Startups don’t fail because they lack good ideas. In most cases, they struggle because they run out of money.

One major reason for this is overspending on full-time hires. Many founders turn to Employer of Record (EOR) services under the assumption that adding full-time employees is the best way to build a team. Unfortunately, this approach can be a costly mistake and even fatal for many startups.

As I’ve mentioned before, to scale successfully, startups need to overcome three main challenges:

1. Efficiency – Completing tasks quickly and effectively.
2. Speed – Solving problems fast by hiring the right person without delay.
3. Cost Optimization – Keeping hiring costs low, especially during early stages.

EOR services fail on all three fronts. So why are so many founders still using them? Let’s break down why and explore better alternatives.

The Hidden Costs of EOR Services

Using an EOR can be slow. The process, which includes multiple checks, onboarding, and finalizing agreements, can take months. For startups, where market changes can happen in weeks, this delay can be disastrous. Why wait months to hire when you can onboard a contractor in just two days?

Beyond speed, EOR services limit control. When the hiring company doesn’t have a legal entity in the country, it has little influence over things like intellectual property rights, work scope, and employment terms. This creates risks, particularly in countries with employee-friendly labor laws.

In countries like Brazil and Spain, where courts often favor employees, firing an employee can result in lengthy and costly legal battles. This, combined with the monthly EOR fees (averaging $599), can add up quickly.

Better Alternatives to EOR

Luckily, EOR isn’t the only option for startups. Contractor management services or Contractor of Record (COR) solutions can address many of these issues.

Unlike EORs, these services offer speed, flexibility, and cost savings. Contractors can start working immediately, without the red tape tied to traditional full-time employment. And the cost difference is significant—contractor management services can cost as little as $39 to $70 per month, a fraction of the cost of EOR services.

When Do EOR Services Make Sense?

For startups hiring internationally, COR is usually the better choice unless a candidate insists on full-time employment with benefits, in which case, an EOR may be needed. EOR services may also be appropriate if you need to hire a specialist who will stay with the company for the long term, as this creates a full-time employee relationship.

In some cases, such as when operating in hard-to-pay regions or when a startup is committed to building a strong presence in a new country, both EOR and COR could offer valuable solutions.

Final Thoughts

Full-time hiring is not a must for every startup. Once founders realize this, they start exploring smarter, more cost-effective options. For seed and Series A companies, contractor management and COR services offer the flexibility, speed, and cost efficiency needed to scale without burning money on unnecessary overhead.

In today’s fast-moving market, this approach can greatly improve your chances of success and may even be the key to a startup’s survival.