Freelancers vs. Employees: What Is Best for Your Startup
In this article, you will learn about 1) what people requirements startups have, 2) a comparison of hiring freelancers and employees including the implications, and 3) an argument which option is the best fit for your startup.
You’re working to get your startup off the ground. You and your business partners have everything set up but you’re reaching that stage where it is time to grow. You can’t do it alone but you don’t yet have the budget to lure top minds away from the key players in your industry. The only way forward is to be smart with your money and make the most of your budget so you can get the right people without going broke.
The first question you’ll ask is what kind of workers you can hire. You need people to help you accomplish what you need without breaking the bank. To answer this question, you’ll need to decide between two types of workers: employees and freelancers.
Hiring either type of worker comes with advantages or disadvantages but the decision should always come down to the needs of your company.
Here is a quick guide for directing your HR team towards the right type of candidate.
STARTUP REQUIREMENTS FOR HUMAN RESOURCES
The startup phase of your business requires a lot of agility. You need to be flexible and quick when you’re making decisions and striving towards milestones. It is essential to be able to move from discovery to validation quickly and to be able to pivot back again just as quickly.
All of this needs to be reflected in the kind of people you hire. Thus, your HR practices should look like this:
Your HR practices must be flexible.
Flexibility in hiring and firing is key here. You need to be able to bring people on and let them go without jumping through a long series of flaming hoops. You need contracts that can onboard people without difficulty and that won’t result in long legal battles if you need to reevaluate and let them go.
You also need flexibility in staffing people on different tasks and projects. Depending on your business, you will need people on your team who are good at more than just one thing. You’re not yet at a stage where you can afford to hire specialists to do a single job. Thus, it’s better to look for generalist people. By looking for someone who can multi-task across multiple projects or roles, you save HR costs because you won’t have to hire several people.
Your flexibility also needs to extend to your key employees. To avoid huge staff shake ups, key employees need to be retained by all means. In HR terms, you need to be willing to give them what they need to keep them around. The things you need to keep employees around will vary by employee. You need to be flexible to be able to offer them what they need, not what you think they need.
People must be affordable in a total package.
When hiring people, always keep in mind that you have to look at total HR costs. It’s not only the salary, HR costs include social security, insurance, days off, IT and equipment and indirect costs such as communication costs as well.
As your liquidity is tight and you might not yet generate a sufficient cash-flow, your goal is to minimize HR costs. That means you have to find the employee that offers the best deal in terms of his total HR costs compared to the skill-set he brings to the company.
Basically, finding the complete package is the best way to keep your overhead low without eating into your productivity.
Work done by people must be effective.
Your HR practices need to look at more than just costs and overhead. It’s important to find people who have sufficient knowledge, the appropriate skills and an attitude that is in line with your startup’s vision.
COMPARISON OF FREELANCER VS. EMPLOYEE IN A STARTUP
Now that you have a better idea of how you need HR to operate, you can better assess what kind of workers you need. Here is a quick breakdown of how freelancers and employees stack up according to your startup’s HR requirements:
In terms of flexibility in hiring and firing, freelancers win. They are faster to hire and easier to fire. You don’t have to worry about the paperwork that comes along with an employee and most of the time, you don’t want to wait for a cooling off period if they’re coming from another position. Freelancers are also more flexible in terms of start dates and won’t take on jobs that they can’t start in the immediate future.
Freelancers are also easier to fire. However, that does not mean you can cut them loose without paying their bills. The best freelancers will have cancellation clauses in their contracts that protect them from clients who want to ditch them too quickly.
On the other hand, employees will be less flexible to hire, depending on country-specific regulations. You’ll need to go through HR due diligence, because they’re around for a longer period of time. Hence, you’ll generally perform background checks on them. Plus, you’ll need to make sure that they are available to be your employee. Then, there is the paperwork, the negotiations and all of the other things that go along with hiring an employee.
Employees are also difficult to dismiss. You need to have a valid reason to getting rid of them and even if you do, you might still pay a benefits package to them when they leave.
Flexibility also varies in staffing people on different tasks and projects. The freelancers you hire would primarily be specialists in their field and because they’re freelancers, you’ll only be able to assign them tasks that you hired them for.
Employees are more flexible on the job. Because they’re employees, you can move them from project to project and assign them tasks outside of their traditional roles without issue. This is useful both when you’re busy or when you’re slow because you can best use your employees’ time without needing to renegotiate their contracts. Essentially, their flexibility helps you justify their salary.
Freelancers are often located in a different geographical area than your startup which means you often face high communication costs. Early communication might be slow and bringing them into the office will usually be on your dime. On the other hand, they won’t require office space.
Freelancers are also more expensive per hour because they charge a flexibility premium and because they have some very unique specialist skills that are valuable on the market. Remember that they are also covering the expenses of a small business so they have overhead to take care of after they receive their salary. Basically, they’re paying IT, taxes and healthcare costs so you don’t have to.
Freelancers are more expensive in the long run but can be more affordable if you’re working on a fast-paced, short-term project. Although you’ll pay a premium, you stop paying once the project is over.
Employees are often more affordable in the long run because the employees build up a knowledge base and network connections within the company. Their flexibility is important here because you can use them in other ways when you’re facing some down time in the office. You can also train them to be leaders which increases their value to the company.
However, the separation costs may be high if an employee isn’t performing well. If you have to fire an employee that has been around for a longer time, you will give up on the skills that you trained him, which means you will basically lose your investment.
Freelancers and employees have a similar level of general knowledge. However, their working standards vary significantly.
In some industries or functions that are in high demand, such as data science or IT, you may only be able to hire freelancers. These freelancers will have honed their skills elsewhere and become experts in their field, which is why they demand higher fees. To succeed as a freelancer and command those fees, you need to be exceptional at what you do. This premise is valuable when your startup needs something done fast but still done well.
However, freelancers often work project based. This is essential for their profession and for their status as freelancers. If they work only with one client or take on too much work from a single client, their status as freelancers starts to become murky. The more time and responsibility they have with one client, the more likely they are to be mistaken for employee. This limits their personal mobility and makes their life difficult with tax agencies.
Employees are generally more effective over the long term. Because they have greater ties to your company, they are likely to invest more of themselves in your company. It makes sense for them to do so because your success and their success are directly related. Thus, an employee will go out of their way to learn more about the company’s structure, processes and goals. They are then more likely to perform in a way that is geared towards your company. Employees will have the company in mind when making decisions rather than having tunnel vision on what is best for the project and themselves.
You can watch a discussion of the implications of hiring a freelancer vs employee for your startup.
SHOULD STARTUPS WORK WITH FREELANCER OR FULL TIME EMPLOYEE?
The answer to this question depends on the startup phase, business function and the unique situation that your startup is in. Even if one sounds better than the other initially, you still need to explore both avenues depending on what your startup needs now, in the near future and in the long run.
Start making your decision based on the startup phase you’re currently in.
If you’re in the seed phase, you need a lot of flexibility with your staff. You need to be able to pivot at a moment’s notice. You also need to be able to downsize when necessary. Generally, it’s a better idea to have a higher number of freelancers on board alongside a small number of employees who are directing the ship.
If you are entering your growth phase, you’re a bit more settled and you don’t require so much flexibility. You also need people who are going to help you grow as a business rather than just completing tasks or projects. During this period, its better to have a high employee ratio. Keep freelancers around primarily to work on very specific tasks.
Now, think about your business functions and the role that you are hiring for.
Certain core functions require less flexibility and you need to have the team working within your vision. This is especially true for core functions where you need to be working together as a unit, rather than individually. Some of these core functions include: product development, technology development, sales, marketing and HR.
Support functions that are not critical for validating key assumptions early in your business are more flexible. They can be outsourced to a freelancer without undermining the goals and direction of the business. Accounting and payroll are two of the functions that can easily be sent out to freelancers. IT, basic design or programming and any roles that work on one specific function within the business are also suitable candidates for these roles.
The choice between a freelancer and an employee depends on your individual business. The best way to make this choice is to dial into what your needs are rather than what your budget allows. Instead of putting a price on your staff, think about who will help drive your company forward and work your way down from there. Consider the stage of your business and the requirements of the role and the mystery will be resolved quickly.
One of the interviews we did during our Europe-trip was an interview with both co-founders …