Traditional Leave Policies Can Be Disrespectful

Sometime late last year, before I had decided to quit my job and co-found Retrium, I started thinking about my then-employer’s leave policy. It was a pretty standard leave policy for the corporate world: we accrued roughly 2 “personal days” every month which we could use as we wish. The more I thought about it, the more I found this policy, along with all “maximum days off” leave policies, to be moderately disrespectful to the employee. That’s because an employment contract to me is, or rather should be, an agreement that relies on mutual trust — on the employer’s side, trust in the employee to get the job done; on the employee’s side, trust in the employer to be able to pay.

By limiting the number of days off an employee can take, the employer is implicitly telling the employee: “I don’t trust you to take off a reasonable number of days each year, therefore I’ll arbitrarily set a contractual limit.” It’s as if you, in the eyes of your employer, were a young child eating too many candy bars. “But Mommy, can’t I have just one more!?!?”

But are Unlimited Vacation Days the Answer?

I’m not alone in feeling this way. Over the past decade, there’s been a trend emanating from Silicon Valley towards a policy of granting unlimited leave to employees. Take as much as you want! We trust you! Upon first glance, this seems to be an optimal solution: the employer is demonstrating its trust in the employee to do the right thing. It makes the employment contract a contract based on trust and respect, at it should be.

But there’s a catch. Without a guaranteed number of vacation days each year, employees no longer have control over their ability to take leave in the first place. Employees who work under traditional leave policies accrue days off; in other words, taking a day off is an employee’s right. With unlimited leave, a bad boss can actively prevent an employee from taking a day off because days off are not the employee’s, per say.

As a result, unlimited leave gives the employer even more control than it had with a traditional maximum days off policy. “You already took a few days off last month, Jon. Don’t you think that’s enough?” Or, even worse, “Sorry, Bethany, if you take more vacation this year you might not get that promotion we were talking about.” Think that’s unrealistic? Possibly, but the “fairness” of unlimited leave policies is entirely dependent on good corporate culture. And it also relies, scarily, on the whims of your particular boss.

Is There a Better Solution?

So, are we eternally caught between the traditional annual leave world, in which employers demonstrate a lack of trust in their employees, and the new, hip unlimited vacation day world, in which employees place an incredible amount of trust in their employer to treat them decently? I don’t think so.

Here’s my suggestion: why not give employees a minimum number of days off each year that employees have the right to use, while at the same time establishing no maximum? (Note: after doing some research, I also realized that I’m not the first to think of this. Credit where credit is due.)

What excites me most about a minimum leave policy is that it combines the best features of traditional and unlimited leave policies into one. By establishing a minimum number of vacation days that an employee must take each year, it solves the problem with unlimited leave policies: employees now have the right to take vacation every year and don’t need to trust that their employer will allow them to take time off. At the same time, by not establishing a maximum number of days an employee is allowed to take, it fixes the problem with traditional leave policies by placing trust at the core of the relationship between the employer and employee.

In essence, the employer that offers a minimum day off policy is saying to its employees:

I trust you to take an appropriate number of vacation days each year and therefore I am not setting a maximum. How many days you take is up to you. Just get the job done. At the same time, I want you to know that you have the right to take time off and therefore I am establishing a minimum number of days which are yours to take as you wish.

Because I eat my own dog food, a minimum day off policy is one of Retrium’s core values from day one. What do you think?

One of the first decisions I had to make as co-founder of Retrium was how to legally form my business (I chose an LLC). You can find many articles online comparing and contrasting LLCs with Corporations, and as a founder, it’s well worth your time to understand the implications of each option. In a nutshell, an LLC has two key features that make it very attractive. First, as a pass-through tax entity, it avoids double taxation. Second, it provides personal liability protection for the owners of the business. (Note: the advantages and disadvantages of LLCs vs. other business types is a very complex subject — so please do your own research.)

Despite these advantages, it’s rare to find startups that have formed as an LLC. In fact, if you search on Google for “Startup LLC or Corporation“, the vast majority of the articles you will find argue that tech startups should be structured as a corporation. In most cases, I disagree. And it’s because I’m a lean startup aficionado.

Why Most Startups Should Form as an LLC

Like most startups, I’m going to assume that yours has limited cash and therefore a short runway. The number one risk factor for a startup in this situation is your ability (or, rather, inability) to find your first customer. If you can’t find that elusive first customer, you’re done. Out of Business. Kaput.

As a result, you should have a laser focus on finding someone to pay you for whatever it is that you are building. That means saying ‘no’ to any expenses that don’t directly support this goal. Which also means saying ‘no’ to forming as a corporation. Corporations are like bad boyfriends or girlfriends. They are expensive. Expensive at the beginning (formation costs are high) and expensive to keep (annual filings are complex and costly). LLCs are the opposite. Formation costs are minimal and they have very few ongoing legal requirements.

Delay Expensive Decisions Until You Have More Information

By choosing to form as a corporation early on, you’re basically saying: “The best use of these few thousand dollars is to form a complex legal entity.” Not to build your product, not to advertise, not to do market research. To form a legal entity. Are you sure that’s the case?

Here’s an alternative. Form as a low cost LLC. You can always switch to a corporation if you need to (for example, if you are closing in on a funding round and the investor requires it). Yes, there are associated switching costs, but I recommend it anyway. Here’s why it’s a good, lean strategy:

1. It keeps your costs low while your runway is short
2. It tells investors you know how to spend money wisely
3. And most importantly, it extends your runway by delaying your decision to spend significant money on business formation until it is required

The Key Takeaway: Be Lean

The key takeaway here is to apply lean startup to as many decisions you are making as a founder as possible. Lean says we should follow the “build-measure-learn” feedback loop. In other words, we should build a small bit of product, test it in the marketplace, learn what works and what doesn’t, then start all over again. Applied to the choice of LLC vs Corporation, here’s what build-measure-learn looks like:

• Build – form as a low cost, inexpensive LLC (that’s your small bit of “product”)
• Measure – see if it’s working for you (can you find funding as an LLC? is it preventing you from giving equity to employees?)
• Learn – if the LLC is preventing you from achieving something critical to your business, switch to a corporation; if not, don’t

Then, rinse and repeat.

In fact, the principle of build-measure-learn can be applied to almost every decision you have to make as a startup founder. Keep that in mind as you continue on your entrepreneurial journey.