips on building your dream startup team. And, as always, be sure to #AskAcuity your burning entrepreneurial and financial accounting questions on Twitter or reach out to us directly. We’d love to help you reach your business goals.