The employee incentive program I set up backfired for the business

I know metrics are crucial to measuring and running a business. I got some books on entrepreneurship and business and found a set of common metrics startups and business used to measure their performance. I chose eight and added some more to capture a deeper understanding of particular aspects of my business. I then read about linking people’s performance to the metrics and using this to set targets for individual bonuses.

When I chose metrics, I didn’t pay any attention to their interrelationships. I quickly learned I had made a mistake by ignoring these. One of the key metrics was a 10% increase in new customers. Another was a 10% reduction in the investment in existing customers. I increased staff bonuses for each new customer they got. At the end of the first quarter we saw a 35% increase in new business but we lost 5% of our existing customers and only 15% of existing customers used our services more than once.

At the end of the next quarter the we saw another large increase in new consumers but a even bigger churn for existing customers and less than 10% using our services more than once. I brought this to the team and they saw no problems, they were following the metrics-based incentive program and happy with their bonuses.

How can I start a family on the salary the investors want me to take?

I didn’t take a salary for the first year of the business but now I needed money to live off of. My friends in the corporate world earn six figures. In my country, someone with my degree would earn $70-80K. I was told investors look at how much a CEO proposes to pay themselves. They don’t want the CEO using the business as a personal piggy bank.

I need to raise more money but don’t know what to put in the business plan for my salary. I finally settled on $40K; this was just enough for me to get by. The investors agreed to this and wanted to keep this until we raised more money. My heart sank; how was I supposed to survive on this? I want to marry my fiancé and start a family. I feel like I now have to choose between having a family and my startup.

Compensation for short-term and part-time workers

I hired an undergraduate software developer part-time to do some development work on our new platform. He was very good and inexpensive and had another year of studies before he graduated.

One day, he came to me and said he’d been offered other work by a major corporation for three times what we were paying him. We had just completed a seed round of funding and did not have a lot of cash to offer him more salary.

I didn’t know what to do. I thought about offering him options, but he likely wouldn’t stay long-term. I wondered if I should just go ahead and find someone new.

I alienated my team by paying a newcomer a much higher salary

I am the CEO and founder of a business with a startup team of four. We were working well together but we needed more help, especially with the financials. We had our first round of financing and we were trying to grow the business. Everyone did whatever was necessary to get things done and we had no conflicts, which was nice.

Someone recommended a person with an MBA from the local university who had spent some time in Europe. We met for lunch and got along quite well. He was eager to work for us. He wanted more money than everyone else was making, but he said this was the going rate for finance people. I really needed help, so I offered him the job.

When I went back and told the team about him and how excited I was, they were all upset that they did not have the opportunity to meet him before a decision was made. I told them it was my decision since it was my company. One teammate asked about the salary package and when I told them, they were incredibly upset; why did I value this new person more than them? They had sacrificed and worked hard and did not deserve this. I realized I’d made a huge mistake. I apologized, but the damage was done and the positive team culture and spirit never recovered.

I should have paid better attention to the formation documents and shareholder agreements

I thought startup documents were just necessary and standard paperwork. The four of us co-founders went to lawyer who helped us incorporate and gave us a Shareholder’s Agreement and Option Plan. I read all of it but didn’t really understand what it meant and didn’t think it was that important. We each got 25% of the company. These were Restricted Shares, which vested over time – 6.25% for each of us each year for 4 years.

After six months one of the cofounders decided to leave the company and move away. He wanted to take his share of the company, which he thought was 25%. He was told that he did not have any shares as the stock did not vest until after the first year. The situation turned nasty and interpersonal. He hired a lawyer who threatened to sue the company. They claimed that the shareholder agreement was not adequately explained to him and that it was the company’s responsibility to do so. The company did not have any money to meet legal cost and settled by giving him his first year’s shares, 6.25% of the company.

In year 2, at the first fundraising, the absent cofounder refused to agree to the terms. He was able to do this because decision-making called for unanimous approval by shareholders. So, even though the rest of us, who owned 93.75% of the company agreed to the terms, the deal was held up and our investor moved on because of this one guy.