Employee vs. Contractor vs. Company

The most common inquiry we get from startups is “when do I use a company versus a contractor, versus an employee?”

Our research has concluded that getting this question right correlates with startup success, and getting it wrong often leads to startup failure.

So, what is the right answer?

      Employee:

– The only choice for core tasks. Core = the one thing you can/will be better at than anyone else.
– Most costly choice.
– Increase the risk of running out of money.
– Decreases the ability to pivot.

      Contactor:

– Lowest cost option if you have the leadership, management, and expertise to manage.
– Highest cost if you do not have the leadership, management, and expertise to manage.
– Increases the risk of doing the wrong thing really well.
– Increases the ability to pivot.

      Company:

  • The only choice if you do not have the following:
    * Management – processes, and expertise to execute these procedures.
    * Leadership – the ability to get people to follow processes.
    * Experience – the team has worked together for a long time.

One of the biggest mistakes startups make is underestimating the time and money it takes to develop a functional team that can execute complex tasks like product development, sales, accounting, etc.

They also misjudge what it will take to do things they can only do: raise money, develop core technologies/capabilities, etc.

Last but not least, they also miscalculate the likelihood they will pivot.

All this underestimating leads to a poor decision to hire a group of employees or string together a set of contractors. Without management, leadership, and experience, this team quickly becomes dysfunctional. Along comes a pivot, making a large part of the team obsolete, and they quickly run out of money and have to shut the doors.

Meanwhile, successful startups look to outsource non-core activities to companies that already have a functional team. This frees up their time to focus on core activities. These successful startups realize that they are not adding value by duplicating capabilities that are readily available in the market place. Instead, they focus on building a team that can create new and unique skills that define their differentiation.

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