HR for Startups: A Guide to Setting Up the HR Function

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HR for Startups: A Guide to Setting Up the HR Function

Large companies typically have multiple HR professionals to manage their HR function. But startups are different. Typically, they work with a tight budget, are laser-focused on growing their bottom line, and don’t want to get tied down with superfluous bureaucratic work and policies. But startups and small businesses need HR strategies to succeed in scaling. Let’s explore why and what HR for startups looks like in practice!

Does a startup need HR?
What does HR do in a startup?
How do you build an HR department in a startup?

Does a startup need HR?

The short answer is yes; startups do need HR. Founders in startups often wear multiple hats at once. They take on several jobs and tasks, including Human Resources, despite having no proper HR training. Long hours and stress are common as they race to get their business up and running and into the green while hiring and onboarding, employee happiness, and company culture wind up at the bottom of the priority list.

The problem is that this leads to great disharmony within the team, which is a significant contributor to the failure of startups. 23% of businesses fail because they don’t have the right team. This is why a dedicated operations or HR person is a must from early on. Dedicating resources to developing HR practices sets your startup for long-term success in attracting and retaining top talent. That will ultimately lead to business growth.

In addition, startup accelerators prefer teams with a history of working effectively together because this indicates stability. Investors will always look at employee retention rates to gauge the leadership team’s effectiveness.

A startup may be able to hack its way to business growth, but it cannot hack its way when it comes to managing people.

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HR for Startups
We have a closer look at how to start the HR function in a startup below.

What does HR do in a startup?

HR matters in startups are often handled by one or more employees for who it is not the main responsibility. When startups do hire a dedicated HR employee, they typically start out as an HR department of one. What exactly do they do?

Set up the basics of HR policies and processes

HR functions in a startup include outlining foundational policies and procedures to provide employees with clear guidance and structure for the work environment. These policies and processes give employees a point of reference for standard business conduct.

Policies may include pay and employee benefits, paid and unpaid leave, tardiness, discipline, internet and data, code of conduct, performance management, learning and development, and more. We discuss policies in more detail below.

Organize employee records

An HR department ensures that important records and documentation are kept in order, including business paperwork, resumes, performance evaluations, leave, accidents, sensitive information, and more. 

Grow the team

With HR in startups, it’s typical for founders to hire from within their network. That often results in informal hiring practices and little to no strategy for onboarding. The more a business grows and takes on more team members, the more unprofessional this looks and the more chaotic it becomes.

HR plays a crucial role in recruiting and onboarding new employees (often with hiring managers) and infuses structure to the entire talent journey.

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Ensure compliance with laws and regulations

Documenting policies and processes and ensuring your startup remains compliant with local, state, and federal laws is a must to avoid a potential lawsuit. This is particularly important once the company grows to 50+ employees. 

Improve employee wellbeing 

HR also plays a significant role in looking after employees and improving their wellbeing, whether it’s mental, physical, or financial.

They’ll ensure new hires are given proper employment contracts, welcomed into their team, trained and given the development they need, have a point of contact to go to with any people-based concerns and provide them with access to equal pay and a safe workplace.

Help build an inclusive work environment

A McKinsey survey found that 39% of participants decided not to take a job because they believed the organization was not inclusive enough. This suggests that many people desire to work somewhere where they and their coworkers fit in and feel welcome.

HR helps nurture an inclusive work environment which leads to happier employees, more innovation, and a stronger desire to remain with the company, all of which improve the bottom line. Create this environment early at the startup stage, and it’s much easier to maintain as the company grows. 

Prepare the company for growth

Finally, HR helps startups prepare for growth. They create hiring plans, conduct research, develop organizational culture, and create scalable processes (such as hiring and onboarding). What’s more, the HR team grows too as the company expands.

How do you build an HR department in a startup?

Now that you understand HR’s role in a startup, here’s how to build an HR department in any small business from scratch.

1. Determine the company goals, priorities, and concerns

The first step in starting an HR department is taking time to listen to startup founders, leadership team, and employees to understand the business. That enables you to get familiar with the product or service on offer, the target audience, the industry, and the overall strategy. 

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What is the current state of HR in the startup? What are the biggest areas of concern or roadblocks in operations? What systems and tools exist? Are they scalable, or do they need to be replaced? What needs to be developed to meet the vision and future goals of the company? What policies are in place, and do they uphold the bare minimum work standards? You can determine the priorities from here, which will give you a clear area to begin building your HR department.

If there are compliance concerns, it might be worth conducting a compliance audit. This involves reviewing the local and national compliance guidelines (as well as industry-specific ones) for all policies, comparing current practices, identifying areas for change, implementing legally compliant and fair employment practices, and continuing to reevaluate these.

Many employees and leaders will have little knowledge of what an HR department does or the laws regarding employees and businesses. Take time to educate everyone on HR’s function and what to expect from an HR department.

If you’re looking for a way to make an impact as an HR practitioner in a startup, AIHR’s online interactive HR Generalist Certificate Program provides you with the knowledge, tools, and templates you need to succeed.

2. Focus on the HR fundamentals first

When forming an HR function in a startup, you should focus on the have-to-haves first. This includes policies and documentation on the following:

  • Recruitment documents
  • Employee contracts
  • Hours of work & overtime
  • Employee leave policy
  • Code of conduct
  • Anti-harassment and non-discrimination policy
  • Payroll procedure
  • Employee performance records
  • Completion of training records
  • Disciplinary procedure
  • Termination records
  • Disclosure of business interests
  • Health and workplace safety policy
  • Social media policy
  • Drugs and alcohol policy

You don’t need to create all these policies from scratch. You can find many templates online, which you can use and edit as required for a startup. Certain policies can be grouped together under one policy. Some of these documents may already exist in an informal or disorganized manner.

Work with what you have and build your HR fundamentals from here. Once you’ve developed a policy, ensure that every employee is aware of it and can easily access it. 

Every employee should have a personnel file with related information and document. You can speak to managers to collect the information needed to create these files and work with IT to ensure the private electronic records are stored securely.

3. Establish a recruitment and onboarding process

The hiring process is a major part of HR in startups. As you grow, it’s essential to have a seamless recruitment and onboarding process that meets the needs of the recruiters and candidates. This enables you to hire the right people for your company.

Begin by determining what you want the recruitment process to look like from the initial application to the employee’s first day in the startup through to their first year. This includes:

  • the stages involved,
  • which assessments you’ll use,
  • how you’ll structure interviews,
  • what templates and documents need to be sent and received,
  • which members of staff will be involved and making decisions,
  • what happens when a new employee joins,
  • how to make sure they have everything they need to thrive in their role how to get them excited about the brand,
  • and so on.  

Many startup companies fail to provide new employees with clear, formal working agreements, but this is the law and a key step in ensuring your employees are happy at work and have peace of mind. Plus, this helps protect the intellectual property of the business. 

4. Streamline the payroll

First, understand the legal and policy requirements that will influence your payroll process, conduct a cost-benefit analysis, and then decide whether to insource, co-source, or outsource it entirely. Many startups outsource payroll.

HR needs to assess what is currently in place for compensation and benefits. This includes an annual salary or hourly wages, retirement savings, paid leave, and benefits like health insurance. It’s important to ensure these structures are formalized and communicated to employees. The next step is to advance the compensation and benefits offering to include bonuses, profit-sharing, and stock options.

You may also want to create a rewards package that includes non-monetary incentives such as flexible work arrangements, volunteer time off, and recognition programs. Only start to offer perks like a snooker table in the break room or wellness support once you’ve got the fundamentals in place.  

5. Start building your HR tech stack

Most startups are bootstrapping with a limited budget, so starting with free and low-cost tools is the best approach. Startups with a handful of people commonly track everything with spreadsheets. However, as the team grows, this quickly becomes unmanageable.

There are plenty of tools and software out there that will save you time, help you stay organized and compliant, and don’t cost much. Take time to research your options and choose the best ones for the business – this will pay off in the future.

Assess the current tools you have in place and whether they’re useful and necessary or need replacing. Determine the exact budget there is to play with, and then start assigning it based on your list of priorities. Ensure all the software and tools you choose integrate with each other and don’t create extra work.

Some core systems you will need to eventually have in place include:

  • Payroll (if you’re doing this in-house)
  • Workforce management system
  • HRIS
  • Applicant tracking system
  • Learning and development system
  • Performance management system

6. Be employee-centric

The danger when in startup mode is to focus all the attention on the product and the potential customers. Although this is essential, paying attention to the employees who build your product and are helping to achieve your vision is just as important. 

HR for startups is all about learning your employee’s needs and desires and figuring out how to shape your policies and the company’s future to ensure these are met while maintaining the overall strategy and goals of the business. 

To do this, schedule one-to-one and group meetings with employees, managers, and leaders (in separate groups), and create a safe space for open discussion. You can also send out anonymous surveys but in companies with few employees, they might have privacy concerns. That’s why it’s important to communicate confidentiality.

Show employees that their voice matters. Listen to them, get to know them better, and ask follow-up questions. Find out what motivates them – this is different for everyone. Be professional and engaged. This helps to establish your position as an expert in HR.

Begin by promptly addressing pressing concerns and updating employees on the steps taken to do this. Failure to do so will lead to a lack of trust amongst the ranks. Next, create a learning and development plan so that employees can gain new skills and progress in their careers within the company. Each employee should have their own personal development plan. 

The most successful startups build employee-centric cultures and make growth and development an integral part of their company culture. Top talent expects to be mentored and developed in their roles, which is key to attracting and retaining the best employees. Plus, your employees are the people driving your business forward, so it makes sense to help them perform at their highest level. 

7. Build your HR function with DEIB in mind

Working on HR for startups, it’s essential to have diversity, equity, inclusion and belonging (DEIB) in mind when creating policies and processes and during the hiring journey. This helps build diversity in the startup from the beginning and sets a precedent for an environment where all employees feel welcome, supported, safe, and respected regardless of gender, religion, ethnicity, or sexual orientation. This leads to happier and better-performing employees. As you scale your startup, this will make it easier to attract diverse candidates.

A good place to start is conducting an employee survey on diversity and inclusion and act on the findings. Review current policies and update them accordingly. Make inclusion a part of your onboarding journey. Set up KPIs to measure progress.

A survey by Harvard Business Review found that 75% of those surveyed don’t feel the effect of diversity policies unless leadership is committed to creating change. This is why a non-discrimination policy is not enough; inclusion must be promoted as a core company value and integral to its mission. Managers must listen to their employees, practice empathy, and advocate for them. 

To sum up

Establishing an HR function sooner rather than later helps startups grow their teams and create a welcoming, inclusive work environment while staying compliant. This is key for startups that hope to scale successfully and build a cohesive team that wants to grow with the company. 

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