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This CEO says he was shut out by tons of investors in Silicon Valley for classifying his workers as W-2 employees

josh bruno hometeam
josh bruno hometeam

(Hometeam CEO Josh BrunoHometeam)

The debate about whether "on-demand" economy workers should be classified as independent contractors (who use IRS Form 1099) or employees (who use Form W-2) rages on, but one startup CEO found that for Silicon Valley venture capitalists, there was a clear preference for 1099s.

On-demand startups like ride-hailing Uber or delivery service Instacart generally rely on 1099 workers who aren't technically employees of the company.

And there's a simple reason: Having employees on your payroll can get expensive.

Last year, the food delivery service Munchery told Business Insider that hiring its drivers as employees instead of contractors adds an estimated 20-30% to cost per hour. That's a ton.

But having your workers on 1099s restricts the type of training and support a startup can give, and this can decrease efficiency. The cost-benefit analysis of 1099 versus W-2 even caused valet startup Luxe to switch from W-2 to 1099, and then back to W-2. It can sometimes be tough for a startup to decide which is best for it and its workers.

But Josh Bruno, the CEO of senior-care startup Hometeam, said that for him it was always clear that Hometeam's 1,000-plus caregivers needed to be on W-2s. They needed a lot of training, and Bruno wanted to give them the sense that Hometeam was investing in them for the long haul.

But unfortunately, when Bruno was trying to raise money, that wasn't what Silicon Valley VCs wanted to hear.

"I was kicked out of every office on Sand Hill Road," Bruno said, referring to the iconic street that houses many famous Silicon Valley VCs. Bruno said he even had a verbal agreement with a "flashy name" VC, who then wouldn't go through with the investment unless Bruno put his workers on 1099s.

Why? One reason, Bruno said, is because big names like Uber and Lyft were doing it. Bruno's main competitor, Honor, which was named one of Business Insider's hottest San Francisco startups to watch in 2016, originally used 1099s. It has since switched to W-2s.

But it wasn't simply because everyone was doing it, Bruno said. The deeper reason rested in what a 1099 represented.

Bruno said that to VCs he spoke with, a 1099 meant a job that was both easy and repeatable. The worker is a part that can be swapped in, which is good because it means the business will be easier to scale, Bruno explained. And it would be easier to get the kind of growth the VCs were looking for.

Not all VCs think this way, even among those whom Bruno was pitching. Hometeam has so far raised $43.5 million from Kaiser Permanente Ventures, Oak HC/FT, Lux Capital, IA Ventures, and Recruit Strategic Partners.

Honor has raised $62 million total, and recently raised $42 million long after switching its workers to W-2s.

But Bruno's experience raises useful points about how "gig economy" workers are conceptualized by both startups and VCs. The more that workers swing toward the W-2 side, the less they seem like cogs in a machine, but the less they feel like part of a startup that can use technology to scale itself rapidly, up and up.

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