How much cash reserves should you plan to have before hiring?

We're at a point where we need to hire at 1-2 employees, and I'm not sure how much cash to have on hand. We're a SaaS product, with growing traction and on target to be cash-flow neutral next year. Until now, it's been the founders working on the company along with contractors. Peldi, the Balsamiq founder's opinion on this was to hire when you're feeling that you're about to die (we're there) and you have one year of salary for the hire in reserve (we're not there).

Complicating matters a bit further, half of the company is in Europe, and I have a tough time in general explaining the differences in social benefits to my European counterparts (that a US FTE isn't entitled to healthcare, for example). For instance, a European worker can sign on for a 9-month gig without impact to their health insurance. Not in the US.

Can anyone offer some experience here - Mainly I'd appreciate any wisdom from others who had to calculate when they had enough cash to hire someone. If anyone has any insight to explaining US hiring variables to EU folk, that'd be a bonus

Thanks

I don't have a full answer for you, but I think for the part about explaining US hiring practices to EU folks, you are looking at it the wrong way.

European countries (and they all differ) have very strict labor regulations. You can't just explain to someone in Europe that "that's how things are done in the US" and give them US terms. Labor laws will apply to you, no matter how much explaining you do.

To answer your question more directly, if you are looking into hiring anyone, make sure you understand how you can fire that person for economic reasons (when you are running out of cash), when the person has otherwise been performing fine (ie., didn't commit any major mistakes). That's the #1 issue I think you should focus on.

In the US, since employment is at will, with a courtesy 2-week notice, you can hire someone even if you only have one month of cash in the bank, because you can always get rid of them anytime. In many European countries, you need to give at least 3 months notice, and sometimes you can't fire someone at all unless there is a serious issue with their performance. That's what a startup should be concerned about.

To work around some of these labor laws, you can look into contracting with someone as opposed to hiring, but again, check very carefully the law. You don't want that person to be reclassified as an employee that can't be fired, that would kill your bank account real fast.

You're an SaaS, which is great when you hire employees, because you have a good idea of your estimated monthly revenue.

When should you hire someone? When you have enough money to. You don't need to have a years worth of salary, half a year, or even 3 months worth.

Is it ideal to have capital reserves to keep employees on incase you guys start losing money? Sure, but is it worth it to bootstrap an extra 3-4 months before bringing in help? Nah, you can use those employees in asap.. especially if you guys are getting burned out.

The most important rule is that you should be honest with the potential employee. The implicit social contract of employment is that as long as the employee does good work and the company is doing reasonably well, they will continue to have a job. (Of course, companies can have problems, or simply reprioritize, and sometimes this changes who you want working for you.) But if you're banking on a miracle to pay the person's salary, it's unfair to hire in the usual way.

Alternatively, though, you can hire with significant equity compensation. You can also hire part-time, hire cheap interns, or bring on an additional co-founder. And if you're hiring for a position that has significant ability to influence revenue, e.g. a salesperson, you can tie compensation to revenue generation (commissions).