How to do layoffs right
Photo by Sergei Wing on Unsplash
The past few months have been brutal to tech at all levels. Whether you’re a seed stage founder or an executive at a publicly listed company, the current market dynamics have been top of mind. Within the early stage, the general sentiment ranges from “things are slowing down” to “the market is finally correcting” to “the world is over”. Broadly speaking, the conventional and pragmatic company building advice holds - reduce burn and extend your runway, focus on unit economics, etc. But that’s not what this post is about.
Rather than making BS predictions on the venture market or list generic platitudes, I’d like to focus on the founders that have already decided that they need to reduce their burn. This can be a significant decision that should be carefully considered with your co-founder(s), investors and advisors because for the vast majority of startups the way to meaningfully extend runway is to let go of staff. This post is written for those founders who know what needs to be done but are not sure how.
A quick note on me. I am a recovering management consultant. Before my venture career I spent several years doing the Tumi grind advising large companies on operational issues. I was a heavy cost reduction guy with a specialty in supply chain, but I did lead a number of projects on “workforce optimization”, which is consulting jargon for layoffs. It wasn’t Up in the Air, but I did analyze how bloated an organization might be, estimate the reduction potential and outline strategies to execute it. I rarely tap into my consulting training within my venture work but this is a unique circumstance where my past is actually quite relevant. Below is a summary of what I’ve learned about workforce reduction, which hopefully will be helpful to founders the reading.
The Golden Rule - “Cut Deep and Cut Once”
If there is one thing to take away from this post it is - do not drag out layoffs over multiple rounds! This will absolutely destroy morale and culture. Uncertainty over one’s employment is extremely painful and directly attacks a sense of safety. Hitting targets goes out the window if an employee thinks they may be next on the chopping block. At an individual level this is psychologically damaging but at a workforce level it’s a disease.
Founders need to ensure that cuts are done in a single action so you can immediately begin rebuilding trust and reorient the remaining team towards the future. It’s understandable to want to cut the minimal amount of staff possible but if you have to do a second cut you will lose all credibility as a leader. No one will feel safe and you’ll almost certainly set the stage for your best people to leave either voluntary or through poaching.
Step 1 - How deep do I cut?
Most investors you ask will probably tell you “enough to have 24 months of runway”, which is pretty good advice. It’s best to first decide on a target and then work backwards with how to get there. If you start with you org chart and try to pick people that aren’t essential you’re going to waste a lot of time and will likely start discussions in a very defensive environment (i.e. VPs want to protect their people). First determine your cash out / runway target and then assess what revenue impact you may have, which is hard to predict so go conservative. You’ll also want to factor in the funding environment you’re in and whether your existing investors are comfortable topping up now.
Step 2 - Who do I cut?
There are a few approaches at this stage:
Voluntary option: You may elect to offer enhanced severance to those who decide to leave on their own. The main benefit being that you empower staff to control their own careers, to an extent at least, and leave on their own terms. You give an easy out for those that are generally unhappy in their roles or those who are underperforming and may have been let go anyway. There is also the argument that those who could be tempted with a few months of severance probably aren’t the types you want around anyway. Personally I think the costs outweigh the benefits. Most early stage companies won’t have a large number of employees that can / want to leave so the forced layoffs are likely still necessary. The whole process of announcing the voluntary option, allowing time to decide, assessing the impact to burn and then undertaking forced layoffs will extend the time longer than if you did a single cut.
Equal targets: Once you know your burn reduction target you can ask each Director / VP remove that much from their budget. For example if you need a 20% cut to burn in order to extend your runway to two years you would ask everyone in your leadership team to reduce their own burn by 20%. The advantage of this approach is that every lead gets hit equally so there’s less risk of politics or in-fighting. I don’t think this is the best solution though because it assumes all teams add equal value, which is never true.
Team-specific targets: As a founder you alone have a company-wide perspective of the present and future of the company, which means you need to decide how resource should be allocated. It’s a good idea to have each lead make the call on who goes but you need to set the goal. Some may need to cut more than 20% and others less. This approach is less equitable and overall less popular but it’s usually the right path.
Step 3 - What do I give them?
While reducing burn is critical in these situations you don’t want to be brutal. Obviously the more financial certainty departing team members have the better but there are strategic benefits for the company as well. The employees that remain will usually take some comfort in knowing that those who left have been taken care of. Generous severance can also provide the company with goodwill in the event that the news of the layoff gets picked up by the press. Requirements will vary depending on which governing employment laws you’re subject to, but my general advice (if you can swing it) would be to provide three months of pay. I’d also strongly encourage you to offer extended exercise windows for as long as legally possible. It’s one thing to lose a job but quite another to also have to pay a hefty tax bill or lose out on their upside.
Step 4 - How do I communicate this?
Here too you have a few options:
Like a band-aid: Leaders may elect to notify all affected staff in a single blast - either via email, video conference or all-hands meeting. This can be a pretty brutal approach for those affected but it does get things over with quickly. This approach requires a lot of preparation and coordination with leadership and People / HR. If done well the layoff can be limited to just a few painful days but unpreparedness can make this strategy go very bad very quickly.
Multi-stage, mass communication: You may elect to let the entire org know that layoffs will be taking place, followed by secondary notes to everyone (very) shortly after notifying each of their specific outcome. Here too preparation is key but since everyone finds out first that a cut is coming the sense of being blindsided is diminished. The downside here is that your team will have more questions than you can reasonably answer in time, which can cause a sense of panic.
1-on-1 notifications: The most humane approach is to sit down (ideally in person) with every team member that is being let go to explain the situation and their options. The messaging used is very important of course but generally speaking this is the best path to make the affected team members feel respected and taken care of. The challenge, of course, is that this is very unscalable. Depending on how big your staff, a 1-on-1 approach can take several days or even weeks. Extending this too long can create a very negative environment of uncertainty and gossip. If you take this approach you should broadly assume that the entire time departure conversations are taking place your entire workforce will be unproductive. It’s very hard to care about anything until someone knows they’re safe.
As you can tell there is no perfect option. My personal preference is to make a single, team-wide announcement that layoffs are coming, followed by 1-on-1 conversations for those being let go, followed by another mass announcement to all those remaining to let them know they’re safe.
With any of the chosen options, preparation and communication is critical. You need to make it clear why you’ve made the decision, what it means for those affected, what it means for those that aren’t, the process of how people will find out their individual situation and the timeline for when everyone should know where they stand.
Step 5 - What do I do once it’s over?
Respect the memory of those who’ve gone. It’s very easy to fall into the narrative that this was an opportunity to cut the fat. “We kept the winners” may seem like a motivating message for the remaining team but I strongly advise against it. Reputation is very important to individuals and belittling those that have left can really damage culture and the perception of management.
Doing this well can actually make a company stronger. Working through adversity together is a unifying experience and some history’s most powerful company culture’s were borne from period’s of strain and challenge. Doing this is never easy and by no means should you take this short blog post as indifference to the task. However this is what leadership really is and during tough times it’s our leaders that get us through.
Thank you to Fredrik Bergenlid for help writing this article