Why all VC backed companies should use PEO’s.

Why all VC backed companies should use PEO’s.

Recently, I became absolutely convinced that VC backed companies should use PEO’s (Professional Employee Organizations). The failure of a prominent, well funded, local VC backed company proved my point. But I will talk about that later.

When a VC backs a company, they back an entrepreneur, a team, a business model, and possibly some technology. The VC wants this team to be laser-like focused on the business model and the technology. Not bogged down by HR.

But, while venture backed companies, by their very nature, are designed to become big companies, at the start, they are small companies. The have all the HR issues that a new small business entrepreneur has – no systems, no policies and procedures, no payroll processor, no benefit packages, etc. A PEO solves all of these issues.

Most small businesses make lots of rookie HR mistakes. Startups want to avoid them. A PEO can help (but not guarantee) that startups will avoid them.

Startups are growing fast. They hire people quickly…and there is often a lot of employee churn. This brings a significant amount of HR burden. Even with good systems, processes, and procedures this is challenging. Without them, I guarantee it will be a mess.

Usually it will be the CFO or COO that bears this burden. They are rarely HR experts. They won’t like doing it and probably won’t do a great job. Also it distracts them from the business and what they were hired for – managing the company’s financials, raising money, and partnering with the rest of the executive team to drive success.

But, back to my story. The clincher is Cobra. I ran into an ex-employee of the failed company I mentioned. This company was well funded, they had term sheets to fund the next round, and nobody expected it to shut its doors. But it did. Certainly the employees didn’t expect this. Anyway I ran into an ex-employee of that company. Tha employee lamented that because the company failed, she did not have Cobra.

VC’s expect a significant percentage of their companies to fail. But, when a company fails, there isn’t Cobra. Nobody thinks about this when starting or joining a company. Many startup employees would not join startups if they knew this. A gap in insurance coverage can be disastrous for an employee and their family.

Startup CEO’s won’t necessarily care about this issue. All CEO’s are absolutely convinced that their company will be successful – failure won’t happen to their company so Cobra is not an issue. But…every CFO should care. And any HR manager WILL care. And finally, VC’s should care. VC’s want to build good relationships with the employees of startups…even for their companies that fail. Those employees might move on to the next great company. Leaving an employee without medical coverage is not a good way to foster and maintain those relationships. So VC’s should care. Every VC backed company should use a PEO.