Ep. 19 - Fundamentals of Organizational Design for Startups

I know: org design isn’t the thing that keeps most founders awake at night, but trust me, it is important to your startup’s success. That’s because org structure is not just about creating an org chart and deciding your reporting lines. Good organizational design helps you organize your business functions, people, and processes in a way that aligns with and enables you to execute your company’s strategy.

Whether you’re a startup founder or an HR leader, my goal in this episode is to explain how org structures can impact your startup and the considerations you need to make in order to design the right one for your business.

So read on for the cliffnotes or listen to the whole episode to see how organizational structures directly impact decision-making, business priorities, and employee interactions, helping founders and HR leaders create frameworks that align with their strategic goals.

You’ll leave with practical insights on optimal span of control, management layers, and process design, along with key considerations for evaluating and evolving your org structure as your startup grows.

Why Does Organizational Structure Matter?

Simple: Your org structure directly determines how your company makes decisions, which business functions it prioritizes, and how its employees interact to deliver business value.

Most importantly, your org structure should reflect your company’s business strategy. Here are some questions that I recommend you ask when evaluating your org structure for strategic alignment:

1. What are the organization’s primary strategic goals, and does the current or proposed structure enable us to achieve them effectively?
2. What are our core business functions, and how do they connect to value creation, customer needs, or competitive differentiation?
3. Which functions or roles need proximity to the Founder or CEO to maintain agility and focus on strategic direction?
4. Are there overlapping roles, bottlenecks, or unclear accountabilities in the current structure that impede performance or alignment?
5. How will the redesigned structure accelerate decision-making, strengthen collaboration, and promote accountability across the organization?

An org structure is not just a diagram of boxes that visualizes the reporting lines across the organization. This has a significant impact on how your company operates. The answers to the above questions will help you to ensure:

• Strategic Alignment → The org structure reflects the company’s strategy and will help you achieve your goals.
• Focus on Business Drivers → Identify the functions that drive value to your business and help deliver on strategic priorities. These functions will be elevated in the org structure and will most likely report to the Founder or CEO.

This is all theoretical, so let’s get practical. Let’s say you’re an early-stage fintech startup that is building a SaaS platform for the virtual banking industry.

In order for your startup to be successful, you have to build a reliable and secure product that virtual banks want to use. From an org structure perspective, this translates into a focus on three core functions:

• Product
• Engineering
• Information Security

Your organization’s structure must prioritize these three business functions and ensure they lead decision-making and receive the lion’s share of resource allocation. It will be different in your company, but whatever they are, I like to call these functions the business drivers, and they’re the functions that should report to the CEO by default.

Why report to the CEO? Simple. Your CEO is your “commander in chief,” and they have to focus on these business-driving functions to achieve the company’s goals.

If you have critical functions buried in the organization, then it’ll be harder for the founder or CEO to receive the information they need to make quick decisions, regardless of how good your company’s communication lines are. And this issue becomes more pronounced during hypergrowth as your company adds more people and management layers.

I’ve seen many CEOs try to minimize the number of business areas they manage directly by burying important functions under others. But every single time, they end up reversing that decision after a major incident that could have been avoided with the appropriate executive visibility.

Span of Control: How Many People Should Report to a Single Manager?

I get this question all the time: How many people should a single person manage?

The answer: it depends.

I’ve seen managers with 1 direct report and 10 direct reports. It really depends on the type of work being done, but for organizations that rely on knowledge workers, the sweet spot is between 4 and 6 direct reports. Knowledge-based workers perform relatively complex work and need more guidance, coaching, and support. I personally don’t recommend stretching it beyond 7 direct reports because by then, you’re stretching your people managers too thin and they won’t be able to manage effectively.

Spans of control grow over time as a company matures, mainly because its operations and processes become more robust and efficient.

We can’t talk about the span of control without getting into layers of management, though.

Layers of Management

Early-stage startups tend to have a flat structure. That’s probably not too much of a surprise given how small startups can be. But as startups scale, they will need to add layers for a few reasons:

• Increasing Span of Control → Additional layers accommodate the growing headcount.
• Job Role Transformation → Roles evolve from generalist to more specialized as the breadth, depth, and volume of work increase.
• Functional Expansion → Departments evolve and expand. For example, HR might add recruiters and a Talent Acquisition Manager as hiring needs grow.

Here’s a quick example. Most early-stage startups have an HR department of one, and that person does everything in HR, and sometimes more. But as they begin to experience success, they might hire a few recruiters to support the company’s growing hiring needs. As the startup enters full-scale-up mode, the HR department might add several more recruiters and hire a Talent Acquisition Manager to oversee the hiring function, while also adding other HR sub-functions. Most functions evolve and expand in a similar way as a company grows.

The Relationship Between Org Structure and Job Roles

The term “job architecture” refers to a structured framework that organizes all roles within an organization into job families, functions, levels, and career tracks.

This isn’t mere HR bureaucracy. Understanding job architecture creates a foundational system for organizing, managing, and evolving a company’s workforce to align with its operational and strategic needs.

The most common misstep I see startups make when scaling is creating narrow job roles early in their growth. This move is always made with good intentions and is generally proactive in anticipation of continued hyper growth. More often than not, these narrow jobs don’t have enough work for a full-time employee. So this ends up being a bad investment that could have been better deployed elsewhere in the business.

Org structures are not static. They change over time for many reasons, and leaders should always evaluate whether their structure is fit for purpose. Unfortunately, most leaders focus on organizational structure only when problems start to pop up. These problems are generally related to slow decision-making, misalignment of core functions, and bloated processes.

The Role of Processes

Process design must follow org design.

When you’re designing or revamping your org structure, you’re essentially rearranging your company’s functions and reprioritizing which ones the business will focus on based on the strategy you are pursuing. This means changes in business priorities, decision-making criteria, and levels of authority. So, without appropriate changes to processes, the org structure will cause more problems than it will solve.

Key Takeaways

• Revolve Your Org Structure Around Business Drivers: These functions drive value and have the biggest impact on your strategic goals.
• Org Structures Evolve: Proactively evaluate if your org structure is fit for purpose, especially in a hyper-growth environment. If your company is growing headcount by more than 20% year over year, evaluate your organizational structure annually.
• Don’t Force a Flat Structure: If a manager’s span of control nears 6 employees, consider adding a new job level. Be careful not to create very narrow roles early on to avoid premature headcount bloat.
• Don’t Forget Processes: Process design must follow org design to avoid confusion between reporting lines and process-based decisions.
• Additional Resources
• For more on the basics of org structures, check out The Business of People newsletter by Melissa Theiss.

Final Thoughts

Your startup’s organizational structure is the core building block that enables it to achieve its strategic goals.

A great business strategy with a lousy org structure that doesn’t align with the strategy might not cause the startup to fail, but it’ll make it a helluva lot harder to succeed!

Revolve your org structure around your business drivers. They are the functions that drive value and have the biggest impact on your strategic goals. At the same time, give your business room to grow and adapt. Org structures are evolving organisms. Don’t expect them to remain unchanged for long. In fact, it’s actually healthy for a startup to proactively evaluate if its org structure is fit for purpose and act accordingly.