People debt and HR debt: what they are and when should you pay them off?

In the early 1990s, Ward Cunningham coined the term technical debt to describe what happens to startup engineering teams:

“Shipping first time code is like going into debt. A little debt speeds development so long as it is paid back promptly with a rewrite...The danger occurs when the debt is not repaid. Every minute spent on not-quite-right code counts as interest on that debt. Entire engineering organizations can be brought to a stand-still under the debt load.” 

Early-stage startups generally need to take on technical debt while you have a small team so you can ship products faster and start a positive feedback loop. The quicker your feedback loops, the quicker you can reach product market fit. At some point, you’ll need to pay off the debt and fix the hacks that you initially used. Technical debt is a tool you need to manage, control, and track. If you don’t pay back your technical debt, it’ll crush you.

People debt and HR debt are similar: 

• People Debt: Relying on junior or inexperienced team members to solve important problems because they're your only option, even if they're not the best fit for those roles.
• HR Debt: Having communication, documentation, and HR processes that are not scalable.

It’s good to take on some People debt and HR debt when you have a small team because it’s better to use all your time and energy to focus on:

1. Building a product that customers love 
2. Making sure you don’t run out of money
3. Setting the foundation for the culture you want to build

Most founders dislike HR because they associate it with bureaucracy that slows you down. Other founders struggle to upgrade their team and keep generating people debt because they don’t want to invest precious resources in upgrading the team. 

But People and HR isn’t an all-or-nothing game. You need to act your stage. You shouldn’t build out the same HR function that a 500-person Series C company has when you’re 15 people, but you can’t keep your 15 person HR and People strategy when you have 50 people either. Prioritize the 80/20 or the 90/10: pay off people debt first and make sure you have A players and select senior autonomous leaders on your team. Then, prioritize paying back only the HR debt that will help unlock growth. 

TL;DR: keep track of your People debt and HR debt and prioritize what to pay off when

• People debt is when your team is too junior and can’t take you to the next level
• HR debt is when you have communication, documentation, and HR processes that aren’t scalable and slow you down
• It’s good to take on People debt and HR debt early; your focus should be on building a product that customers love
• Prioritize paying off your People debt first: make sure you have the right team solving your most important problems
• Not all HR debt is created equal. Ruthlessly prioritize paying off only the HR debt that matters today. 
• Paying off People debt and HR debt is not about adding bureaucracy, it’s about allowing you to move faster 
• Track your team’s pulse; you can’t outsource team and culture to other people, especially early on

People debt: inexperienced people leading important projects in your company

Early-stage startups should hire high-slope people who get their hands dirty, wear different hats, adapt, and grow fast with you and your startup. As you grow, you’ll promote top performers into more senior roles. Some of your top performers will be able to grow into their new roles and excel, but most will eventually top out. Most startups over-promote their best do-it-all team members into leadership roles they aren’t ready for. 

Founders run into the Peter Principle: you promote your best people until they are in a role that they are bad at, leaving you with a company full of people who are incompetent in their roles, but would have been great if you had brought in stronger talent to manage them. You accrue people debt each day you have inexperienced people in charge of something they can’t handle. People debt makes it harder for you to raise money and execute. It will spread you thin and potentially burn you and your team out.

To avoid accumulating a mountain of people debt, you need to hire select senior autonomous leaders who you can delegate important work to who you know will do an amazing job. The first senior hires you make should deliver high-quality work, have good judgment, and work well with you. 

Hiring senior people is hard and takes time. But the more you push it off and leave junior people in senior roles, the more people debt you accrue, and the more expensive it is to pay off. 

Pay off your people debt before you pay off any HR debt. Getting the right people in your company early on is one of your most important jobs as a founder. As Vinod Khosla says:

HR debt: communication, documentation, and HR processes that are not scalable

Early-stage startups should avoid unnecessary processes and administrative burdens early on. If you don’t build a product that customers like, your company will fail, so you should focus on moving fast and trying to find product market fit.

As you scale, your team will grow and all of your processes will be ad hoc, generating HR debt: processes that aren’t scalable. Common examples of HR debt are: 

• Your communication of company mission, vision, and strategy is not clear
• You have no basic hiring process
• Your payroll is manual and in spreadsheets
• Managers have no expectations for how they should manage their team or handle 1:1s with their direct reports 
• You don’t have a process for evaluating people’s performance

The HR debt list is long, and most companies struggle to prioritize which processes they want to build first. Focus on paying off your People debt and building the right team around you first. Once your business is growing and you have a strong team, shift your focus to HR debt.

Avoid the People and HR debt snowball  

Drowning in People and HR debt happens much like the famous quote about going broke: two ways: gradually, then suddenly. Many founders experience the gradual, then sudden impact of People debt and HR debt this way:

The People Debt Snowball progression

1. Our team has got us to where we are today, so why should we hire someone senior?
2. We’re starting to move slower because our leaders are junior and don’t have expertise in the areas they are leading. I have to make every important decision at the company.
3. All of a sudden, our People debt starts to crush us:
   1. VCs reject us because they don’t trust our team to execute with a multimillion-dollar investment.
   2. A chunk of important A players or high slope team members leave because they are in roles they aren’t ready for.
   3. You’re stressed and showing signs of burnout.

The HR debt snowball progression

1. Our processes haven’t caused any problems so far, so why should we change anything? 
2. We’re starting to move slower because our team isn’t clear on what they are responsible for.
   1. I no longer know everyone’s name on our team, not to mention who is performing well. But I don’t want to add bureaucracy that slows us down.
3. All of a sudden, our HR debt starts to crush us:
   1. We’re trapped by our org structure. Some people have inflated titles, role responsibilities aren’t clear, I have 12 direct reports, and we have severe bottlenecks for decision-making. 
   2. Our compensation structure doesn’t align pay with performance. Top performers have lower salaries than mediocre people. Fixing it now means letting people go, demotions, or raising burn a lot. Not fixing it means our top performers might get better offers from competitors.
   3. We’ve awarded too much ESOP and don’t have enough to refresh our top people or hire senior autonomous leaders we desperately need.
   4. Our team members' contracts aren’t compliant with local laws. We’re at risk if employees get mad, or there’s an accident.

It’s easy to ignore your People debt and HR debt. Until it’s not. Gene Kim’s quote about technical debt is also true for People and HR debt:  

“Left unchecked, technical (People and HR) debt will ensure that the only work that gets done is unplanned work!” 

People debt and HR debt payback plan: pay off your people debt first, then pay back the HR debt that helps you move faster

Priority one: pay back your people debt by building the right team around you

Your most important people priority is building a strong team that complements each other. Hiring or promoting mediocre or bad people is extremely expensive. You need the right people in the right roles to be able to raise money and execute well. To start paying back your people debt: 

• Monitor your team’s pulse
  • Know who your A players, high slope people, and senior autonomous leaders are at all times. 
  • Try out several frameworks like Danny Meyer’s 4 Types of Employees and Keith Rabois’ Barrels and Ammunition, or a 9-box until you find one that works best for you.
• Evaluate team members’ performance
  • You don't need performance management software yet, but track and document team member performance regularly. Give feedback so your team members always know where they stand.
• Identify which team members can take on more senior roles
  • Give your top high-slope people more responsibilities and quickly assess their performance. If they excel, it's a win for your team and culture. If they struggle, consider hiring a senior autonomous leader above them.
• Build a hiring roadmap and start hiring senior autonomous leaders who you can delegate important projects to and know they will do an amazing job. 
• Set guidelines for how you manage low-performers
  • Decide whether to fire your mediocre C+ players immediately or give them 2 months to improve after explaining what needs to change. Both options are fine, but you need a clear policy that fits the culture you’re trying to build.

Always focus on paying back your people debt before your HR debt. Without the right team around you, your HR processes won’t matter.

Priority two: pay back your HR debt in three stages

Most founders dislike HR because they see it as an off/on switch: keeping it off allows you to stay fast and agile, while turning it on brings processes and bureaucracy that slow you down. 

Paying off HR debt is not about adding bureaucracy, it’s about allowing you to move faster. You need to think about your minimum viable process: the minimum amount of HR you need to help your company move quicker and more efficiently.  

Bad processes destroy speed and agility, and processes are only good if they address real problems. Never build processes for process' sake.

We categorize HR debt into three stages to help Magma portfolio companies prioritize the minimum viable HR processes that will help them move faster:

• HR debt priority 1: develop clear communication, mission, vision, and strategy 
• HR debt priority 2: create basic HR guidelines
• HR debt priority 3: implement HR processes that scale

HR debt priority 1: develop clear communication, mission, vision, and strategy 

You need to clearly communicate your mission and vision to attract top candidates, investors, and customers. The best leaders have focused priorities and communicate them clearly to their team. Start to: 

• Develop a clear vision, mission, and strategy
  • You can’t communicate your vision and mission with the team until you figure it out first. Check out Netflix’s culture document and Coinbase founder Brian Armstrong’s Mission, Strategy, and Culture guide to create a mission that resonates and a differentiated culture. 
• Communicate your vision, mission, and strategy clearly
  • Everyone on the team should know what you do and why you do it. 
• Schedule regular all-hands meetings to talk about your mission, vision, and specific business goals using metrics
  • Your entire team should understand the company goals and how their daily work relates to them. Hold all-hands meetings at least monthly to reinforce this.
• Require all managers to have regular 1:1s
  • All managers should have regular 1:1 meetings with their direct reports. Use these meetings to give and receive feedback, set clear priorities and expectations, and develop growth plans for each person.

HR debt priority 2: create basic HR guidelines

Once your messaging is clear, reduce legal and compliance risks by creating your cornerstone HR processes.

• Create a basic hiring process
  • List the steps that you will take everytime you want to hire. We have plenty of guides on how to know what to hire for, how to write a good JD, how to find top talent, how to interview better, why you should work with candidates, and referencing candidates. 
• Structure an onboarding process
  • Create a clear plan for "from signing to starting" and a first-week plan to help new hires get up to speed. If your team is under 20 people, schedule a 1:1 with the new hire during their first week.
• Understand local employment laws
  • Make sure you are compliant and current with local employment laws.

Create a simple code of conduct or team member handbook

• Start by setting clear expectations and mitigating risk. Include your company mission, vision, values, communication channels, confidentiality policy, potential conflicts of interest, and a note on legal compliance. State your zero tolerance for discrimination or harassment, provide a way to report harassment, and outline your investigation process.

HR debt priority 3: implement HR processes that scale

After you have clear messaging and basic HR guidelines, you can think about building repeatable HR processes. During this stage, consider hiring a Head of People who can focus entirely on building out more structure and help you:

• Track compensation and equity
  • You’ll eventually need to develop a compensation philosophy, but the first step is tracking all base salary, bonus, and equity compensation you have given out, and plan to give.
• Create a V1 of employer branding
  • Create some material that show what it's like to work with you, your expectations, and why top talent should join you. Ben Horowitz recommends making a cultural document outlining what it’s like to work with you a key part of the hiring process. You should also publish a work with us page on your website.
• Consider software to manage payroll, employee benefits, employee records, and hiring
  • Use only one HR software until you hire a head of people, who should have an opinion on the best software to use. A full HR tech stack isn't necessary until you're scaling past Series A.
• Build a process for how you prepare new managers
  • Promoting top performers to manager roles they aren’t ready for can make them mediocre. Provide standardized manager training to prevent this.

Start tracking your People debt and HR debt today and build your own payback plan 

It's good to take on People and HR debt early on to focus on building a product customers like, but you need to track, manage, and control these debts carefully. 

We help Magma portfolio companies assess their teams and create hiring roadmaps to pay off people debt. We also help them develop minimal viable processes to address their most important HR debt. But by using the tips and guides in this article, you can better manage your team, avoid letting your People and HR debt snowball, and transform People and HR from a liability to an asset for your startup. Don’t wait until our company starts to break down to take action. 

Use some of our frameworks like our A players framework, our high slope people framework, our senior autonomous leaders framework, or other frameworks like Danny Meyer’s 4 Types of Employees, Keith Rabois’ Barrels and Ammunition, and the 9-box template to track your team better and help you stay on top of your people debt.

Use tools and surveys like Alotten's score tool to help you diagnose your HR debt today and prioritize what to pay off. 

Your team is the company you build, and it’s almost impossible to stumble into building a great team. Start building a better team today with intention.