Entrepreneurial Operations; Hiring; Optimal Stopping Problem
For many early-stage entrepreneurs, hiring the first employee is a critical step in the firm’s growth. Doing so often requires significant time and monetary investments. To understand the trade-offs involved in deciding when to hire the first employee and how hiring differs in entrepreneurial settings from more established firm settings, the authors present a simple growth model that depends on two critical inputs for revenue generation: the entrepreneur’s time and money.They show that without hiring, the entrepreneur’s time eventually becomes more valuable than money in contributing to the firm’s growth. In that context, the value of the employee is driven by how much relief he provides to the entrepreneur. They characterize the optimal timing of hiring in terms of the firm’s cash position and how the firm is affected if it requires an upfront fixed investment in time and/or money.The authors find that the upfront investment in time needed for hiring cannot be converted to an equivalent upfront investment in money and that mistiming hiring can be very costly, especially when these upfront investments are high.