The Top HR Challenges in Startup Companies (Here’s What You Need To Know)

Startups are quick-moving, dynamic businesses that don’t want to get bogged down by unnecessary bureaucratic work and regulations.

However, failing to have an HR strategy in place for your startup is setting yourself up for failure in the future.

With nearly half of all small businesses failing in the first four years, you might think that an HR department would simply hurt the company’s bottom line before it ever gets off the ground. So, do startups need HR? In short, yes; here’s why:

The Need for HR Strategies for Startups

While there is a myriad of reasons a new startup might fail, ignoring the importance of a human resource strategy is a major undoing of startups. In fact, businesses fail 23 percent of the time because they don’t have the right people working on their team. A solid HR solution for startups can solve this problem. Hiring the right people to do the job and implementing solid practices (like some of the best companies in the world do) will help you retain your top performers.

How Do You Start an HR Department?

Starting an HR department isn’t an overnight process, but you can start with these strategies:

Learn Priorities and Concerns

A successful HR department is rooted in meaningful connections. Building these connections means having conversations with all levels of staff to learn about their priorities and concerns.

Meet with the executive team first, followed by the managerial staff. Ask the directors and managers for recommendations on whom to speak with among lower-level employees. Interviewing middle managers and regular employees is crucial—they are the ones who really understand the day-to-day routines and can provide the insight you need to build an effective HR plan.

Create a Substantial and Realistic HR Plan

After gathering all the pertinent information, you’ll need to map out a realistic plan. Incorporate employee feedback and align the plan with the business’ culture and values. More importantly, provide solutions to the concerns and issues that permeate the workplace.

Perhaps you’ll discover that the startup’s culture needs some fine-tuning during this process. You can incorporate this as part of your HR plan and think of ways to help further define the mission, values, and goals of the company. Discussions with employees can assist you in solidifying these components.

You may want to flesh this out in a 30-60-90 day schedule. Not only will this help you stay on top of your responsibilities, but it will also provide the opportunity to periodically sync up with the executive team and receive their feedback on your progress.

Looking for a more comprehensive checklist on how to get your HR department up and running? Check out our free e-book: The Step-by-Step HR Department Checklist.

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What Is the Role of HR in Startups?

Without an HR strategy in place for your startup, you risk allowing negativity and toxic work habits to establish themselves in the workplace, leading to reduced employee morale and low employee retention. Here are a few of the main roles of HR that keep your startup running smoothly.

As you begin to flesh out these roles, be aware of the HR requirements set apart for small businesses.

What Are the Important HR Requirements for Small Business?

Implementing HR solutions for startups doesn’t have to be a drag on your company. Instead, you can organize the HR strategy for your startup so it creates a flexible environment that allows your company to operate the way you need it to. For startups, greater flexibility is key—your organization can build an HR solution that meets the needs of your company while maintaining flexibility for your employees.

However, even if you choose procedures from the more flexible HR strategies, the role of HR in a startup is still to provide some much-needed structure, help you negate risk, and give your team a leg up. Remember, your top priority is building and maintaining a healthy and safe workplace.

Here are three basic tenets you should strive for:

Whatever challenges you run into, it’s important to always show your commitment. This will reassure employees that you care for their well-being and can drive a successful HR department.

HR Policies and Benefits for Startup Companies

In the energy and excitement of a startup environment, it’s easy to put off creating policies and procedures for HR. While it might not seem important when you’re trying to secure funding, find employees, and establish a source of revenue for the business, do not neglect an HR strategy for your startup that includes company policies.

Having policies in place for employee benefits, company dress code, sick time, vacation time, compliance, training, and more will benefit your company and set you up for success. Here are some considerations for policies that may benefit your startup:

Dress and Grooming

How you structure your dress and grooming standards depends on the type of business you run. Startups tend to be very casual with dress codes, but having dress and grooming standards established from the get-go sets the expectation for the kind of work environment you will have. Even a casual dress code should clarify that clothing with holes, tears, or inappropriate or offensive wording or images isn’t acceptable in the workplace. It may also be helpful to specify whether piercings or tattoos are acceptable in your work environment.

A detailed dress code is great for employees and can help raise employee morale. Knowing they won’t have to worry about offensive or inappropriate attire in their work environment makes work a more enjoyable experience for everyone involved.

Sick Time

Employees need time off to recover, but everyone probably knows someone who’s used sick time when they just needed a day off. While the occasional day off for sick time isn’t an issue, you need to have policies in place to clarify what counts as excessive sick time. This will help your employees understand what is expected of them while protecting your company productivity and revenue—which is especially important for startups where finances are already tight.

Employee Benefits

As a startup, you may decide to provide benefits to your employees such as healthcare, dental, and vision, or you might opt for a non-traditional approach like company shares. Whatever you choose, your HR department will need to make sure you meet any federal and state regulations and provide any benefits required by law.

Providing your employees with benefits helps you attract great people to your company and keep them. Plus, providing benefits such as healthcare can help your employees live healthier lives. Take care of your employees and you’ll retain the best people in your industry.

Vacation Time

Although there’s no requirement to provide vacation time to your employees, they will appreciate the opportunity to take some time off once in a while. Many companies offer two weeks paid vacation per year with more vacation time the longer the employee works for the company. Some companies choose to offer unlimited vacation time. Whichever structure you choose, vacation time helps employees maintain a better work-life balance and helps you retain your best talent.

Company Culture

HR policies might also include your company culture and what you will focus on. Startups tend to define their culture as they grow, but defining the terms of your company culture can be very beneficial in the beginning and your HR department can help you do this. HR will also ensure that they structure their hiring practices to hire individuals who exemplify your company values.

Common HR Challenges and Mistakes in Startup Companies

There are a lot of HR challenges for startup companies including recruitment, establishing policies, getting management buy-in, hiring employees, firing poor performers, and much more. While many of these challenges occur whether your company is a startup or not, it’s important to understand the unique challenge each of these presents to a new company and why they matter. A few common HR challenges in startup companies include:

Employee Morale

Keeping employees happy in their job is one of the biggest HR challenges, whether you’re running a startup or any other type of organization. Creating an environment where employees want to work helps keep up employee morale. HR can assist in creating a great work environment by putting policies in place that foster trust between employees and employers, creating a culture where employees feel comfortable having open, honest conversations. It’s well worth the time and investment to make sure your employees are happy—happy employees are 20–37 percent more productive than unhappy ones.

Because startups are often so invested in kicking off their business right, and focused on the output, they fail to notice or invest time in employee performance. When employees don’t feel valued or recognized for their efforts, engagement drops and they’re soon looking for another job. Therefore, it’s important to pay attention to the people and build values and goals around them.

Some companies have employed non-traditional methods of increasing employee engagement, satisfaction, and happiness by using video interviews, gamifying their websites, allowing employees to gift vacation time, instigating mandatory time off, offering mentoring, getting rid of job titles, creating customized positions, providing health benefits, and allowing for a better work-life balance with flexible schedules. While all of these strategies might not work for your company, finding key practices that make work life better for employees should not be overlooked, and HR can help.

Getting Management Buy-In

HR is often considered an unnecessary expense, and startups often think they’re too small to worry about HR compliance. Some companies want HR to stay out of processes and focus on hiring. In each of these cases, HR has the responsibility to define themselves in the role they play and the value they bring to the company.

Establishing Company Policies and Processes

A common HR mistake in startup companies is having the “too small to matter” mindset. They believe issues can be handled when they arise, but don’t need to be laid out beforehand. But failing to outline policies and procedures fails and asking for signed compliance to give employees a place to turn when they need a standard for business conduct, without outlining policies and procedures, creates confusion.

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Establishing Company Culture

A lot of new companies allow their company culture to form on its own. However, this is a poor decision because it may develop a culture you don’t want in your company. A poor company culture can be toxic to the success of your entire organization.

Hiring Employees

Startups often hire people in their personal network, which leads to informal hiring processes and minimal onboarding. However, as you grow and bring on new employees this can look very unprofessional, as it fails to provide direction to new workers. Company culture and values get overlooked and your business may gain a poor reputation for your hiring practices if you fail to onboard correctly. This indicates to employees that your organization is disorganized and not worth their time.

Training Employees

When you’re just kicking off your startup, you might run low on resources and forego employee training. While it takes time and resources to train employees, failure to do so may be even more expensive. IBM conducted a study and found that employees are 12 times more likely to quit a job if they aren’t getting the training and development they need. Considering that the cost of hiring a new employee to replace an old one can be up to 30 percent of the position’s salary, this is not a cost to be taken lightly. The ability of HR to provide training in startups is an asset you should not overlook if you want to hire and keep great employee talent.

Providing Feedback to Employees

Failure to provide feedback, even in a startup, will quickly lead your business into trouble. Receiving and conveying both positive and negative feedback allows employees to see what they are doing well and where they need to improve. This improves their effectiveness and reduces the need to fire underperforming employees in the future.

Documenting Performance

In a fast-moving startup culture, documentation often falls to the wayside and gets forgotten—that is, until a necessary piece of information is nowhere to be found. These small oversights add up and can land you in some serious legal trouble.

Employee Retention

There are many HR challenges that startup companies face when it comes to employee retention. One of the major challenges is that startup employees tend to have very poor work-life balance. So, after developing new skills at a rapid pace as the startup ramps up, some employees then use those skills to get a new positions at an organization with better lifestyle options. Another challenge for startups is keeping employees aligned with your company vision. Many employees are purpose-driven and need to see their purpose aligned with company goals to feel that their work is valuable.

Firing Employees

Sometimes you reach a point where you need to let an employee go. In small businesses where employees are close, this can be more difficult and uncomfortable. However, keeping toxic employees will hurt your company and ignoring the problem won’t make it go away.

HR Strategies and Solutions for Startups

Thankfully, for every HR challenge startup companies face there is a solution that will help your company succeed. The role of HR in startups is vital to the success and implementation of each of these solutions.

Management Buy-In

Since management buy-in for HR expenses can be a challenge in startup companies, HR departments need to explain why they are important and valuable to management. Before getting the buy-in of management, HR needs to establish a solid plan on what changes need to occur and how that plan will be carried out with data to back their claims. This plan should also align with short- and long-term company goals. Presenting information in this way with a solid plan to back it is a great way to get management buy-in.

Policies and Procedures

A budding business has a business plan, mission, goals, and even work procedures carefully detailed—why wouldn’t you want to invest in establishing company policies for employees as well? Outlining policies and procedures can help eliminate a lot of confusion and keep business practices cohesive. Detailing policies and procedures doesn’t need to be too long—a simple booklet that details employee behavior, policies, and performance expectations is sufficient.

Company Culture

Whether you do it intentionally or not, your company will develop a culture of its own. Evaluate what your culture is currently like and define the company culture you want. Focus on hiring individuals who emulate your desired culture and choose company values that are authentic to your culture. Once you’ve set down your core values, don’t just pay lip service to them; strive to emulate these values in your day-to-day company activities and hiring procedures. Outline the company values, mission, and vision to ensure success from day one.


Startups have limited resources and can’t afford to play around during the hiring process. When you have limited resources, you need the very best people for the job who can effectively contribute to your budding business. A good HR department will help you hire the right employees and make sure they have a great first impression of the company by having structured onboarding procedures in place.

Hiring might seem easy these days with our access to social media and hiring resources, but without a solid, long-term plan for hiring, you won’t find the right people for the job. An HR strategy will not only help you find the right employees, but it will also help you find the right talent and pay them a suitable income.


Startups need to establish a training plan for new hires and established employees, especially as the company grows. Thankfully, training doesn’t have to cost you an arm and a leg. Establishing an in-house mentoring program, cross-training, encouraging conference attendance, and sharing ideas and information are all great ways to get employees learning and growing while they work for your organization.

For new employees, helping them understand their role within their department, teaching them company guidelines and policies, and allowing them time to feel comfortable using their equipment are all critical tasks HR can do in a startup. It’s also essential to make sure they receive training specific to their job position, whether it’s sales, IT, or customer service. A new hire training checklist can get you off to a great start.


One of the roles of HR in a startup is to provide an outlet for employees to express complaints, dissatisfaction, and opinions. Employees need to feel that their feedback is heard and considered. Determine what kind of feedback matters to your organization and use a variety of tools to collect it. This might include Google Forms, one-on-one discussions, and meetings. Show employees you value all of their feedback, both positive and negative.


We’ve already touched on how training your employees can help you retain the best talent, but there are other ways to encourage your employees to stick with your company for the long term. Some of the best ways to keep employees are by showing them respect, giving them additional, meaningful responsibilities, offering rewards that aren’t monetary, giving generous time-off, and tying the performance of the company to monetary incentives for your employees. Things like offering shares in the company can be especially useful for startups, because they give your employees a vested interest in the success of the company.


If you’ve already taken the time to identify and communicate any performance issues with the employee and the situation has not improved, it’s probably time to terminate employment. Firing an employee should be thoroughly documented and should be an objective, performance-based process. Don’t let firing be a surprise. Always provide a warning before termination and give the employee a chance to correct their behavior or actions. It could be that the employee didn’t know they were doing anything wrong. Keeping detailed records of warnings during the process will allow you to defend your position if need be.

Employee-Centered HR

The face of HR is changing. It’s not just about following rules and regulations, but also about maximizing the use of your people and creating a great work environment. HR solutions for startups solve challenges by evolving and making adjustments as the company develops. Innovative hiring, attracting good talent, encouraging teamwork, celebrating milestones, and thanking employees for their work are all ways your HR department can overcome HR challenges in startup companies and give you an advantage over your competition.

Starting a company is time consuming, but knowing HR strategies for startups and having them in place can make it easier. Now that you understand the role of HR in startups, set a plan to establish your own HR department and give your startup the advantage it needs to succeed.