Most startups begin with a single engineer. The structure is simple, overhead is minimal, and you can use an EOR or basic contractor setup.
But as your team grows from one to two to three to five, something shifts. What worked smoothly for one person becomes clunky for five.
Benefits you could skip at the start begin to feel unfair. Payroll you manage semi-informally demands a more rigorous process. And a legal structure that once felt "fine enough" starts raising real questions.
The question founders face is: when exactly should I formalize this structure? When should I move from a simple setup to something more formal? Is there a team size that becomes a true turning point?
The answer is: there is no single magic number. But there are clear milestones. As you scale from one to five engineers, there are three or four decision points where you must stop and reassess whether your current setup still makes sense, or whether it is time to move to a more formal structure.
If you are in this scaling phase now, or planning to be in the next six to twelve months, this article will help you understand when to formalize benefits, payroll processes, and legal structure.
Not "you must formalize today," but "here are your decision points, and here are the trade-offs of each option."
Instead of guessing about when to formalize, sit down with a partner who has seen the pattern from single-engineer through ten-plus teams and knows exactly when formalization becomes critical versus optional.
Schedule a 30‑minute scaling and structure review call with RainTech to map out when you should upgrade payroll process, formalize benefits, or consider a local entity, tailored to your specific team and growth plan, not generic advice.
Stage 1: Single Engineer (Months 0-3) - Keep it Simple
When you have one engineer, simplicity is key. Most startups at this stage choose one of three models.
Contractor Arrangement
The engineer is an independent contractor; you pay via invoice. This is administratively simple, but it carries misclassification risk if the engineer works full-time.
EOR with Minimal Benefits
You use an EOR or local payroll provider that handles contracts, BPJS, and tax. The engineer is happy because everything is properly structured. You are happy because administrative overhead is low. Benefits are usually basic: salary, BPJS, statutory leave.
Hybrid Approach
You hire as an independent contractor for three to six months as a "trial," with the understanding that if both sides are happy, you will convert to proper employment.
At this stage, the advantage of keeping things simple is you can move fast, administrative costs are low, and you have not yet needed to invest in formal HR processes or complex benefit structures.
Cost: EOR fees in Indonesia typically range USD 250–500 per month (IDR 4–8 million), depending on provider and scope. Contractor arrangements cost basically just recruiter fees or DIY sourcing.
Limitation: Once you hire a second engineer, the dynamic shifts.
Stage 2: Two to Three Engineers (Months 3-9) - Process Tightens
At this stage, issues emerge that did not exist with a single engineer.
Payroll Becomes Visible
With two or three engineers, payroll is no longer abstract. Engineers compare notes about salary, benefits, and review timing. If they discover one person gets benefit X and another does not, that is a fairness perception you do not want to create.
Benefit Standardization Becomes an Expectation
Your first engineer may have been fine with minimal benefits. But your second engineer, hired three months later, might ask, "Wait, my friend at another startup gets X and Y. Why don't I?"
Tax and Compliance Grow More Complex
With two or three employees, tax reporting, BPJS administration, and compliance are no longer trivial. If you handle this yourself, mistakes are likely. If you use an EOR, you become heavily dependent on them, and as your headcount grows, the reliability and responsiveness of your EOR matters more and more.
Turnover Risk Increases
At this stage, newer hires are still in honeymoon mode, but they are also starting to think about long-term careers. If you have no clear path for salary growth, benefits, or career development, some will start exploring options by months six to nine.
Decision point: At this stage, you must decide whether to stay with the same EOR and tighten your internal process, or start thinking about formalizing your structure. If your plan is to scale to five+ engineers, begin researching whether a local entity in Indonesia makes sense.
From RainTech's work with dozens of founders at this stage, a consistent pattern emerges: founders who take time now to standardize benefits and communicate payroll structure—proactively, not reactively—end up with more stable teams and higher trust.
Conversely, founders who skip this step often discover by stage four or five that they must scramble to retrofit policies that should have been clear from the start.
Our article "Hiring in Indonesia? 3 Costly EOR Contract Traps Most Founders Miss,” discusses how EOR structures hold up as your team grows and what you must lock in before it is too late.
Stage 3: Four to Five Engineers (Months 9-18) - Formalization Becomes Strategic
By this stage, some founders realize their current structure is starting to feel stretched. This is when a real decision must be made. What typically happens at this stage:
Year-One Bonus Expectations Surface
Your first engineer, who has been on the team for twelve months, likely expects a year-end bonus or salary adjustment. If company policy is not clear, tension can emerge.
Benefit Requests Increase
Two or three engineers start requesting specific benefits: equipment allowance, professional development budget, health insurance upgrades. Without a formal benefit structure, you handle these case-by-case, which creates inconsistency and becomes hard to scale.
EOR Relationship Gets Tested
With four or five engineers, you now depend significantly on your EOR. If an issue arises: payroll delays, unclear tax guidance—the impact affects five people, not one. Confidence in your EOR becomes critical. Founders at this stage who have an EOR that is responsive and proactive—one that does not just process payroll but also offers guidance on scaling, benefit structure, and compliance—realize that the quality of your EOR partnership truly matters.
Succession Planning Gains Importance
If a founding engineer leaves or conflict arises, you realize you need formal HR processes and documentation.
Investor Due Diligence Questions Emerge
If you are in fundraising conversations, investors ask: "How is payroll structured? Is everything compliant? Do you have a local entity, or are you entirely on an EOR?" At this stage, "everything through an EOR" sounds operationally fine but can feel like a red flag to an investor evaluating your readiness to scale.
Three Options Most Founders at This Stage
Option A: Stay with EOR
You keep your EOR for payroll and compliance, but you build a formal benefit structure, clear salary bands, and documented review and promotion processes. You invest in an HR tool or consultant to manage this on your internal side. This approach is low-risk operationally, compliance stays the EOR's responsibility, but you remain somewhat dependent on them.
Option B: Open PT Locally
You create a PT (Perseroan Terbatas—limited company) in Indonesia, hire engineers directly, and manage payroll through a local provider or in-house. This gives you full control and impresses investors, but it requires you to manage local compliance, accounting, and possibly hire local HR support.
Option C: Hybrid
A hybrid where you keep your EOR for new or short-term engineers but transition senior or founding engineers to a local PT. This gives flexibility and can be introduced gradually without disruption.
For detailed guidance on when a PT makes sense and how the process works, read "Indonesia Hiring: Why Most Founders Choose Wrong" and "“Indonesia’s Tech Talent Outlook 2025: Demand, Strategies, and Real Action,”which discusses the pros and cons of each model with real examples from founders who have lived through each scenario.
Five Key Metrics that Indicate You are Ready to Formalize
Do not just count headcount. Watch for these indicators too:
- Retention risk becomes real. If engineers ask about long-term paths, compensation, or benefits, that signals they are thinking about whether to stay or leave.
- Compliance uncertainty grows. If you start realizing you are not 100 percent confident your current setup is fully compliant with Indonesian law, it is time to formalize or get clearer guidance.
- Investor questions emerge. If you are in fundraising conversations and an investor asks about structure, payroll, and legal setup—and your answer is vague—that is a signal to formalize.
- Operational friction with your EOR. If you start experiencing delays from your EOR or difficulty making changes, that signals the relationship is stretched or you have outgrown a simple EOR setup.
- Founder time spent on admin becomes significant. If you spend more than two to three hours per month managing payroll, benefits, or compliance, that is inefficient. Time to delegate or formalize so the process runs smoother.
Timeline: When Each Step Should Happen
Detail on timing: Month nine to twelve is the critical window. If you plan to open a PT, starting the process at month nine means you can transition by month twelve without major disruption. If you stay with an EOR, month nine is when you should have already locked in the benefit structure and promotion criteria.
Benefit Structure: What to Standardize at Each Stage
Why this progression matters: Do not wait until five engineers decide on bonuses or promotion criteria. Lock these in by month four when you hire your second engineer, so all engineers have the same expectations.
By month twelve, when your first engineer expects a year-end bonus or raise, the policy is already documented and communicated.
Do not over-commit in the early stage. But do not over-restrict either. The balance is: offer enough to attract talent, be fair for consistency, but not so expensive that cash flow becomes a problem.
Payroll Process Formalization
Like benefits, payroll processes must improve as you grow:
- One engineer: EOR handles everything. You receive an invoice once a month, approved, done.
- At two to three engineers: EOR still handles payroll, but you introduce monthly payroll review meetings, documentation of salary structure, and tax withholding tracking.
- At four to five engineers: If staying with EOR, you formalize benefit administration and documented performance reviews. If moving to PT, you hire internal payroll coordination and establish local provider relationships.
Upgrading the payroll process does not have to be expensive. It can be as simple as a structured spreadsheet, monthly check-ins with your provider, and documented promotion criteria. But it matters because:
- It reduces compliance risk (you have an audit trail).
- It improves transparency with employees (they know how decisions are made).
- It prepares you for the next scaling phase or investor due diligence.
Conclusion
Many founders think "formalization" is one big event: "We move to a PT, upgrade all benefits, hire an HR person." In reality, it is gradual.
Each stage of growth—one engineer, three engineers, five engineers—presents a few small decisions: Do we stay in our current setup, or is there one or two upgrades that make sense?
Smart founders do not wait until a crisis point (a good engineer wants to leave because benefits are unclear) to make moves. They anticipate: "If we scale from three to five engineers, what should I formalize now?" And they make small upgrades ahead of time, so that when the team does grow, the structure is already in place.
To determine the right formalization roadmap for your team:
- Schedule a 30‑minute scaling and structure review call with RainTech to map the exact point where you should upgrade payroll, formalize benefits, or consider a PT—customized to your growth plan.
- Explore RainTech's EOR and Local Entity Services to see how the transition works and what support is available at each stage.
References: