Why Startups Lose Money Using Employer Of Record Services

Startups don’t fail because they lack good ideas. Most of them, as we know, flounder because they run out of money.

One factor that can contribute to this is overspending on full-time hires. In line with this, many founders turn to employer of record, or EOR, services under the assumption that adding fully fledged employees is the default path to building a team. It’s not. Worse than that, in many cases it is a fatal mistake.

As I’ve written before, to scale effectively, startups need to address three critical challenges.

The first one is efficiency — getting a specific task done.

The second one is speed. Problems need to be solved fast, which means finding the right person without delays.

And third, there is the cost optimization issue. Especially at the early stages, hiring expenses need to remain low.

EOR fails on all three fronts. So why are founders still using it? Here’s the rationale, as well as a better, more viable alternative.

The hidden costs of EOR services

Hiring through an EOR is slow. The process, which involves a long chain of checks, onboarding, and drafting and finalizing agreements, can take months. For startups, especially nowadays when AI-driven market shifts happen in weeks, this delay can be deadly. Why wait months when you can onboard a contractor in two days?

Beyond speed, EOR limits control. Since the hiring company may lack a legal entity in the country, it has little say over intellectual property rights, work scope or even employment terms. This creates risks, especially in countries with employee-friendly labor laws.

In Brazil and Spain, for instance, courts overwhelmingly side with employees. If a startup needs to let someone go, the legal battle will likely be lengthy and expensive, not only in terms of salaries, but also EOR fees. The average EOR costs $599 per month.

The alternatives

Fortunately, working with an EOR is not the only choice startups have. By working with a contractor management service or a contractor of record (COR), you can solve these problems.

Unlike EORs, these solutions offer speed, cost savings and flexibility. Contractors can start working immediately, without the red tape associated with traditional employment. And the cost difference is staggering — contractor management services range from $39 to $70 per month, a fraction of EOR fees.

When do EORs make sense?

For startups hiring internationally, a COR is the better option unless a candidate insists on full-time employment and benefits, in which case, an EOR is needed. Additionally, an EOR can be useful if it’s decided to hire an ultra-key specialist expected to be with the company for a very long time, since the relationship will mirror that of a full-time employee.

In other scenarios, such as if a company is operating in hard-to-pay regions or if a venture is committed to establishing a full-scale presence in a new country, both an EOR or COR could provide effective solutions.

Final thoughts

Full-time hiring isn’t mandatory. Once startups realize this, they start looking for better alternatives. For seed and Series A companies, contractor management and COR provide the flexibility, speed and cost savings they need to scale smartly without burning cash on unnecessary overhead.

Particularly in today’s fast-moving market, this increases the odds of success and can make the difference between life and death.

Pavel Shynkarenko, founder and CEO of Mellow, is an entrepreneur with more than 20 years of experience, and a freelance economy pioneer who aims to transform how companies engage with contractors. In 2014, Shynkarenko launched his first HR tech company, Solar Staff, a fintech payroll company for freelancers, which showed $10 million-plus in revenue for 2022 and 2023. Earlier in 2024, responding to the growing demand for specialized solutions for long-term interaction with contractors, Solar Staff, as a global company, pivoted to Mellow ($1 million MRR). Shynkarenko enjoys combining AI, art and photography and has images on display in galleries in New York, Chicago, Europe, Asia and Australia.