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Should a Startup Offer Employee Benefits?


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In years past, companies of all shapes and sizes needed to offer a good employee benefits program, with which to attract the best candidates.  That was even true for early-stage startups, since that was one of the hooks to get someone to leave their big company jobs and rich benefits packages.

But, a lot of things have changed over the years, and my feeling today is early-stage startups should not worry about offering benefits.  If you can afford them, great, offer them.  But, honestly, how many startups can really afford them, on their tight startup budgets. To help me frame the topic, I am going to focus a lot of my discussion around healthcare benefits, since that is typically the most demanded, and most expensive of all employee benefits offered.

First of all, healthcare costs are rising so quickly (a whopping 15-20% per year, 5-6x the rate of inflation), that even many big companies are cutting way back on the amount of healthcare benefits they are offering their employees (e.g., lower percentages of costs covered, less benefits for non-employee family members, HMOs vs. PPOs).  Secondly, individual plans have never been easier to source, especially in the wake of the Affordable Healthcare Act (AHA), so employees don’t necessarily need a company-sponsored plan to get access to affordable healthcare.  And, thirdly, many employees are very “mobile” in their careers, jumping from company to company every couple years (and hence don’t want to have to re-apply for health coverage every time they move jobs, and prefer a more “portable” plan that moves with them from job to job).

I spoke with an insurance broker, to get a sense of how many startups were actually offering healthcare benefits.  Here is what I learned.  For companies with 2-15 employees, approximately 35% offer healthcare benefits (so 65% of those startups have decided not to offer it).  And, for companies with 16-50 employees, a materially higher 65% of such companies are offering healthcare benefits, as their budgets grow.  And, the AHA law, all companies with 51 or more employees will now be required to offer healthcare.  So, this helps validate my assumption:  early-stage startups should not feel like they have to offer benefits, but as revenues and profits scale over the startup’s development, more and more of them do, and will have to, after they get to the 51 person requirement point.

In addition, I wanted to know for the companies that did offer healthcare benefits, how much of the plan costs are the companies actually paying for.   The 2-15 employee companies are typically only covering around 50% of the plan costs of employees and 30% of the costs of any additional family members. And, for 16-50 employee companies, they are typically covering around 70% of plan costs of employees and 50% of the cost for any additional family members. So, once again, the level of benefits offered scale up with the company’s size, when they can better afford to offer such benefits.

So, if benefits are not the key draw for attracting early-stage startup employees, what are?  Let me count the ways!!  Firstly, hopefully the employee is getting equity in what could become a huge financial windfall, if the company is successful (albeit with high risk here).  Secondly, the employee has a lot more responsibility and fun working inside a nimble, early-stage startup, compared to working a “cog in the wheel”, routine job within a big company.  And, thirdly, there is nothing more personally rewarding than being part of a team that is building something from scratch and seeing it succeed.

So, rest assured, all you early-stage entrepreneurs.  If you are not offering benefits today, it is not a big deal these days, as you are in really good company among your peers.

 

This article was originally published on the Red Rocket VC blog, a consulting and financial advisory firm with expertise in serving the startup, digital and venture community.

 

Image credit: CC by 401(K) 2012

 

 

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About the author: George Deeb

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

  • Peter Barko

    It depends on how a startup wants to position itself. It’s possible to get by without offering healthcare benefits if “getting by” is your goal. If you’re a startup with 2-15 employees, do you want to view yourself as one of the top 35%, or bottom 65%? If you have 16-50 employees do you really want to emulate the bottom 35%?

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