By Healy Jones, Financial Planning and Analysis, Kruze Consulting
Startup layoffs are dominating the headlines, and many early-stage tech company founders are approaching difficult decisions about how to reduce the size of their teams. Layoffs are extremely painful, and executing them well is not intuitive for most leaders.
With tight operating budgets and limited resources among startups, layoffs are difficult to plan for and to execute in a way that feels fair to employees and effective for the company. However, with the right planning and execution, startups can successfully manage layoffs, position themselves for a strong recovery, and treat their employees with respect.
Before Reducing Headcount, See Where Else You Can Cut
As financial advisors to nearly 800 startups, we always insist on creating a set of projections that start with a deep analysis of the current situation. In particular, we like to walk clients through their general ledger and their vendor lists so they can see what they are spending outside of staff headcount. While we’ve never seen enough savings cuts solely from reducing non-headcount expenses to avert a layoff, we have helped founders find enough savings to save some employees’ jobs. So understand your current expenses and see what non-essential expenses you can remove.
Understand Where You Want to Go
Understand where you are trying to get to with a longer runway. Your startup’s goals will impact how and where you make cuts. Build a financial forecast that gets you to the goal. Often your plan to get to your long-term target is iterative. To the extent that you have more tangible goals such as a revenue target to hit for the next fundraise, or getting an MVP done, start by modeling those out and then back into the resources you need to achieve those goals. Use projections as an exercise to understand the tradeoffs around making very deep cuts versus light ones. We tend to recommend going deeper to try to avoid the trauma of having to do multiple rounds of layoffs – once is going to be painful enough, so do all in your power not to have to do it multiple times.
Identify Individuals and Prepare Packages
Once you’ve decided upon what layoffs are needed, now comes the difficult job of determining who to let go. Using the projections, and working with department leaders, decide which people will be impacted. Once they have been identified, create separation packages. You’ll need to decide things like:
- How many weeks or months of severance pay can you offer?
- Are you able to pay for any of their monthly COBRA premiums, should they be eligible?
- What happens to their unvested options?
We highly recommend that you consult with an attorney and experienced HR professionals to make sure that your startup is complying with labor laws and that your layoffs are not going to adversely impact protected classes of workers. Employment laws related to separations and severance agreements are state-specific to where the employee lives, not where the company is based.
Prepare a Communication Strategy
Decide how you’ll let the impacted employees know. Startups should be as compassionate and sensitive as possible. One-on-one conversations are typically best, although this can be very challenging if a large number of people are being laid off. Referencing the Better.com fiasco, remember that a mass-Zoom call is likely not to be well received internally or externally. Be organized with all of the information you need and be prepared to answer their questions. Employees may not be able to fully digest the details all at once, so make sure they have the opportunity to ask questions later and prepare written content with information on benefits and other information.
Next, communicate with the rest of the company – the team that will be responsible for helping get to your next goal. The level of transparency you have can help preserve morale and trust. Explain the financial position, goals, and objectives with an emphasis on how the remaining team is valued, trusted, and able to achieve those goals. How much detail you share is important, but also presents potential risks to the company if it gets leaked, so finding the right balance here can be necessary.
Managing layoffs is never easy, but it can be especially challenging for startups. However, with the right planning and execution, startups can successfully manage layoffs and position themselves for a strong recovery. By forecasting potential financial difficulties and considering all possible alternatives to layoffs, being transparent with employees, taking a strategic approach to identifying which employees will be affected, executing layoffs with compassion and sensitivity, providing support during the transition period, and planning for a strong recovery, startups can minimize the negative impacts of layoffs and help to preserve morale and trust.
Healy Jones runs FP&A (Financial Planning and Analysis) for Kruze Consulting. In his spare time, he runs online marketing businesses. Formerly, he was a venture capitalist and an executive at VC-backed startups.
Healy ran marketing and was part of the sales team for ForUsAll, a Foundation and Ribbit Capital-backed FinTech startup. He also was with Sunrun (NASDAQ: RUN) pre and post IPO, running a large part of the marketing team. He held VP of Marketing and Finance roles with other startups backed by Venrock and other VCs.
He was a venture investor with the technology team at Atlas Venture, and started in venture capital with Summit Partners. His career began in investment banking at Hambrecht and Quist (eventually became JP Morgan Chase).
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