Jun 28, 2013

Are start-ups getting carried away with crazy perks? Maybe not, responds one VC, who offers a nuts and bolts rationale for this obsession with morale.

The internet is full of tales of startups going to extreme lengths to get company culture right and keep morale high. From paying employees to vacation to moving the company to Morocco, we’re not talking about simple office foosball tables here. Have you ever stopped and wondered why?

Working from sunny locales and eating fab food on the company’s dime certainly makes for happier workers (and in the latter case longer hours at the office), but start-ups are bound by the same fundamental rules of economics as larger firms (eventually anyway) and it’s hard to understand sometimes how the boost in productivity from these extreme perks could possibly make financial sense for young firms. Is this simply keeping up with the Joneses Silicon Valley edition?

Christina Cacioppo, of VC firm Union Square Ventures, has another idea. On her blog recently she floated the possibility that high morale is more important for start-ups hoping to retain and motivate talent because the financial payout of their work is less clear. She writes:

Might employee morale matter more at startups than at public companies? Here’s one argument in favor: compensation tends toward a mix of cash and equity in startups and public (tech) companies. Cash has a known value. In a public company, equity has a knownish value: there’s that day’s market price, which might be different tomorrow but probably not be drastically so. At a startup, no one really knows what their equity is worth. VC valuations only happen every 12-36 months, and they’re wonky. (Though company performance loosely enters into VC valuations, a high valuation doesn’t foreshadow a lucrative exit.)

When employees of both startups and public companies evaluate the value of their equity, they could consider what they can see: their day-to-day sentiment, fellow employees’ experiences, how the management team sees to be performing, whether the company’s strategic direction feels right. These judgements are mostly subjective. Public-market feedback provides a check on employees’ feelings; if the company’s stock is performing well, you might think more highly of the management team’s performance, and the value of your equity, than you otherwise would. (You might also be more down on a seemingly-strong team leading a poorly-performing public company too.) Private companies don’t have this outside check, and so the employee-perception datapoints could matter more.

Of course, lavish perks don’t necessarily translate into improved employee morale if the employees get the distinct impression that management is recklessly burning through cash to the detriment of the business.

But the impulse to create a rosey picture of the company’s prospects and the benefits of working there to keep employees with unsure financial compensation tied to the firm seems like a sensible explanation for the drive towards lux benefits and an obsession with culture.  

What do you think, are extreme perks a sign of froth and recklessness or a sensible way to deal with talent in the competitive and uncertain work of start-ups?

Source: Why Culture Matters So Much for Start-Ups


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