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SAN FRANCISCO (Reuters) - When Square Chief Operating Officer Keith Rabois left his job last month, citing legal threats from a young colleague with whom he had a two-year relationship, he threw a spotlight on the risks associated with the freewheeling startup culture that many entrepreneurs cherish.
Startups often thrive on a lack of rules and boundaries. But experts say that as they make the transition from a handful of people in a room to sizeable businesses, the hazards of operating without manual - including lawsuits, reputational hits, and waning employee morale - grow exponentially.
Longtime employees sometimes chafe at the arrival of human resources professionals, codes of conduct and other policies that they fear will step on the company's culture. Yet entrepreneurs and start-up investors say they ultimately have little choice.
Take Facebook Inc, which displayed murals of naked women, some riding dogs, in the Palo Alto offices it leased as a small company in 2005. As proud as some of the early employees were of them — one was painted by the then-girlfriend of Facebook impresario and serial entrepreneur Sean Parker — they got painted over shortly after venture-capital firm Accel Partners invested in the company. Facebook had no immediate comment.
About a year into the life of online-ad tracking startup DoubleVerify, an employee gave a presentation about how advertising fraud takes place. Many in the room got a rude awakening when a slide popped up showing an example of an ad where it shouldn't be: next to a particularly raunchy image on a pornography site.
"That was the first time we realized, ‘We gotta get a little more institutionalized," recalls founder Oren Netzer. Today, the company has policies concerning naked images. The same presentation would use a less controversial example, or obscure anything racy.
Alcohol is another dicey topic. "We used to have these new employee hazing ceremonies," said Dheeraj Pandey, chief executive of virtualization company Nutanix, largely involving knocking back tequila shots with chili peppers. But once the company hit about 100 employees, some new hires pushed back and he started considering the potential for liability.
"It just faded away about four, five months ago," he said about the hazing. Potential concerns run the gamut from some employees feeling excluded if they don't drink to incidents that sometimes accompany drunken behavior.
At 250-person social-media management company Hootsuite, "I somewhat infamously have said I never wanted to work at a company with an HR department," says founder Ryan Holmes.
"That's coming back to bite me a little bit now."
A year ago, Holmes made his executive assistant the director of human resources. That type of promote-from-within strategy for HR is commonplace, startups say.
A few months into her role, the new HR director told Holmes the company needed a mission statement. "I said, ‘Oh my God, this is HR fluff,'" Holmes remembers. But shortly afterward, when he overheard new hires discussing beliefs he thought were out of step with Hootsuite's ethos — he says he cannot recall the details — he realized she was right.
But Holmes says he is resisting conforming on other levels. Hootsuite employees attend teambuilding trips, including a recent stay at a hot-springs resort. That is the type of event big companies cut out — Google Inc halted its famous all-employee trips in 2009 - often because of the potential for various kinds of legal liability and cost.
Holmes says he might have to rethink his overnight trips if the company ever goes public, but for now, he plans to keep going. "We think it's very valuable," he says.
At Nutanix, Pandey decided last summer's annual whitewater rafting trip on the Sacramento River would be the last. "We used to go through some rough rapids, and had a couple of close shaves," he said. "A couple of the guys aren't good swimmers."
Part of the philosophy is that young companies want to encourage a "think different" attitude, employees say.
"Start-ups by design want to differentiate themselves from the large companies like the HPs that have very thick employee handbooks," said Brian Samson, chief executive of HR for Startups, referring to computer company Hewlett Packard Co.
Start-ups often deal with the inevitable by aiming for a careful, light-footed approach to new policies.
"I've tried to make sure we don't talk about rules," says Evan Wittenberg, HR head at cloud-content firm Box. "The language around this really matters. These are guidelines."
Still, there are tensions as the company, which now employs around 700 and is considered a likely prospect for a 2013 initial public offering, grows. Cecilia Wong, people manager at Box, cites the daylong orientation process for new employees.
"I've had some managers ask, ‘Why's it a full day? On my first day, it was just an hour, then I could hit the ground running,'" she says. She believes the full day is important for explaining the company culture, business and logistics issues.
The consequences of neglecting HR policy and other big-company practices can be dire.
Rabois said he resigned from his post after an ex-boyfriend that he recommended for a job at Square threatened to sue for sexual harassment. A Square spokesman declined to say what kind of HR policies, if any, the company has in place, and he declined to comment on any issue related to the relationship that led to Rabois' resignation. Square had about 30 employees when Rabois joined and now has about 400.
Many large organizations - not just companies, but nonprofits and government agencies - have firm policies about intra-office romances, and often prohibit them if one party has any kind of supervisory authority over the other.
"You can be open to liability if the relationship goes sour, and you have a person in a position of power over the other person," said San Francisco employment attorney Therese Lawless. "Any actions of that person in power can be deemed to be retaliatory."
In addition, it can create a morale issue if other employees believe the more junior employee in an ongoing relationship is receiving favorable treatment, she said.
Reporting By Sarah McBride; Editing by Jonathan Weber and Leslie Gevirtz