Most founders dread the words “performance review.” It brings back memories of stale corporate conference rooms, complex HR forms, and awkward conversations that feel like theater. Because of this trauma, many startup leaders skip them entirely. They assume that because the team is small and talks every day, everyone knows how they are doing.
This is a dangerous assumption.
A Performance Review is a formal assessment in which a manager evaluates an employee’s work performance. In a startup context, it is not a bureaucratic box to check. It is a synchronization point. It is the moment where you pause the daily chaos to ensure that the employee’s output matches the company’s speed and direction.
Without this mechanism, resentment builds silently. The founder is annoyed that the employee is not stepping up, and the employee thinks they are doing a great job because no one has told them otherwise.
The No Surprise Rule
#The most important rule of a performance review is simple. There should be no surprises.
If you sit down for a six month review and tell an employee they are failing, and they are shocked by this news, you have failed as a manager. A formal review should be a summary of the feedback you have been giving continuously in your weekly one on ones.
The review is not the time to drop a bomb. It is the time to look at the aggregate data of the last period and identify patterns. It transforms isolated incidents into a trajectory.
Separating Coaching from Compensation
#A common mistake founders make is combining the performance review with the salary review. They sit down, give the employee a list of things to improve, and then tell them their new salary.
This is biologically ineffective. The moment you mention money, the employee’s brain shifts into a transactional mode. They stop listening to the feedback about their skills and start calculating their rent.
To be effective, you should separate these conversations. Hold the performance review first. Focus entirely on growth, skill acquisition, and career path. Two weeks later, hold a separate compensation meeting. This allows the feedback to land without the emotional noise of financial negotiation.
The Two Way Street
#In a corporate hierarchy, the review flows one way. The boss judges the subordinate. In a startup, it must be bidirectional.
You should use this time to ask for feedback on your own leadership. Ask the employee what you can do to unblock them. Ask them where you have failed to provide clarity.
This does two things. First, it gives you critical data on your own blind spots. Second, it creates psychological safety. When the founder admits they are a work in progress, it makes it safer for the employee to admit their own weaknesses.
Growth vs. Measurement
#Finally, you need to decide what the purpose of the review is. Is it to measure past performance or to spark future growth?
Measurement looks backward. It is about judging what happened. Growth looks forward. It is about planning what will happen.
For a startup, the past is already gone and usually irrelevant. The focus should be 80 percent on the future. The review should end with a clear plan for the next six months, listing the specific skills the employee needs to acquire to help the company reach its next milestone.