“Fast-growing tech companies do not run out of ideas. They run out of people at the right cost, doing the right work, at the right time.”
Investors do not care whether you hire full-time or build a bench of subcontractors. They care about one thing: your ability to turn a dollar of headcount spend into more than a dollar of revenue. The hiring model is just a lever. If your margins expand and your delivery risk goes down, they call it good management. If your burn explodes and delivery slips, they call it a leadership problem.
For most early and mid-stage tech companies, the real question is not “subcontracting vs. hiring” as if it were a moral choice. The real question is “At what revenue predictability and margin profile does it make financial sense to own capacity instead of renting it?” That is where founders either compound growth or quietly stall at a plateau that looks permanent.
The trend is clear in funding decks and quarterly updates. Seed and Series A companies lean heavily on subcontractors to prove demand and maintain flexibility. As revenue mix stabilizes and sales cycles get repeatable, leaders start converting that rented capacity into payroll. The exact crossover point is not obvious. It sits somewhere between “we are drowning in work” and “we can forecast this work with enough confidence to carry salary risk.”
The tension comes from two competing truths. Subcontracting feels safe because cost is variable and you can pull back quickly. Hiring feels powerful because knowledge stays in-house and culture gets stronger. The market does not reward feelings. It rewards companies that time the switch with discipline, supported by metrics, not panic.
A founder who overcommits to subcontractors often sees margin erosion, brand dilution, and rising delivery risk. A founder who overcommits to employees too early often sees bloated burn, founder stress, and a runway clock that starts to look very short. Somewhere in the middle sits a hiring strategy that investors respect, customers trust, and P&L statements can carry.
Why this decision is not HR: it is a financing decision
On paper, subcontracting vs. hiring looks like an HR topic. In practice, it behaves like structured finance. You are trading fixed cost for variable cost, and you are deciding how you want to finance growth.
Investors look at your people model through three lenses:
1. Gross margin
2. Revenue predictability
3. Execution risk
If your cost of delivery scales up and down with revenue, your short-term risk stays lower, but your long-term margin ceiling may be limited. If your cost is more fixed, your short-term risk goes up, but you can compress cost per unit of output as you grow.
Expert view: “Founders underprice the cost of chaos from 100% subcontractor teams. They overprice the cost of early core hires. The data shows that companies with a stable core team reach operating margin stability 12 to 18 months faster.”
This is why the timing of the switch matters more than the method. Subcontracting can help you buy learning before you lock in commitments. Hiring can help you compound what you learned into a durable engine.
Unit economics: how to compare a subcontractor and a full-time hire
You cannot answer “subcontract or hire” with gut feeling. You need a simple model. No fancy spreadsheet required, just four numbers:
– Cost per hour
– Revenue per hour (or per unit of output)
– Utilization rate
– Ramp time
For a typical tech service or product company, the math can look like this.
Example: comparing cost structures
Assume you run a SaaS company with a services layer. You sell “implementation packages” for 10,000 each. You can deliver one package in 40 hours of qualified work.
| Metric | Subcontractor | Full-time hire |
|---|---|---|
| Hourly cost (fully loaded) | 80 | 55 |
| Hours per implementation | 40 | 40 |
| Delivery cost per implementation | 3,200 | 2,200 |
| Gross revenue per implementation | 10,000 | 10,000 |
| Gross margin per implementation | 6,800 | 7,800 |
| Utilization (hours on billable work) | Paid per hour used | 65% |
| Monthly fixed cost | 0 | ~9,500 |
The subcontractor costs you more per hour, but you only pay for confirmed work. The employee costs you less per hour, but you carry them every month, booked or not.
The missing input is volume and predictability. If you can only sell 2 or 3 implementations per month, the subcontractor is safer. If you can reliably sell 10 or more, the employee starts to win, even with lower utilization.
Data point: Many growth-stage SaaS firms report that the break-even point for moving services from contractors to in-house teams sits around 65% to 75% capacity utilization over a 6-month rolling window.
The same idea applies to engineers, designers, sales development reps, and customer success. At low, volatile volume, rent capacity. At stable, growing volume, own it.
Where subcontracting creates business value
Subcontracting is not just a stopgap. It has clear business roles if you define them with intention. The value comes in specific use cases.
1. Proving demand without burning runway
Pre-seed and seed companies try to show traction fast, before the bank account dips too far. Committing to a payroll-heavy org structure before you have consistent customers is risky.
Subcontractors create a variable cost layer. You match spend to revenue, within reason. If deals slip, you pause or reduce work orders. If deals come faster than expected, you expand with more hours or extra partners.
This helps your cash flow profile during the search phase. You pay a premium per hour, but you buy information: which features people use, where onboarding fails, how much support is needed per account, and how long projects really take.
From a funding narrative perspective, this phase looks like:
– Light core team
– High contractor ratio
– Strong focus on learning per dollar, not margin
Investors accept lower gross margin early if they see you treating it as a temporary price for learning, not a permanent operating model.
2. Buying niche skills without long-term bets
Many tech products require specialized knowledge for short periods: a security audit, a data warehouse migration, a payment integration for a foreign market. Hiring these skills full-time too soon traps your capital in specialists without enough recurring work.
For these cases, subcontracting behaves like an on-demand skill market. You buy an outcome, not a career. That keeps your salary structure focused on repeatable work that supports your core product or service.
Over time, you turn recurring specialist needs into roles. Example: if you hire penetration testers three times a year, for similar scopes, that can evolve into a full-time security lead with clear ROI.
3. Smoothing peaks in demand
Even mature companies hit seasonal or project-based spikes: major client onboardings, new product launches, holiday traffic, or big migrations.
Carrying permanent staff sized for peak load clogs your P&L during normal months. Subcontractors cover the peaks and help you hold headcount at a level that matches your average, not your maximum.
For this to create value, you need clear metrics:
– Target utilization for employees
– Maximum acceptable subcontractor share before margin erosion
– Service level expectations that subcontractors must meet
When this balance is right, your gross margin stays stable, and your time-to-revenue on big deals does not suffer.
4. De-risking international expansion
Entering a new geography raises legal, tax, and cultural questions. Hiring full-time employees in a region where you have not proven demand can tie you to legal entities and compliance costs that you do not yet understand.
Subcontracting, or working through local agencies, lets you test a market: local sales, localized support, local integrations. Once revenue passes a clear threshold and churn stabilizes, you can flip into entity setup and payroll with better confidence.
From an investor’s standpoint, this reads as capital discipline. You are not guessing from a distance. You are buying on-the-ground feedback before you lock in.
Where hiring full-time creates business value
Subcontracting cannot carry your company forever. There is a point where renting all your core talent starts to act like a tax on your growth.
1. Protecting core IP and product velocity
If your product knowledge lives in the accounts of 10 different subcontractors, you are one missed email away from project risk. Codebases take longer to understand. Product decisions drag out. Architectural trade-offs lack a clear owner.
Full-time teams build shared context. Over months of working together, they learn how to make faster, better calls without needing to re-explain the entire product every time.
Business value shows up as:
– Shorter cycle times
– Fewer defects escaping to production
– More predictable release schedules
– Lower rework costs
Investors read those signals as execution strength. When they see heavy reliance on outside dev shops for core product lines, they start to question moat, IP ownership, and resilience.
2. Building culture that retains knowledge
You do not build true culture with a Slack room full of emails from contractors who are juggling five other clients. Culture is not about ping-pong or slogans. It is about how people make decisions when leadership is not present.
Full-time hires are more likely to commit to the long arc: roadmaps, customer relationships, internal standards. Over time, this reduces training time, handoff friction, and context loss.
From a financial angle, lower voluntary churn among key staff has a direct impact:
– Reduced hiring and onboarding cost
– Less time lost to replacing knowledge
– More stable relationships with key customers
At Series B and later, investors start to look at your retention numbers and internal promotion pipeline. A company that lives on a rotating cast of subcontractors often struggles here.
3. Improving margin as revenue scales
Subcontractors are convenient at low scale, but they lock in high variable cost. As volume grows, each incremental unit of work keeps carrying that higher rate.
Bringing work in-house allows you to drive down your cost of delivery per unit, assuming you manage utilization well.
Expert view: “For service-heavy tech firms, shifting from 80% contractors to 70% in-house over three years can add 5 to 15 percentage points of gross margin, if utilization and pricing discipline hold.”
That improvement does not just look good on a spreadsheet. It buys you more room to:
– Invest in product
– Invest in sales
– Absorb pricing pressure from larger deals
At exit, strategic buyers and private equity groups pay attention to margin structure. A company with heavy subcontractor dependency can see valuation multiples compressed, because buyers fear that margins are “rented” and not fully under management control.
4. Creating career paths that grow leaders
Sustained growth needs leaders who understand your business deeply: engineering leads, product managers, sales managers, and customer success heads who can carry teams.
You rarely develop these people through pure subcontracting models. Contractors may be great at delivery, but they are not usually tasked with internal mentoring, process creation, or long-term team building.
Full-time hires let you invest in leadership tracks. Over 3 to 5 years, that compounds into a management bench that investors trust. They stop seeing the company as “founder plus vendors” and start seeing it as a durable organization.
How investors read your team structure
Your mix of subcontractors and employees sends a signal to the market about your strategy and your risk.
Stage by stage: expected mix
Here is a rough pattern investors see often.
| Stage | Typical Contractor Share | Investor Interpretation |
|---|---|---|
| Pre-seed | 50% to 80% | Capital-light, testing ideas, still searching for product-market fit |
| Seed | 30% to 60% | Building core team, renting niche talent, buying learning |
| Series A | 15% to 40% | Core product and GTM team in place, contractors for overflow and specialties |
| Series B+ | 5% to 25% | In-house capacity on core functions, contractors used surgically |
These are not rules, but they shape investor expectations. A Series B company with 70% subcontracted engineering triggers concern. A seed company with all full-time hires and high burn can raise a different concern.
Signals investors like to see
Investors look for clarity and intent:
– Clear explanation of which roles are strategic and must be internal
– Defined reasons why certain work stays with subcontractors
– A timeline and trigger metrics for moving key functions in-house
– Evidence that margins improve over time as mix shifts
When your hiring vs. subcontracting story plugs into your financials, your deck feels coherent. You are not just reacting to short-term fires. You are managing capacity as a portfolio.
Decision triggers: when to move from subcontracting to hiring
There is no universal calendar date where you stop subcontracting and start hiring. Instead, you need operational triggers. These are the kinds of thresholds that can guide the switch.
Trigger 1: Revenue predictability reaches a threshold
Once you can forecast a steady stream of work, carrying fixed salary gets safer.
Common markers:
– 6 to 12 months of consistent revenue from a given product line or service
– Pipeline coverage at 2x to 3x target for the next 2 quarters
– Customer churn below a level that would suddenly empty your backlog
At that point, a full-time hire can be covered by a known base of work, with upside if sales beat plan.
Trigger 2: Contractor dependency hurts speed or quality
If you notice that every release, onboarding, or key feature sits stuck waiting on external capacity, the subcontracting model is now a drag, not a buffer.
Signals:
– Regular delays because your usual subcontractors are booked
– Quality swings between different subcontractors
– High rework because context lives outside your company
When the time and quality cost crosses the cost savings from variable labor, it is time to pull work inside.
Trigger 3: Cost per unit stabilizes and starts to look high
In early chaos, you accept messy margins because you are learning. Over time, your cost per feature, per integration, or per customer should start to cluster.
If you see that you pay roughly the same premium rate on similar tasks, month after month, that is a sign you could probably staff this work internally at lower blended cost.
A simple step:
– Track subcontractor spend by category (e.g., “frontend dev on core app,” “customer onboarding in EU,” “Level 2 technical support”)
– For each category, compute monthly average spend and hours
– If the category stays above a threshold for 3 to 6 months, ask if there is a role hiding there
Trigger 4: Strategic importance crosses a line
Some work becomes so central to your value that you cannot risk it living in outside hands. Examples:
– Your core recommendation engine
– Your primary data pipeline
– Your core mobile app
– Your highest-value enterprise onboarding program
Once a function becomes part of your differentiation or sales story, you need tighter control and continuity. That usually means full-time roles, even if the cost picture is not perfect yet.
How to structure a mixed model that actually works
Most companies will live in a mix of subcontractors and full-timers for a long time. The question is not how to eliminate one, but how to manage both without chaos.
Define ownership, not just tasks
A common failure pattern: founders give key responsibilities to subcontractors without naming internal owners.
Better model:
– Full-time staff own outcomes: product area, customer segment, or internal process
– Subcontractors own scoped deliverables under that owner’s direction
Example:
– Internal product manager owns the “billing and subscriptions” area
– Subcontract dev team builds specific epics under their roadmap
– Internal QA and engineering lead review and integrate
This keeps strategic control and knowledge with your team, while still using external hands for capacity.
Standardize how work flows to subcontractors
Ad hoc contractor use leads to inconsistent quality and high coordination cost. Treat subcontractor engagement like a product pipeline.
Basic elements:
– Standard scopes and definition of done
– Shared tools and repositories
– Fixed review and sign-off steps
– Simple documentation templates
You want to reduce the “spin-up” cost every time you bring in external help. Over time, this makes subcontracting less chaotic and more predictable.
Link compensation to customer value, not just hours
Pure hourly billing can encourage volume over outcome. For predictable work, start moving toward models that connect pay to value.
Example:
– Fixed price per implementation milestone
– Per-ticket pricing for support, with strict SLAs
– Per-feature pricing where scope is well defined
This structure gives you better margin control and gives subcontractors clear incentives.
Pricing models: subcontractors vs. employees
Comparing internal and external costs gets messy when you ignore fully loaded cost. Salary alone does not tell the story.
Here is a simplified comparison.
| Cost Component | Subcontractor | Full-time Hire |
|---|---|---|
| Base pay | Hourly or project fee | Annual salary |
| Taxes & benefits | Usually included in rate | Employer taxes, health, retirement, etc. |
| Recruiting cost | Low to moderate | Higher (time, agencies, tools) |
| Training & onboarding | Spread over shorter term | Spread over longer term |
| Equipment & tools | Sometimes included | Company responsibility |
| Idle time cost | None (not billed) | High (still paid salary) |
| Control over time | Limited, negotiated | Higher, part of employment |
| Commitment horizon | Short-term, project based | Medium to long-term |
For early use, the “all-in” rate for subcontractors looks high, but your risk can be lower because you are not locking into fixed overhead. As your planning improves, the predictability of employee costs becomes an advantage.
Case patterns: common paths tech founders take
While every company is different, certain patterns appear often in the market. These patterns can help you stress test your own choices.
Pattern 1: Outsourced MVP, internalized core product
– Pre-seed: founder contracts a dev shop to build v1
– Early seed: first paying customers arrive, product feedback grows
– Mid seed: founder hires a technical lead and first internal engineers
– Late seed / Series A: dev shop involvement shrinks to overflow or specific integrations
Risk: if the transition is delayed, knowledge and control stay locked in the dev shop. You depend on their priorities and staffing.
Mitigation: bring in an internal technical owner early, even part-time, so that knowledge starts accumulating internally before the full switch.
Pattern 2: Contractor-heavy services, then build a standardized delivery team
– Seed: company sells custom implementations or consulting around the product, mostly performed by subcontractors
– Series A: founders identify repeatable patterns across engagements, standardize scopes and packages
– Series A+: hire internal delivery managers and consultants, keeping contractors for overflow
Outcome: margin improves as delivery becomes predictable and internal expertise grows. Contractors remain as a flexible shell around a strong core.
Pattern 3: Global contractor network, then regional hubs
– Early growth: company taps freelance networks worldwide for support, content, or local market help
– As revenue concentrates in certain regions: company spins up regional hubs with full-time teams and uses contractors only for new test regions
This structure allows growth into new geographies without overcommitting, while still building stronger local teams where revenue proves itself.
Risk management: legal, compliance, and brand
Subcontracting touches more than cost. It affects legal risk, compliance, and brand perception.
Misclassification and regulatory risk
Treating long-term, full-time-like workers as contractors can trigger misclassification issues in many jurisdictions. Regulators look at control, duration, and dependence.
To reduce this risk:
– Keep contractor arrangements tied to defined deliverables, not indefinite “jobs”
– Avoid giving contractors the same working patterns as employees (e.g., fixed daily schedules with direct supervision) if the legal environment does not support that classification
– Consult local legal guidance where you rely heavily on non-employee labor
Investors care about this because misclassification claims can lead to back taxes, penalties, and sudden cost spikes.
Brand and customer experience control
When contractors interact with your customers directly, they carry your brand. If standards slip, customers blame you, not the subcontractor.
Set clear rules:
– Code of conduct and communication standards
– Documentation expectations
– Escalation paths back to your internal team
Over time, if customer-facing work becomes core to your promise, consider moving more of that work inside to stabilize experience.
Practical playbook: questions to ask before you hire or subcontract
Before deciding on subcontracting vs. hiring for a specific role or function, walk through a simple checklist.
1. Is the work core to our long-term advantage?
– If it touches core IP, core product, or primary customer relationships, bias toward internal.
– If it is supporting or experimental, bias toward subcontracting.
2. How predictable is the volume over the next 12 months?
– If you can see at least 60% to 70% of a full-time workload with high confidence, hiring begins to make sense.
– If demand is spiky, testy, or seasonal, subcontractors offer flexibility.
3. What is the fully loaded cost of each option?
– Compare hourly contractor rates against salary plus benefits, taxes, tools, and expected utilization.
– Look at payback time: how many months of planned work does it take for the full-time hire to “beat” the contractor option?
4. What happens if we are wrong?
– If revenue falls short, can you re-deploy the hire to other valuable tasks?
– If a subcontractor disappears mid-project, do you have internal ownership to recover?
Thinking in terms of failure modes forces you to design resilience, not just cost savings.
What “good” looks like over time
The healthiest tech companies tend to move along a path where:
– Early on, they buy speed and learning with subcontractors
– As signal strengthens, they invest in core hires around product, engineering, and customer value
– They maintain a subcontractor pool for spikes, specialists, and experiments
– Their gross margin trends upward as mix shifts and processes mature
Data point: “In a sample of high-growth SaaS and productized services companies, those that reduced contractor dependency in core functions by 30% between Series A and Series C saw median EBITDA margins improve by 8 points compared to peers that stayed contractor-heavy.”
This is not about purity. It is about discipline: using subcontracting and hiring as tools in a capital strategy, not as reactive moves.
If you are a founder or operator, the question is not just “Do we hire or subcontract for this role?” The sharper question is “At our current stage, revenue predictability, and margin profile, which structure gives us the highest return on each dollar we commit to people, while keeping our downside under control?”
That is the point where team building stops feeling like guessing and starts acting like real capital allocation.