How do we know we're ready to grow?

Is it better to make the decision to hire based only on revenue growth? Or if you saved enough money to pay another salary for 4 months, would it be better to grow first and try to increase our revenue to pay for the new salary?

I always liked to have 6 months runway in the bank. If you have more than that, you can make big mistakes (like hiring someone and not figuring out it was a bad hire for 6 months) and it's OK.

Given that, the next question is: How will hiring someone result in 3x return on her salary? That is, if you pay someone $80k, how will that result (eventually) in at least $240k of additional revenue? Answers could include:

• The new features she adds will be saleable.
• The new features help us compete better and win more deals.
• Mowing through the bug backlog keeps customers happy and trial users impressed.
• A new marketing campaign brings 10x more eyeballs.
• Freeing up everyone from busywork lets them be more productive

If the path isn't clear, question at least the job description, if not the choice to hire at all.

Sure, "growth" generally means needing to hire, but be clear why, and you'll increase the chance the hire will make sense.

I think to a large part this is decided by how your revenue has been growing. Can you expect it to continue to grow to support a new salary?

Would the person you are hiring be comfortable knowing that if the revenue doesn't grow enough they are unemployed.

How quickly can the new person get up-to-speed to help with generating revenue?

There's no easy answer to this. It depends on a lot of details and how much risk you're willing to take. If you're confident that you're going to grow in the next 4 months go ahead and hire the person, but you certainly don't want to be in the position that you're not only going to lay off this perosn in 4 months but you also didn't have reserves for your other employees.

I agree whole heartedly with the other answers: there's no easy way to know when is the right time to take the next growth step. Growing revenue versus growing expenditure is a great chicken and egg problem. Personally I would tend to be conservative and wait for evidence that my revenue growth is 1. sustainable and 2. sufficient to meet the cost of whatever new commitment I was considering.

It is worth noting that the downside of over-eagerly hiring someone then being unable to keep them extends well beyond just the human cost. Every team member you bring aboard contributes to the collective knowledge of your startup - letting them go for financial reasons feels to me like bleeding raw intellectual capital that you've just invested in.

I remember Joel Spolsky saying that he uses a rule of thumb where every $100k annual revenue growth allows him to hire another programmer!   

I'd agree with Jason, you need to ask yourself if adding a new team member will increase your business or the value of your company, and by how much. This is especially important because it sounds like you are not in the situation where customers are beating on your door and you simply don't have the staff necessary to meet your existing demand.

They need to be able to create enough value for their salary, the overhead, the cost of training them, and hopefully some real growth for yourself and your investors.

Stepping away from revenue (but related) I would look at cash reserves and burn rate.

Those two figures should give you a pretty good picture of when your startup reaches Armageddon unless it gets revenue/funds.

When taking someone on you have to also consider the cost in time to hire (your time), train (yours and their time), as well as the cost of salary.

Its not uncommon in small business to take on people using reserves knowing that you cannot fully cover the cost with existing revenues. This may seem risky but you know that taking on someone will almost certainly increase those revenues beyond the costs (and if you don't know this then why are you taking someone on).