The Most Common Human Resource Challenges Faced by

Startup Companies and Recommended Approaches to Deal

with Them

Bachelor Paper I

Submitted by:

Kristna Paulovi

Matriculation No.:

1210633869

at

Bachelor Programme
Business Consultancy International
(International Human Resource Management)

Supervisor:

Dr. Josette Winkler

Wiener Neustadt, 22.December 2014

Table of Contents
1

Introduction ............................................................................................... 1

Defining the concepts .................................................................................. 1

2.1

Defining a Startup ................................................................................. 1

2.2

Defining Human Resource Management .................................................... 2

Startup challenges ....................................................................................... 2

3.1

3.1.1

Dimensions of Employment blueprints ................................................. 3

3.1.2

Typology of Employment Blueprints .................................................... 4

3.1.3

Impact of Blueprints on the Role of HR ................................................ 5

3.1.4

Impact of Changing Blueprints on Labour Turnover ............................... 6

3.2

Attracting and selecting competent personnel ............................................ 6

3.3

Compensation ....................................................................................... 8

3.3.1

Creative benefits .............................................................................. 8

3.3.2

Free benefits ................................................................................... 9

3.3.3

Benefits as investment ...................................................................... 9

3.3.4

Equity and stock options ................................................................... 9

3.3.5

Better pay than the CEO ................................................................... 9

3.3.6

Part-timers, interns and volunteers ................................................... 10

3.4

Leadership and development ................................................................. 10

3.4.1

Transformational Leadership ............................................................ 11

3.4.2

Transactional Leadership ................................................................. 11

3.4.3

Laissez-Faire Leadership ................................................................. 11

3.4.4

Picking the right style ..................................................................... 11

3.5

Money versus Power Dilemma ............................................................... 13

3.5.1

Preference for Money ...................................................................... 14

3.5.2

Preference for Power....................................................................... 15

3.6

HR Blueprint ......................................................................................... 2

Mergers and Acquisitions ...................................................................... 15

3.6.1

Defining Mergers and Acquisitions .................................................... 15

3.6.2

The Role of HRM in M&A .................................................................. 15

3.6.3

The Acqhire phenomenon.............................................................. 18

Conclusion ............................................................................................... 19

List of Figures ................................................................................................ 21

List of Abbreviations ........................................................................................ 22
Bibliography ................................................................................................... 23
I

Abstract in English:
Startup companies are often faced with many challenges throughout their life cycle
from the point they are born until the end of their startup phase when they change
into fully grown-up firms, merge, get acquired or become extinct completely. These
challenges include developing a human resource blueprint, issues regarding
compensation, determining the best leadership style, solving the dilemma of picking
either money or power, and finally addressing the growth of the startup and the
challenges it faces when deciding whether to get acquired or merge with another
business. The importance of each of the challenges is first explained into detail and
then possible strategies are introduced to address the issues in order for them to
remain competitive and become successful.

Keywords
Human resource management, Startup, Challenges, Issues, Entrepreneur

Abstract in German:
Junge Unternehmen, die auch als Start-ups bezeichnet werden, sind oft mit
verschiedensten Herausforderungen whrend ihres Lebenszyklus konfrontiert.
Besonders in der Grndungsphase, aber auch bei wichtigen Ereignissen wie
bernahmen und Fusionierungen, mssen sich Start-up-Unternehmen vielen
schwierigen Aufgaben stellen. Diese Herausforderungen beinhalten unter anderem die
Entwicklung eines sogenannten human resource blueprints, Angelegenheiten
bezglich Personalentlohnung, die Ermittlung des passenden Fhrungsstils, Dilemma
der Entscheidung zwischen Geld und Macht, aber auch Herausforderungen bezglich
des Firmenwachstums und Entscheidungen ber eventuelle bernahmen oder
Zusammenschlsse. Zu Beginn dieser Arbeit wird jede dieser Herausforderungen im
Detail erklrt. Anschlieend werden mgliche Strategien herangefhrt um etwaigen
Problemen entgegenwirken und konkurrenzfhig und erfolgreich bleiben zu knnen.

Keywords
Human resource management, Startup, Herausforderungen, Angelegenheiten,
Unternehmer

II

1 Introduction
In the past few decades it has become increasingly more attractive to set up startup
companies. One of the main reasons for this occurrence is the all-time low and still
decreasing cost of entry to the market. The inexpensive possibilities of creating a
website and popular digital marketing and social media advertising now enable young
entrepreneurs to build brands and grow their businesses very easily. Furthermore,
startup companies are gaining more and more attention due to their innovativeness
and flexibility, in comparison with large corporations. Some of the successful ones
later become acquired by these large corporations while others continue on the
success path on their own (Forbes 2013). At the early stage of their lives, however,
they all share a common challenge: Human Resources (HR).
The purpose of this paper is to determine what human resource challenges
startup companies are facing throughout their life cycles. In addition, the paper aims
to discover what strategies are recommended to cope with these challenges in order
for the startups to remain competitive in the market and become successful.

2 Defining the concepts

2.1 Defining a Startup
First of all, before getting deeper into this topic, it is necessary to define the word
startup. According to Business Dictionary, a startup company can be described as an
early stage of the life cycle of an enterprise, where the entrepreneur moves from the
idea stage to securing financing, laying down the basis structure of the business, and
initiating operations or trading(Business Dictionary: Startup 2014).
Taking into consideration different aspects of a startup, Investopedia defines it
as a young firm that is starting to develop, offering products or services that are new
to the market and having one or few founders who initially operate and finance it.
Furthermore, startups tend to be highly risky, since in their early stages, when the
firms are practically unknown, their expenses usually exceed the revenues.
(Investopedia: What exactly is a startup? 2014).
Last but not least, startups can be easily confused with small businesses and
thus a distinction between these two needs to be made. The U.S. Small Business
Administration characterizes small businesses as independently owned and operated,
organized for profit, and not dominant in its field (U.S. Small Business Administration
2014). In comparison, startup companies are not expected to stay small, but rather
aim for high growth, conquering new markets and becoming the leader of the
industry. The startup phase of these firms tends to last only temporarily, until they
reach milestones such as initial public offering or cease to exist completely as a result
of a merger or acquisition (General Assembly Blog 2014).

2.2 Defining Human Resource Management

Human resource management (HRM) is a concept that describes the way people
should be managed within organizations (Reid et al. 2002, 245). Pinnington and
Edwards (2000) argue that HRM is not simply a single theory that is always
applicable, but rather can be viewed as a set of competing theories. They claim that
HRM theories and models can be subdivided into two schools of thought hard HRM
and soft HRM. The hard HRM refers to trying to achieve organizations goals by
managing and controlling employees. The soft HRM, on the other hand, takes into
consideration the employees needs and focuses on the importance of their
commitment to the organization (Reid et al. 2002). In the following paper, the term
HRM will be used to refer to both of these concepts.
In order to specify what exactly HRM involves, we can have a look at a business
dictionary definition. According to that, HRM includes all the tasks connected to
recruitment process, such as conducting job analysis or screening, through decisionmaking regarding compensation, incentives and benefits, to concern for personnel
needs, training and development, dispute resolving or leadership choice (Business
Dictionary: Human Resource Management (HRM)).
Now, being familiar with both of the concepts, it is possible to move on to the
real challenges concerning human resources that startup companies have to deal with.
This paper will then not only identify the most often perceived challenges, but also
propose a possible strategy for coping with each of them.

3 Startup challenges
There are numerous obstacles regarding human resources that firms in their startup
phases need to overcome. It all starts at the very founding of the startup. The
company has to define its HR blueprint, which it may intend to keep for the rest of its
existence along with its culture. Further problems arise as the company is expanding
and recruitment decisions such as whether to hire and if yes, then who, have to be
resolved. For young entrepreneurs it is also rather difficult to obtain sufficient funding
for their new businesses, which makes compensation decisions a substantially
challenging issue. Picking the suitable leadership style as well as deciding between
money versus power is another challenge that must not be neglected. Finally, each
startup is ultimately heading to one of the three endings getting big, getting bought
or dying (Harvard Business School Blog 2014) and thus, the choice of getting acquired
by a larger corporation often seems to be a favourable and easier alternative.
However, even in this case, challenges regarding human resources arise and need to
be solved to assure smoothness of the process. Therefore, to gain a better
understanding of these issues and ways of handling them, they will be described into
a greater detail in the following sections.

3.1 HR Blueprint
When starting up a new venture, the founders often have the tremendous task to deal
with various issues such as initial capitalization, business operations, marketing and
sales, and of course, the products or services that it offers (Communities Digital News
2

2014). Trying to cope with all of that, the problem of human resource management is
often neglected or even overlooked. HRM is considered to be a useless diversion of
leaders time and energy away from more important and immediate concerns (Baron
and Hannan 2002, 8). Others view HRM as only something that takes care of the dayto-day activities and administrative duties and believe it could easily be managed by
the founders themselves or by distributing the tasks among some of the employees
(Firmology 2013). The persuasion that HRM should rather take the back seat is
further supported by those who perceive it as not really cost effective. Indeed, it may
be hard to justify the hiring of a person (HR specialist) to the small starting business,
which is not generating any feasible revenue (Communities Digital News 2014).
Despite all what was said, the role of HRM at the first stage of a firm is very
important and should not be underestimated. On the contrary, the founders should be
very cautious when launching their businesses and picking (maybe even
unconsciously) the HR blueprint for them. As the research group Stanford Project on
Emerging Companies (SPEC) has examined, the blueprint chosen at the birth of the
firm does have an immense impact on its success in the future (Baron and Hannan
2002, 8-28).
3.1.1 Dimensions of Employment blueprints
The SPEC group started their research by trying to find out what ideas the founders of
startups had when they were launching their businesses about how it may look and
feel like organizationally. They were interested in knowing if the entrepreneurs had
some visions of their companies, such as what to aim for or even, what to definitely
avoid. Their findings showed that the founders visions on how the overall work and
the employment should be organized was concentrated around three main dimensions
attachment, selection, and control and coordination.

Figure 1: Dimensions of Employment Blueprints (Source: Baron and Hannan 2002, 10)

The attachment dimension encompasses three sub-dimensions which the SPEC

group named love, work and money. Some chief executive officers (CEOs)
imagined there should be a strong emotional bond among the organizations
3

employees love that would create a family-like atmosphere, inspire effort and
help to retain the core members who are strategically important for the firm. Other
CEOs believed the work itself should be the primary motivator that would help to
attract and retain their employees. In comparison with the love orientation, the
founders that placed emphasis on work did not expect the employees to be loyal to
the firm and their co-workers, but rather to a concrete project. Last but not least,
some executives viewed the employee-firm relationship as a mere exchange of
labour for money (Baron and Hannan 2002, 10).
The second dimension concerned the selection criteria used when hiring new
employees for the company. Also this dimension can be seen through three elements
that matter the most to the startup founders skills, exceptional talent/potential and
team/organization fit. The first group of CEOs emphasized that the employees they
were looking for had to have the right skills and experience to effectively carry out
various tasks required by the company. Their main concerns were money and time,
therefore the employees were selected based on how quickly and cheaply they could
get on board. The other group of CEOs focused more on the long-term potential of the
employees, by envisioning the employees performance on a series of projects over
time. The third group was primarily interested if the newly hired employees were able
to connect well with the current organizations employees. Therefore for them the
main concerns were the values of the employees and the question whether they would
be a perfect fit into the organizations culture (Baron and Hannan 2002, 11).
The third dimension regarded the means of control and coordination, which
according to the founders would be most effective in their startups. These were by the
SPEC research group divided into four main categories direct monitoring, peer
and/or cultural control, reliance on professional standards, and formal processes and
procedures. The first group of founders expressed they would prefer to control and
coordinate the work performance personally by direct oversight. The second and
most often occurring case was when the founders indicated they would prefer to rely
on informal control through peers or organizational culture. Some founders intended
to use some kind of professional control in their organizations that would emphasize
the autonomy and independence of the workers. They would be committed to
excellence and as a result put on an outstanding performance. The last group of CEOs
decided to implement a more traditional approach by creating formal processes and
procedures for control and coordination of work in the organization (Baron and
Hannan 2002, 10-11).
3.1.2 Typology of Employment Blueprints
Now that we have defined the three dimensions, it is necessary to point out that each
company could choose any combination of their sub-dimensions to create their own
HR blueprint. However, what the SPEC research group observed was that some of the
sub-dimensions occur more often together than others. After thorough analysis the
group then realized that, in fact, there were only 5 different, most often appearing
dimensions combinations - as the employment blueprints (summarized in figure 2).

Figure 2: Typology of Employment Blueprints, Based on Three Dimensions (Source: Baron and Hannan
2002, 11)

The first model Star involves attachment based on challenging work, where
employees are selected based on the top talent criterion and long-term potential. The
employees are given a good deal of autonomy and the founder relies on professional
control. The second model Engineering also keeps the employees attached
through challenging work, however, they are not selected based on their potential but
rather based on their unique knowledge and skills that can help them perform the
given task. The engineering model uses control through peers and organizational
culture, and is the most common type among high-tech startups. The third model
Commitment expects strong sense of personal belonging and affection towards the
organization and uses peer-group control. When hiring new employees the firm
focuses on the question of cultural fit and after that expects the people to form an
emotional bond and only leave when they retire. The fourth model Bureaucracy
relies on attachment based on challenging work and chances for personal
development. When hiring new employees, the bureaucracy model expects them to
have the right skills and qualifications for the job, and to control and coordinate the
work in the firm, it uses formalized control. The last, fifth model Autocracy is the
only one that is based on monetary motivations as well as the only one to rely on
direct oversight when controlling the performance of the employees. The people for
firms with this blueprint are chosen based on their professional skills and abilities that
would enable them to perform pre-specified tasks (Baron and Hannan 2002, 11-12).
3.1.3 Impact of Blueprints on the Role of HR
In their study, the SPEC group found out that the blueprint, which each CEO choses to
apply to their company, has an apparent impact on the way HRM is perceived in the
company and on the roles that are assigned to it. First of all, they observed that Star
and Commitment firms were the first that started to care about HRM at all and sensed
the need to bring in some HRM experts. The Stars felt the need for HRM, since their
most valuable assets are top-talent employees and recruitment and selection were a
crucial breaking point for their success. The key HRM challenge for Commitment
5

companies was to create a strong organizational culture and attract hires that match
this culture. In companies based on the Engineering model, the key function of the
human resource department was supposed to be keeping the employees energized
and buying the beer, chips and dip for the Friday afternoon festivities (Baron and
Hannan 2002, 14). The Bureaucracy companies understood the role of HRM as
creators and promoters of rules and procedures that needed to be done. Finally, the
Autocracy model tried to avoid HRM completely, perceiving it only as a cost item.
These autocratic entrepreneurs in these companies preferred to take the control over
the employees in their own hands, sometimes delegating the human resource tasks
(referring mostly to payroll processing) to their secretaries (Baron and Hannan 2002,
15).
3.1.4 Impact of Changing Blueprints on Labour Turnover
For startup companies with lack of resources, the people are the key to success and
therefore being able to retain them is very essential. The study carried out by SPEC
found considerable evidence that changing the HR blueprint has a destabilizing effect
on the company. They claim that by changing the blueprint the firm rapidly increases
its employee turnover, particularly of the employees that have stayed with the
company the longest. The SPEC also observed that turnover is driven by the changes
in the nature of employment relationships which are often a result of a CEO
succession. However, they do not consider the entry of a new leadership to be the
cause of the turnover, but rather a mere accompanying factor (Baron and Hannan
2002, 21-22).
The companies that were confronted with higher turnover were further found to
have experienced much slower revenue growth in comparison with those with lower
turnover rate. The SPEC researchers proved this to be true even after taking into
consideration various external factors that could have had influence on the revenue
growth such as past performance of the firm, employment growth or access to
venture capital. Therefore turnover, its effects as well as the powers that cause it,
such as the change of the HR blueprint, must not be neglected (Baron and Hannan
2002, 22).

3.2 Attracting and selecting competent personnel

Even though there is a notable difference between startups and small businesses, at
the beginning of their existence they have one thing in common: the size. According
to Zotto and Gustafsson (2007), recruitment can be considered one of the most
challenging human resource management tasks for small businesses and therefore it
is necessary to have closer look at this issue.
Every startup begins its journey as an unknown small entrepreneurial firm
usually with a lack of financial resources, however, during its lifetime it develops and
moves through different phases. Based on the findings of Leung et al., in each of
these phases, the firm uses different network pools to acquire new employees.
Therefore it is not possible to generalize the recruitment process, but rather necessary
to analyse the startups behaviour in both them the startup phase and the growth
phase.
6

In the very early stage of a startup, the firm is handicapped by two factors, which
potential employees find very important when applying for a job lack of
organizational familiarity and unknown employers image (Williamson, Cabel and
Aldrich 2002, 86-88). The familiarity is quite necessary when attracting the potential
employees attention in the first place, while perceived organizational image is an
important determinant that differentiates one firm from another (Williamson, Cabel
and Aldrich 2002, 86-88). Since startups are quite new to the business, they offer a
rather high level of uncertainty and therefore cannot rely solely on talent markets as
their employee pool. Furthermore, due to lack of financial resources, they can rarely
afford to employ sophisticated recruitment and selection programs or provide
potential employees with well-defined job descriptions (Leung et al. 2006, 669-670).
Therefore in the first stage of the startup the most commonly used practice is the
recruitment through networks (RTN).
Core members of a startup are usually recruited from social and business
networks of the founders (Zotto and Gustafsson 2007, 4), such as family, friends or
acquaintances which may be convenient due to easier approachability and greater
trust. The problem is, startup CEOs often underestimate the importance of such HR
decisions, and by relying only on the RTN, they lose the chance to get the best talents
on the market. Furthermore, if the new employees do not fit the culture, they can
destroy it easily and since they are close acquaintances of the founders, it may be
difficult to get rid of them as soon as they realize their mistake (Communities Digital
News 2014).
There are several strategies that can help a startup to combat these early-stage
problems. According to the Brand-Marketing Approach, suggested by Williamson et
al., the recruitment effectiveness is strongly tied to job seekers organizational
knowledge and therefore it is imperative to increase this knowledge through brand
marketing. To conquer legitimacy issues, the same author also suggests a method
called Strategic isomorphism. Underlying logic of this strategy is that small businesses
can improve their credibility and be more likely perceived as legitimate by copying the
pattern of recruitment practices used by larger organizations. Although this imitation
may be constrained by the available financial capital of the startups, incorporating the
core features of these practices proved to be highly beneficial (Williamson, Cabel and
Aldrich 2002, 94-100).
If the company already moved from the inception and survival stage to the
growth stage, the recruitment practices change notably. It already started attracting
more media coverage, has a significant customer base and expanded business
networks which make attracting the talents on the market much easier. Furthermore,
the style of hiring also changes focus from generalists, who are committed and willing
to exert great deal of effort into the new venture, to professionals, who rather
contribute to the startup with their knowledge and expertise in a certain area and help
the business grow further.
The problem in the growing stage in startups may still arise from the inability to
foresee the individuals fit within the next level of growth (Zotto et al., 2007), which
may later result in increased turnover. High turnover can be detrimental for startups
7

not only because it carries the cost of finding a replacement for the employee, but
also due to the loss of knowledge. The firm is thus condemned to a so-called start-up
cost, which refers to a comparative lack of productivity of new employees, who are
significantly less efficient than the experienced ones. Moreover, the new employees
require considerably more supervision by experienced staff, which creates additional
cost due to reduction of contribution of the supervisors (Sutherland and Canwell 2004,
246).
In order to avoid mindless hiring that ends up with the wrong fit, a CEO of a
successful US startup advises not to only look for people when the firm needs them,
but rather, take the opportunity as soon as it comes. This means, when seeing a
person who seems to be a perfect fit, the company should hire her straight away
rather than waiting until the firm needs her and risking that by the time she would
employ her talent for someone else (LinkedIn 2014).

3.3 Compensation
For a startup company with a relatively small size and limited resources at its early
stages, compensation comes as the next great challenge after recruitment that has to
be dealt with (Zotto et al. 2007, 4). Since recruitment is a lengthy and costly process,
a starting firm must make sure that once it manages to attract the right talent, it is
able to retain it. Unfortunately, unlike established companies, for new-born firms it is
complicated and uncomfortable to come up with compensation schemes. This can
partially be due to the fact that their organisational structure is relatively flat, which
leads to rather egalitarian employee treatment (Graham et al. 2002, cited in Zotto et
al. 2007,5). In contrast, large corporations with high level of hierarchy tend to form
their own compensation structures that might be expensive to create, but pay off
when determining the salaries of the employees and other benefits. Since these
structures seem inefficient for startups, there is a strong need for the founders to be
very creative when designing suitable compensation packages.
3.3.1 Creative benefits
In the case of possible benefits that startup can decide to offer to its employees,
uniqueness is more valued than imitation. Therefore radical departure from industry
norms can provide a great competitive advantage (Barney 1991 and Alexander 1999,
cited in Cardon and Stevens 2004, 303). The offered benefits can vary greatly. There
are the basic ones, such as medical insurance, paid time-off, timely payrolls etc. They,
however, cannot differentiate one startup from the others, thats why further powerups are necessary to stay competitive. These can include yours-to-keep notebooks
and cell phones, discounted gym and sport facilities membership or shopping
vouchers, reserved parking spots, free food and drinks during the work time, or
company parties and events (Quora 2013). All of the above-mentioned benefits sound
very attractive and can help startups retain their employees, but it has to be
admitted, even these extras cost the company some money. Luckily, there is a
solution also for startups unable to spend additional money for benefits.

3.3.2 Free benefits

People often tend to value some perks much more than is their actual financial value.
Some employees, for example, appreciate the possibility to take their pets to work
(Mashable 2012). The cost of providing this option is next to nothing, while for the
employee it can be invaluable. Further inexpensive, but appreciated possibilities
include allowed casual dress code, company hikes or outgoings or simply transparent
and orderly job performance metrics or regular feedbacks and performance reviews,
to show that the management does care about its employees.
3.3.3 Benefits as investment
In addition, there is also the kind of benefits that may seem to be costly, but
eventually pays off as a convenient investment - continuing education (Tomasz
Tunguz 2014). This powerful retention tool attracts young potential talents and
encourages them to develop their knowledge and skills, while also contributing to
improved performance of the firm. On one hand the employees have the positive
feeling of being invested into and on the other hand managers can this way assure
their loyalty.
3.3.4 Equity and stock options
Returning to the compensation issue itself, apart from the benefits, in fast-growth
startups, also called gazelles, there is a tendency to offer financial incentives and
stock options to the top-performers in order to keep them on board (Zotto and
Gustafsson 2007, 4-5). For the entrepreneur offering modest salaries and generous
bonuses is a cunning way of shifting a large portion of the organizations risk to the
employees (Barringer, Jones and Neubaum 2005, cited in Zotto and Gustafsson,
2007, 5). By providing profit and stock sharing options in the compensation package,
the founders are also able to motivate their employees to a better performance and
encourage creativity and innovation. Furthermore, for people with low level of riskaversion, this reward system full of uncertainty but also full of chances may add up to
the perceived feelings of the compensation offered, resulting in greater sense of
responsibility and satisfaction (Graham, Murray and Amuso 2002, cited in Zotto and
Gustafsson 2007, 5).
3.3.5 Better pay than the CEO
Despite having the constraint of financial resources, some startups still offer very high
and competitive salaries. This is possible due to one remarkable fact: Not all the
startup CEOs earn the largest salaries within the company. According to Noam
Wassermans study, where he examined compensations in startups set up between
years 1996 and 2002, 51% of entrepreneurs made the same money asor made
less thanat least one person who reported to them. (Wasserman 2008, 3) One
might find this illogical at the first sight, however, it makes perfect sense once we
take into consideration the relationship the founders have with their newly set up
ventures. As Wasserman puts it in his article, the founders have the tendency to build
strong emotional connections to their companies, often referring to them as their
babies. As a result of this unconditional love, as well as fear of losing the baby, the
entrepreneurs are willing to sacrifice their portions of salaries in order to increase the
9

salaries of their talented employees, so as to retain them. Consequently, the top

talents usually are in the position to negotiate their compensation conditions, which is
also enabled thanks to
the flat organizational structure and missing formal HR policies (Zotto and Gustafsson
2007, 5).
3.3.6 Part-timers, interns and volunteers
Asheesh Advani, in his article on Entrepreneur.com, suggests another solution to the
startups that are unable to pay regular employees the use of part-time workers, or
interns and volunteers (Entrepreneur 2014). Part-time employees, especially stay-athome mothers and fathers seem to be the secret weapon for startups. This way the
companies are able to attract qualified employees and cut their compensation costs by
more than half. The only risky matter to beware when deciding for this kind of
employment is the fact that these people are really doing it only part-time and
therefore may prioritize their personal issues over the ones of the business.
Even though this option is often overlooked, hiring interns and voluntary
workers is a great way to save money while getting the necessary jobs done.
University students and college graduates are an invaluable source of potential
talents, all eager to gain experience, willing to work part-time or full-time and all that
for little or no money. However, when taking interns on-board, the startup needs to
pay attention to one fact: they are really not doing it for the money, but for the
experience. Therefore offering them menial or inferior work is not an option. They will
only be willing to work for the startup for free if they see they can gain the practical
experience which they have been looking for in the first place. The startup should also
take into consideration that time of the employees who will be coaching the
inexperienced interns is needed. Not only do they have to educate them into the job,
but regular supervision is required. In spite of this inconveniences, these costs still
remain lower in comparison to employing full-time workers (Entrepreneur 2014).

3.4 Leadership and development

One of the main liabilities of startups is their newness. It is associated with lack of
experience, and a high degree of flexibility and dynamic (Zch and Baldegger 2014,
4). This liability can, however, in the case of leadership be seen as an opportunity
rather than a threat. In comparison with established firms, who face the problem of
overcoming the liabilities of aging and have to fight against constant resistance
towards change or transformation processes, young enterprises are much less prone
to such behaviour and more open to embrace new ideas for improvement (Zch and
Baldegger 2014, 4; Aldrich and Auster 1986, 188). The challenge, though, still
remains picking the suitable leadership style and being able to implement it. The
direct involvement of the founders therefore plays an essential role in the success of
the new venture.
First of all, let us define the three key leadership styles from the Full Range of
Leadership Model, whose effects on startups were observed in a study by Zch and
Baldegger (2014, 1-17). These styles are: transformational, transactional, and
10

laissez-faire. It is important to understand these concepts, since each of them has its
own impact on the overall organizations performance and growth.
3.4.1 Transformational Leadership
This leadership style can be described as the most effective and active one,
generating performance beyond the original expectations. The leaders adopting this
style are exemplary roles for their subordinates and represent a compelling vision and
values which guide the decisions of their followers. They are able to inspire motivation
and encourage team spirit so as to improve the achievement of each individual. They
also try to stimulate their followers innovation and creativity by providing exceptional
challenges and promoting critical thinking and problem solving. Last but not least, the
transformational leaders tend to act as coaches and provide individual consideration
and support to their subordinates, thus helping them to reach their personal as well as
organizational goals (Northouse 2013, 185-187).
3.4.2 Transactional Leadership
Transactional leadership is according to the Full Range of Leadership Model depicted
as an active but only medium effective style. In comparison to transformational
leadership which aims to act proactively, transactional is viewed as rather responsive.
It works within the organizational culture and does not try to implement new ideas or
to change it in any way. Whereas transformational leaders provide their subordinates
with the combination of external and internal motivation incentives, transactional
leaders prefer to rely on the power of contingent rewards. This means that all the
activities which lead to the organizational goals are linked to some kind of external
rewards. These leaders usually clarify their expectations, provide necessary resources
and then actively monitor the performance of their followers by watching out for
deviations or taking corrective action. However, unless there is a problem with not
meeting the given standards, the transactional leaders do not intervene the
performance of the subordinates (Northouse 2013, 186-187).
3.4.3 Laissez-Faire Leadership
The least effective and most passive of the three leadership styles is laissez-faire, also
called the nonleadership. In contrast with the two previously mentioned styles,
laissez-faire leaders do not actively engage in the whole leadership process. They do
not participate in decision-making and avoid taking responsibilities which often results
in lack of direction of the group and therefore underperformance. By doing nothing
these leaders delegate the chances to make decisions on their subordinates, which
can be effective in case the individuals are highly skilled, motivated and capable of
setting and meeting deadlines (Griffin and Bone 2014, 205), but may also turn out to
have disastrous effects if they are incompetent and unexperienced (Northouse 2013,
196).
3.4.4 Picking the right style
According to Zotto and Gustafsson (2007, 5) entrepreneurial leaders must be able to
engage in new opportunities, break new grounds and go beyond the known. These
11

leaders must have an exciting and contagious vision and be able to inspire their
followers to commit to the organizational goals. Already now it is then obvious that
the leaders, who adopt lasses-faire style, cannot be effective in startup companies,
since they usually do not have a clear vision and even if they had, they are unable to
communicate it to the followers. Without inspiration and proper coaching of the
employees the business is sentenced to simply operate aimlessly in the market until
its complete decline. Furthermore, unlike established companies, due to their usually
small size and young age, startups do not yet have any developed structures or
processes that would be able to substitute the lacking leadership behaviour (Zch and
Baldegger 2014, 8). Both transactional and transformational styles contribute actively
towards the firms performance and have the capacity to communicate the goals to
the subordinates, therefore further differentiation between these styles has to be
made in order to determine the most suitable one for new entrepreneurial ventures.

Figure 3: The Full Range of Leadership Model (Source: Northouse 2013, 192)

When trying to define an ideal startup leader, Darling et al. argue that he or she
must be able to understand the dynamics of the organizational setting and deal with
emerging opportunities effectively. A failure can occur if the organization is overmanaged and under-lead, which happens when the entrepreneurs excel in handling
the daily routines, while forget to pose the question whether this routine is still
applicable and necessary at all (Darling, Gabrielsson and Serist 2007, cited in Zotto
and Gustafsson 2007, 5). Having said this, it is becoming clear that transactional
leaders with their routine problem-solving approaches may not be the right solution
for startups.
In order to stimulate creativity and innovation, which are essential elements of
successful startups, openness and dynamic contact between individuals, teams or
departments within the organization is necessary (Martin Treblanche 2003; Mumford
12

et al. 2002 cited in Zotto and Gustafsson 2007, 5). Furthermore, delegating decision
making to the employees and challenging them to solve stimulating tasks can
contribute immensely to their internal motivation. Since encouraging team spirit and
inspiring internal motivation are the features of a transformational leader, it implies
that this style will be the most effective one to adopt for startup companies.
Transformational leaders are able to create organizational cultures which are
based on trust, tolerance, learning and effort. However, these leaders sometimes
have the tendency of becoming too authoritarian and trying to do all the decisionmaking on their own. This kind of behaviour can have discouraging effects especially
on highly competent and experienced employees (Drumm 2003, cited in Zotto and
Gustafsson 2007, 6). Therefore the entrepreneurs must be able to delegate
responsibilities, despite thinking they would be able to do it better by themselves and
need to provide their employees with sufficient amount of autonomy. However, while
granting autonomy to the subordinates, the leader must not neglect to control
whether the firm is going the right direction and be careful so as not to slip to the
laissez-faire leadership style.
Good leaders must be able to provide sufficient training to develop knowledge
and skills of their subordinates. A problem may arise when they do not regard it as
important enough and neglect it. When taking into account the high costs of
formalized trainings in terms of money as well as the loss of immediate working
time, the entrepreneurs sometimes see it as an expense, when, in fact it is an
investment. In new and small companies, employees skills and knowledge can be
considered as the most valuable asset (Banks, Bures and Champion 1987, cited in
Zotto and Gustafsson 2007, 6).
Last but not least, startups with very little employees could take the advantage
of so-called networked leadership. In this case, the entrepreneurs act as mentors in
order to develop their employees leadership skills, by providing them with
professional and psychological support (Comelli and von Rosenstiel 1995; Swiercz and
Lydon 2002, cited in Zotto and Gustafsson 2007, 6).

3.5 Money versus Power Dilemma

For startup founders knowing which leadership style to apply and even being able to
apply it is very important, however, even this cannot always assure the success of the
business. Sometimes they have to make decisions which are not exactly in accord
with what they wish for. Sometimes the founders even have to step down and leave
their position of the company leader in order to allow the business to flourish. The
issue that causes this to happen can also be referred to as the founders dilemma.
The HRM challenges that have been addressed so far mostly concerned the
founders and the way they should approach their employees. In contrast, now the
problem regards the CEOs and the decision they may have to make about themselves.
The impact on the overall companys performance and therefore also on the staff is
nevertheless immense. The challenge of the founders is to determine, what matters
for them most money or power.
13

Every startup entrepreneur is obviously aiming for both, being rich and being in
control of their business. However, as the company grows, it is inevitable to realize
that only a small fraction of the chosen ones can actually bring that off. The rest of
the businesses have to sooner or later face the question of money vs. power, depicted
in Figure 4. The reason is simple every startup needs some financial resources to
launch, run or grow the business and when deciding how to raise the money as well
as how much to rise, the founder has to understand, which of the two is of a greater
significance (Wasserman 2008, 1-8).

Figure 4: The Trade-Off Entrepreneurs Make (Source: Wasserman 2008, 4)

3.5.1 Preference for Money

If the entrepreneur thinks it is the money that is of the most crucial importance, he or
she can easily raise the financial capital through investors even if they gain a greater
share of the company. What the founder also has to realize is that when owning a
minor share of their company, he or she is losing the power over it and may be forced
to descend from the CEO position to a managerial chair. This can in turn have great
impact on the overall performance of the startup. From the financial point of view, the
situation for the whole company and its employees should improve by having
nominated a new CEO who is more competent in the field. However, the case can also
deteriorate if, for example, the founder CEO was a charismatic leader who was
inspiring them not only through his or her deeds but also through a unique
personality. The employees may lose their trust in the company, lose their internal
morale or become disengaged and start underperforming (Cubiks 2014). Therefore
the founder needs to judge very carefully the way he or she is seen by the employees
before taking the decision. It is not just the leader himself but all the people in -in the
organization that get affected.

14

3.5.2 Preference for Power

Some entrepreneurs refer to their businesses as being their babies and therefore,
despite having the chance to accept external funding, giving up on equity and earning
a huge amount of money, they prefer to stay in the game. By keeping the equity
these entrepreneurs are able to retain their CEO positions and remain in control of
their startup businesses. This way, unfortunately, the company is very unlikely to
raise as much as it could have if the CEO gave up their power (Wasserman 2008, 18). This can therefore also have negative consequences on the employees. They may
view the founders behaviour as selfish due to the preference of own interest and ego
to the financial prosperity of the organization. The discrepancy may then again lead to
disengaged employees generating poor results, and spoiling of the companys
performance.

3.6 Mergers and Acquisitions

3.6.1 Defining Mergers and Acquisitions
First of all, it is necessary to define mergers and acquisitions (M&A). According to
Investopedia, these terms both refer to consolidations of companies. The difference is
that while mergers practically combine two different companies to create a new one,
in acquisitions one, bigger company purchases another, smaller company, but as a
result, no new organization is formed (Investopedia: Mergers and Acquisitions 2014).
Every startup founder tries to maximize the growth of their company straight
from the launching of the business. Usually, this growth is pursued through building
and selling more products or services, while also expanding to a greater number of
geographic locations. This kind of growth strategy is called organic growth (Startup
Professionals Musings 2013). Of course, when taking the right steps, this growth is
sustainable. However, many startups have a much higher growth potential than just
the organic growth and it would be a crime not to take advantage of it. The potential
can usually stem from two options to merge with another company or to get
acquired by a bigger player on the market. The challenge of the startup firms is to be
able to find the right balance between the growth strategies. On one hand, relying on
organic growth can turn into a straightjacket and lead to limited horizons and lack of
innovation (Startup Professionals Musings 2013). On the other hand, putting too much
emphasis on growth through alliances or mergers can make the startup more
vulnerable and lead to potential conflicts of interests. Last but not least, young
companies must be very cautious when deciding about getting acquired, since their
employees may get demotivated and in turn deliver poor performance.
3.6.2 The Role of HRM in M&A
The KPMG International survey monitoring performance of companies after being part
of a merger or acquisition came to a surprising conclusion: When tracking the value
created through M&A, the majority of the companies did not enhance it. This means
they either stayed on the same level as they were before the M&A or, even worse,
their value was, as demonstrated in Figure 5. This leads us to an observation that
probably something is not alright; something important must have been neglected.
15

Our interest is to analyse this fact from the HR point of view and then demonstrate its
importance and applicability to startups.

Figure 5: Tracking Trends in M&A Value Enhancement over the Past 12 Years (Source: KPMG 2011, 6)

According to a 1999 Global M&A survey conducted by KPMG Unlocking

shareholder value: keys to success, there are six keys used by companies to unlock
value from deals that they take part in. Three of the keys are hard and include
synergy evaluation, integration project planning and due diligence. The other three
skills are called soft and refer to management team selection, addressing of cross
border cultural issues, and internal and external communication (KPMG 2011, 18).
The soft keys are the ones that are of great importance when investigating the role of
human resource management in mergers and acquisitions. In fact, the results of the
above mentioned survey came to the conclusion that organizations that took into
consideration the soft factors when carrying out their transactions were 26% more
likely to succeed with their deals. Despite this striking evidence that one should pay
attention to HRM, as can be seen in Figure 6 due diligence on human resources issues
is still given a low priority.
The human resource issues that are referred to in Figure 6 include retention,
cultural differences and redundancy processes, as being the three most important
matters. Other people issues that were assigned lesser importance by the companies
were for instance terms and conditions, communication, recruitment or integration
(KPMG 2011, 19). In order for the company to succeed all of these issues have to be
addressed in all the phases of a merger or an acquisition. The four stages of M&A are
pre-deal, due diligence, integration planning and implementation. Based on the
findings of a survey made by a group of human resource professionals, in the most
M&A cases, HRM did not get involved until the pre-deal and due diligence phases were
over. In successful cases, the human resource unit had the tendency to get involved
16

much earlier (Giffin and Schmidt 2002, 8). Therefore this paper will analyse the HRM
role in each of the four M&A stages.

Figure 6: Types of Due Diligence Done by Companies (Source: KPMG 2011, 6)

In the first, pre-deal stage, the task of HRM is to evaluate the culture of the two
companies that are about to become one. The cultures as well as the success
requirements in the lines of business that will be combined should be compatible. The
HRM must for example pay attention to risk-aversion of the groups to be merged.
Some people might like to take risks and pursue aggressive strategies while others
prefer to take steady, careful steps when making decisions (Giffin and Schmidt 2002,
8-9).
In the second, due diligence stage, the M&A partner is already chosen. This
assigns HRM an important role to assess its culture, regarding management or
leadership styles. They may for example consider whether there is a difference of
power distance between the two groups. Some people with high power distance are
used to strong hierarchies and autocratic leadership while others with lower levels
may find this unacceptable, which may cause problems. The HRM unit also needs to
analyse potential financial issues such as differences between pension plans,
retirement benefits (Giffin and Schmidt 2002, 9).
The third and fourth stages integration planning and implementation can be
considered to be the most crucial task for HRM. It can include activities such as
developing employee communication strategies, programs for retention of top talents
and staffing plans. However, probably the most critical HRM task is to address change.
People have a natural fear of change, since it makes them feel insecure. The role of
HRM is to help the employees overcome their anxiety and answer all their questions
17

regarding the happening M&A from changes in benefit programs, through job
security and relocation questions to information about the others culture. It is
important to provide the employees with the sense of security, otherwise the
company might be facing loss of their key personnel and increased turnover. Not only
the HRM unit, but also the CEO has to step in right from the beginning. Their role is to
clarify the tasks of human resources in the M&A process and grant them competencies
for executing the necessary procedures before it is too late (Giffin and Schmidt 2002,
9).
3.6.3 The Acqhire phenomenon
Now when it is obvious that HRM plays an irreplaceable role in mergers and
acquisitions, one might be wondering, how this all connects to startups. The answer
actually lies in the HRM challenges that established companies are facing. For them
hiring and retaining of talented human resources is becoming ever more elaborate in
the current market. Therefore, in the search for competitive advantage, the dominant
companies are increasingly engaging in a so-called acqhire strategy. The
portmanteau was created by combining the words acquire and hire, and refers to a
human resource strategy used by bigger companies to procure talented people
through acquisition of startup companies (Mayer and Selby 2013, 1).
The acqhire strategy is becoming more and more popular because of various
benefits it provides for the acquirer companies. Probably the most significant
advantage lies in the opportunity for the large corporations to gain easily the whole
team of talents, instead of just a single person though demanding hiring process.
Moreover, these people have worked together before, are an already established and
highly skilled team. By acqhiring the startup, they can be preserved as a cohesive
resource bundle and keep the dynamics of the team. Besides that, the new team
brings new innovation potential to the acquirer company and is also convenient since
the star employees have more incentives to remain in the company in order to stay
with their teams. In addition, the trust in the team can positively impact the
motivation of the employees and make them work harder. For this reason acqhire can
be viewed as a useful retention tool (Mayer and Selby 2013, 1-16).
As Mark Zuckerberg, the founder of Facebook once said: Facebook has not
once bought a company for the company itself. We buy companies to get excellent
people. (Mayer and Selby 2013, 2) it is necessary to realize that it really usually is
the human resources the large companies are interested in, not the products or
services offered by the startup. Therefore, besides all the above addressed HRM
issues connected to M&A, the startup founder must also realize that by getting
acquired by another company, their products, services and all the projects may
possibly be ignored or get abandoned. The entrepreneur should cautiously consider for
example the attachment dimension of the HR blueprint of the firm. In case it is
love, staying in the same team should not affect the employees performance in any
way, since the team remains the same. However, if the chosen blueprint dimension is
work, which means being devoted to a project rather than the team, the
performance may deteriorate after the project is taken away from the employees. In

18

case the picked dimension was money, as long as the acquirer company offers a
competitive compensation, the performance of the employees should stay the same.

4 Conclusion
The main goal of this paper was to determine, what are the most common human
resource challenges that startup companies have to face, and to suggest strategies
that are recommended to deal with them. After an extensive literature research that
covered paperback books, journal articles, popular business magazines, websites and
blogs, it was possible to identify the challenges, which the startup companies are most
likely to come across in some of their life cycle stages as well as approaches how to
deal with them.
The paper first examined the challenge that startups have to deal with right at
the beginning when they are founded picking the organizations HR blueprint. Many
new businesses find the HRM issues at the birth stage unimportant, however, the
facts state the opposite. The HR blueprint proved to be quite essential factor having
an impact on the future success of the firm. Therefore this paper draws attention to
the mistake of ignoring HR at the first startup phase and suggests that every new
business should create an HR blueprint that they will be able to stick to in the future.
The second challenge that was discovered to be vital for startup companies to
cope with correctly was attracting and selecting competent personnel. According to
literature sources it was found out that the recruitment process cannot be generalized
since it differs in various life cycle stages of the companies. Therefore both of the
stages were analysed. In the startup phase startups have to overcome the liabilities of
lack of organizational familiarity and unknown employers image. The recommended
tactics in this phase was therefore recruitment through networks. At the same time, it
proved to be imperative for the startup to increase the job seekers knowledge
through brand marketing and improve its credibility by incorporating core features of
recruitment practices used by larger organizations.
The third issue that every startup has to deal with is the compensation decision.
In order to attract the best talents the startups have to offer competitive
compensation. However, with the liability of newness, smallness and thus lack of
financial resources, the task can get pretty challenging. Therefore this paper compiled
several smart and cost-efficient ways to attract and retain top employees, which
include various creative benefits, some of them in the form of equity and stock
options, or even investment into continuing education. The paper also highlights the
often overlooked option of taking in part-timers, interns and volunteers as a source of
high-quality and low-cost work. Last but not least, the findings showed that it is not
always the CEO who has to earn the highest salary and therefore, when necessary,
they might even be willing to give up a bit more in order to retain the best employee.
The next challenge that all the startups must be aware of its leadership and
development. It is essential to know what kinds of leadership styles exist, which is the
most effective one for startups and then, of course, to be able to adopt this style. The
paper provides the basic guidelines for all the startup founders on how to approach
19

this issue. In addition, it draws the attention to the fact that leaders must not neglect
to provide training and development for their subordinates, since their skills and
knowledge are undoubtedly the startups most valuable assets.
Another question the startup founders have to ask themselves is whether they
have preference for money or rather power. Many entrepreneurs think they can have
it all, but the reality is different and therefore the paper highlights the importance of
being able to decide either for money, which may result in giving up the CEO position
in order for the business to flourish, or for power, which may end up in inability to
raise enough money and slower growth. Unless the founders figure out which matters
to them more, they might end up being neither rich nor king (Wasserman 2008, 2).
Last but not least, with the expansion of the acqhire phenomenon, where
startups are targets of acquisitions by larger corporations, it is necessary for them to
realize the challenges that go hand in hand with this decision. The paper explains the
role of HRM in mergers and acquisitions and points out the major people issues that
should not be neglected.
To sum up, the paper addresses the major challenges startups face and the
strategies to cope with them that were discussed in the reviewed literature. However,
each startup is a unique entity and therefore might come across a unique set of
challenges which require unique solutions that may differ from the ones mentioned in
the paper. Therefore it is necessary to realize that the paper does not serve as a
manual but rather a guide for startup founders to help them understand what to
consider when faced with the words human resource management.

20

List of Figures
Figure
Figure
Figure
Figure
Figure
Figure

1:
2:
3:
4:
5:
6:

Dimensions of Employment Blueprints ................................................... 3

Typology of Employment Blueprints, Based on Three Dimensions .............. 5
The Full Range of Leadership Model .................................................... 12
The Trade-Off Entrepreneurs Make ..................................................... 14
Tracking Trends in M&A Value Enhancement over the Past 12 Years ........ 16
Types of Due Diligence Done by Companies ......................................... 17

21

List of Abbreviations
CEO = Chief Executive Officer
HR = Human Resources
HRM = Human Resource Management
KPMG = professional service company specialized on audit, tax and advisory; the
KPMG stands for Klynveld Main Goerdeler that merged with Peat Marwick
M&A = Mergers and Acquisitions
RTN = Recruitment through Networks
SPEC = Stanford Project on Emerging Companies

22

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