336: How to hire a CEO for your small business

Once you’ve grown your business, you may find yourself looking to hire a replacement. I’ve been there multiple times as a small business owner after scaling up, hiring a few employees, and wanting to spend my time on other opportunities to expand or branch out. And people make a lot of mistakes with these hires–hires that are decision makers, high-value workers, and doing more than just standard operations.

For one, I almost always reach out to people that I know. Some may argue that this limits the hiring pool or isn’t an impartial approach, but by already knowing the person I know how they talk about business, how they think about things, what their priorities are, and how they would solve certain problems. A lot of this is tested on the job, and we’ve promoted employees from operational roles to decision-making roles because we like their approach.

Entrepreneurs will time and time again overcomplicate the pay structure for their replacements. They want to incorporate profit sharing, equity vesting, and all sorts of messy things. The truth is you need to keep it simple to start. For one, most people would rather have a consistent base salary than any sort of incentive structure. We as entrepreneurs are driven to seek rewards tied to our output, but most workers just want to make sure they’re getting their checks.

If you add anything on top of salary, it’s best to give them a percentage of revenue. Specifically, profit sharing is almost never a good idea. Paying people on profits is overly complicated and messy because profits in one period is not always a direct correlation to how much money and value you’re generating. People will argue that this means they won’t be concerned about expenses and margin, but that’s not their job. Their job is to grow and drive the business, your job as the owner is to keep your thumb on spend.

Equity ownership is complicated too, especially when incorporating vesting schedules. Instead, we simplify by giving phantom ownership if we want to include that as part of a package. We’ll communicate if selling the business is in our timeline over the next few years, and if so offer them a percentage of the sale price. If you make this part of your vision, it can be a really exciting component of the offer.

There’s no reason to make things more complicated than they need to be. There’s nothing wrong with bringing someone on board to work on a base salary and telling them you’ll revisit it 6 months down the road.

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I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.