Finance Papers

Document Type

Journal Article

Date of this Version

2016

Publication Source

Manufacturing & Service Operations Management

Volume

18

Issue

4

Start Page

559

Last Page

569

DOI

10.1287/msom.2016.0587

Abstract

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, we present a simple growth model that depends on two critical inputs for revenue generation: the entrepreneur’s time and money. We 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. We 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. We 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.

Copyright/Permission Statement

https://doi.org/10.1287/msom.2016.0587

Keywords

entrepreneurial operations, hiring, optimal stopping problem

Embargo Date

3-1-2017

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Date Posted: 27 November 2017

This document has been peer reviewed.