Your first employee may be the person you're least comfortable putting in charge of your next stage of growth. They may also be carrying something your next VP can't easily replace. This week's feature gets into what those early hires accumulate, why the damage grows as companies mature, and what you ought to know before reorganizing the people who helped build your business.

The Department of Homeland Security wants to charge universities $70,000 to recommend an international student for their first period of Optional Practical Training (OPT), with a $30,000 fee for subsequent periods after the initial fee has been paid (Federal Register).

The money is due before the school recommends the student for work authorization. Schools may pass the bill to students or employers, even though DHS says the fee isn't attached to a particular employer. DHS picked a fairly unusual way to introduce a potentially enormous hiring expense.

The proposal leaves this case open, and a STEM OPT extension issued after the rule takes effect could trigger the full $70,000 initial fee if no fee has previously been paid under the new system.

This remains a proposal. Comments close in early November, and any final rule would take effect 60 days after publication. The payment arrangements between schools, students and employers are still unresolved.

Founder read: A flat $70,000 fee is a radically different investment for a new graduate than for an experienced specialist. If schools pass the cost to employers, the proposal could make entry-level international hiring unusually difficult to justify, even where the candidate is a strong fit. Companies that depend on developing junior technical talent would face a second-order problem: fewer viable opportunities to build that talent internally, with greater reliance on experienced hires later.

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A startup can spend years recruiting better executives, building stronger teams and getting the right people into the right jobs. Yet one of the employees it can least afford to lose may be someone hired before any of those jobs existed.

Four economists studied what happened when startups unexpectedly lost employees who had joined during their first year. Revenue fell about 14% immediately after the loss. Across the following five years, the affected companies averaged roughly 12% less revenue than comparable businesses. The researchers found that the effects persisted for at least a decade.

Replacement hiring hadn't closed the gap.

The findings complicate a familiar piece of startup advice: As the company grows, some of the people who helped build it will need to make way for more experienced talent.

Elad Gil addresses this directly in his High Growth Handbook. He describes founders trying to find an early employee somewhere "where they won't do much harm, versus a place they will excel." When a founder reaches that point, Gil writes, "99% of the time the right answer is to part ways with the early employee."

It's advice about a specific problem: someone whose abilities no longer fit the company's needs.

But the researchers found that the consequences of losing an early employee grew larger as companies matured. Apparently, those first hires can accumulate something that becomes increasingly difficult to replace.

The researchers, Joonkyu Choi, Nathan Goldschlag, John Haltiwanger and J. Daniel Kim, had access to Census Bureau records covering more than 6 million U.S. startups established between 1990 and 2015.

Their problem was figuring out what employees contributed to company performance.

Ordinary turnover makes that difficult. Strong employees may leave struggling companies. Poor performers may get fired. A company may start shrinking months before anyone resigns. Comparing companies that lose employees with those that retain them would mix up cause and effect.

The economists used premature deaths instead.

They identified approximately 25,000 startups where a founder or early employee died at age 60 or younger while still working for the business. They matched those companies with similar businesses that experienced no such death, creating a sample of roughly 52,000 firms. The average company had about 15 employees in the year of the death.

The distinction between founders and early employees was deliberate. An "early joiner" was a non-founder who appeared on the payroll during the company's first year.

The researchers compared what happened afterward. When a company lost an early joiner, employment initially fell about 10% and revenue about 14%. Over the subsequent five years, the estimated gaps averaged approximately 8% and 12%, respectively.

Even after 10 years, the researchers reported that the effects "do not dissipate."

Then they repeated the exercise for employees hired during a startup's second year.

Those departures also hurt. But the damage peaked within about two years and became statistically insignificant by year five.

Apparently, something happened during the first year of a company's life that made those employees unusually consequential.

The economists' explanation centers on what they call "organizational capital that emerges at firm formation."

It's an academic term for something founders encounter constantly: the accumulated knowledge of how a particular business operates.

Consider what the first customer-success employee might know at a B2B software company. They may understand why an important customer's contract includes an unusual provision, which product limitations have been privately negotiated around, and how the company learned to handle an implementation problem that once threatened a renewal.

Some of that information eventually becomes documentation. Much of it may remain in the employee's judgment, habits and relationships.

An experienced replacement might be considerably better at managing a customer-success organization. That experience doesn't automatically provide the history behind decisions made before the replacement arrived.

The researchers describe this as "the firm-specific human capital embodied in early joiners accumulating over time as they remain at the firm."

They found supporting patterns in the results.

The loss was more damaging in companies six to 11 years old. It was also larger in teams of five or fewer and when the departing initial-team member had earned more before joining the startup.

The B2B results were particularly pronounced.

In business-to-business-intensive industries, losing an early joiner produced an additional decline of approximately 4.7% in employment and 9.1% in revenue relative to consumer-facing industries. The researchers calculated that these additional effects were 79% and 115% larger than the respective baseline effects in consumer-facing businesses.

The authors point to the importance of specialized relationships between businesses as a possible explanation.

That interpretation makes sense for a software company whose oldest employees have spent years learning customers' operations and accommodating requirements that were never entirely captured in a contract. But the researchers didn't directly measure the loss of individual relationships, undocumented decisions or customer knowledge. Their findings support the organizational-capital explanation without identifying exactly which pieces of knowledge account for the losses.

And the study covered startups across industries, rather than B2B SaaS companies specifically.

There is one enormous difference between the departures in this study and the staffing decisions founders usually face.

Death is sudden, involuntary and accompanied by circumstances that a planned departure ordinarily avoids. There is no opportunity for a deliberate handover. The study may also capture the disruption of losing a colleague under tragic circumstances.

The economists deliberately avoided resignations and dismissals because those events are influenced by company performance and employee characteristics. They left that research for another day.

Consequently, their estimates cannot tell a founder what happens when an underperforming early employee leaves after a managed transition. A 12% revenue gap in the research sample is no basis for predicting the cost of an individual firing.

Gil, meanwhile, offers another option before separation. When an early employee no longer fits the position, he recommends trying to move the person into a role where they can succeed, even if that means accepting a demotion.

Foundation Capital's Charles Moldow makes a related observation about the first 20 employees: "The employees who got you to this point don't necessarily possess the skills to take you to the next stage."

Both assessments can be correct. An employee may have reached the limits of their management ability while retaining substantial value through customer relationships, product history and judgment accumulated during the company's earliest years.

That possibility deserves attention when the founder decides to bring in a more experienced executive.

The incoming leader's responsibilities can include learning which customer relationships depend on the early employee, what institutional knowledge remains undocumented and whether there's a meaningful role for that person after the reorganization.

Retention may require compensation, an equity refresh or an appropriate change in responsibilities. A departure may still be necessary. The research establishes no universal financial return from retaining someone who no longer fits.

But it provides a reason to examine the company's accumulated knowledge before treating an early employee's departure as an ordinary replacement exercise.

When the next senior executive takes over a function, someone needs to account for the decisions, relationships and history that predate the hire. The founder should know how much of that knowledge remains with the employee whose job is about to change.

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Thanks for reading. See you next Wednesday.
— Jason

P.S. When one of your earliest employees left, what was the first thing your team discovered it didn't know? Hit reply with the story. I'm especially interested in what the handoff left out.