Right now, the start-up community is facing upheaval. Although shelter-in-place rules tend to affect some companies more than others and hopefully will be limited to the short-term, all of us will be in uncharted territory for the rest of the year, as we navigate chaotic capital markets and a possible recession.
That is why every startup CEO is building a contingency plan right now, creatively considering how to extend runway as we wait to see how the next few weeks and months will unfold. For many, this will mean short-term layoffs.
This post explains why you should embrace layoffs as a difficult but necessary step, how you should implement a layoff, and what you can do to rebuild morale down the road.
Yes, Layoffs Hurt and No, Don’t Delay
The first time I had to plan a layoff was for my first job out of business school at a speech recognition company. We were building a voice assistant product like Siri or Alexa, but in hindsight, we were too early. Our product was cool but not truly useful.
When the product failed to sell, we were in trouble. We only had cash for another few months. Every night I would wake up at 3am, agonizing that the people who had trusted me enough to come join the company might lose their jobs.
I tried everything and called anyone, looking for revenue. We dreamed up a major pivot, but it was too late.
Finally the day came, and we laid off the team. To my surprise, many took it stoically, perhaps sadly or sympathetically, but very few were crying or mad. All had chosen to work at a startup. They understood that technology was risky and they had seen the writing on the wall from our poor sales numbers.
Also to my surprise, after they left, many of the affected people flourished! A few programmers had a new job the same week, and even the last person had a new job within two months. The layoff also impacted me, and for me, being laid off let me start E Ink, a far more valuable company.
I have since reflected that it was because of a layoff that the careers of these people advanced faster. If our speech company had somehow raised more capital to continue its old strategy, they still would have beavered away at a mediocre concept only that much longer.
Ignore the Past and Don’t Waste Time on Blame
It is easy to find yourself avoiding layoffs out of shame or guilt. Nobody likes to admit failure. You might fear that a layoff marks you as a poor CEO, when in fact a prompt layoff may be just the opposite: a sign of professional competence.
The company’s current crisis may be caused by your past business decisions, or they may be caused by today’s unprecedented global health emergency. It really does not matter how you got here. You cannot waste time worrying about the past, because now your job is to make the best decisions for the future, and time is of the essence.
As soon as the crisis becomes clear and you realize you do not have enough cash left to assure the next financing under your current plan, you must act swiftly to make a strategic change and revise the plan. The sooner you act, the more cash you have left. More cash means you have more options remaining.
Accepting difficult truths and adapting to reality is a core skill for every CEO. Don’t delay the inevitable – be a decisive leader.
Layoffs are the Last Step of a Strategic Change
A layoff should be the logical result of adopting a new strategy (at a lower burn rate), and it’s important that you clearly communicate this change of plan to your team. Make sure they understand why it is achievable and will lead to success.
How can you and your team change strategy and still win at a lower burn rate?
First, keep the customer’s voice in your head. Narrow your goals to deliver a smaller product that still delivers high value, or find a way to grow slower with less cash burned and a lower cost of customer acquisition. Model how that would change the company’s budget. Then share your plan with your Board and your team, trusted advisors, perhaps a few key customers, and slowly expand the circle, gather feedback from many perspectives to make sure that the new plan is solid.
At a bigger company, we sometimes see a CEO arbitrarily decree all departments need to cut the same percentage of heads. That CEO is not being thoughtful about the best changes needed to propel the business forward, and is clearly unsure what it takes to win. A CEO who has actually improved the strategy and reordered priorities will instead eliminate the majority of one group, perhaps even adding heads to another department, thus giving the new plan its best chance of success.
Don’t take half measures. Every CEO I know who has been through a layoff offers this advice: “Cut deeper than you think you need.” As bad as one layoff may be, the second layoff is absolutely crushing to morale. You don’t want a second layoff. The best tactic is to cut so deep in the first round that you will have room to hire a few new people 3-4 months down the road. That gives you future freedom to adjust your organizational mix, and it will be a big boost to morale when the company starts hiring again.
Preparing for Layoffs
Two Weeks Before – Identifying Names and Preparing Documents
With a specific recommendation to change the business plan, make sure you have Board approval on your layoff. Then bring an HR professional into the loop. If you are leading a bigger team, this person might already be on your team; if you are leading a smaller startup, look to an outside HR consultant for support.
Work with each VP or group head to develop a list of people who will be included in the layoff. Prepare a formal severance letter for each. Prepare a last check for the final pay period and any vacation day balance ahead of time, so you can hand it to each person as they receive the news.
How much severance? That’s a bit tricky. You want to treat people well, but must balance this with the need to save cash for the survival of the company. This is a company decision, but a typical severance policy I have used and have seen others use is a lump sum severance check for 2 weeks of pay, plus 1 week of additional pay for every year of service.
If you can afford it, you can also offer a day of career counseling, or some period of outplacement support (many HR firms offer this service fairly inexpensively). While the employee may no longer be a fit for your company, there is certainly another role at another company in which they would thrive; if you are comfortable, offer to serve as a professional reference to help them find a soft landing. Determine which support you will offer to provide in advance, so you can spell this out clearly when you have the conversation.
One Week Before – Organizing for Conversations
Prepare ahead for these difficult conversations. Work with your HR leader or employment attorney to understand the right language and approach for the discussion, and to make sure you understand language that could put you in a compromising situation legally.
First and foremost, this is an honest conversation with a valued member of your team. Express that you are grateful for their work and that you know that this will be a challenging transition. Deliver the information in a respectful and empathetic way, so that your team member has their dignity intact at the end of the conversation. It is important to practice delivering the message, to ensure that you only include all the relevant information and exclude everything else that could be confusing or create a legal exposure.
Focus on delivering the key facts during the conversation, and have the rest of the information available in writing for the team member to review later. Be concise – this will be a challenging time for the person on the other end of the conversation to process what you are saying.
If your company has more than 100 employees and the layoff is more than a third of your workforce, or in other circumstances depending on the state, you may be required to give 8 weeks prior notice to all affected workers. Check this well in advance so you can comply if necessary.
If a substantial number of people are affected and you expect a big ripple of surprise to disrupt the company, then get ahead of this and face it squarely. Better that the employees hear from you and hear your message directly. So, announce an all-hands company-wide meeting the following Thursday morning at 9 am. If there is a bit of speculation about the purpose, that’s OK – that will make the announcement feel a bit less shocking.
The Day Before (Wednesday night) – Keeping Key Players in the Loop
The night before the meeting, each VP or team lead speaks with their Directors to explain what is happening and bring them into the loop. If there are 1 or 2 other key people – critical tech talent or peer leaders who are vital to the company – those people should also get the courtesy of a personal, confidential heads up.
Then each VP should contact and set up a 15-minute 1:1 appointment in the morning with the affected people who will be laid off, without explaining the purpose of the meeting. If one department is being hit hard, then you as CEO can also step in and manage some of these conversations to share the work.
The Day Of (Thursday) – Announcing the Big Change
Time for the big announcement. Although we sometimes see CEOs address only the people who are staying, if you have a strong company culture then it is better to bring everyone together in the same room one last time, because it shows more respect to the affected individuals. Keep in mind that the people who are leaving also will need to explain what is happening at your company when they interview for new jobs and they will need to make sense of their own role in the company’s history and trajectory. So if you communicate the company’s new direction, they will benefit. You can also give them the round of applause they likely deserve.
At the all-hands meeting, explain the new plan. Explain why this requires a layoff and state everyone who will be affected has already been asked to meet their department head. Be open about what severance and other benefits will be provided. Do take a few questions. Make sure to thank the affected people for their contribution.
The VPs then go into their appointments, each accompanied by an HR professional or other experienced manager so that every conversation has a witness. They walk through the conversation and key information with each employee, sharing relevant papers. Employees are then asked to hand off their papers to coworkers, clear out and return their laptops, and return their keys and parking passes. Ideally everyone who is leaving is out of the building by lunch.
Some VPs may wish to organize a goodbye department lunch, but keep in mind that may carry risk, especially if emotions are running high. Don’t take these types of decisions lightly, and evaluate them on a case by case basis.
Because the layoff is an emotional time, you may want to let any employee who wishes to go home, go home. It is doubtful anyone will be too productive that afternoon.
The Day After (Friday) – Small Group Discussion
The next day, the VPs should hold department meetings to break down how the change in plans affects the department and to walk through the work ahead. Everyone then has the weekend to digest.
The Next Week (Monday) – Rallying the Team
Bright and early the next Monday, you should hold another all-hands meeting to walk through the company-wide strategic change. Take a few minutes to speak from the heart.
The best story you can tell at this moment is your personal inspiration for “Why I Started This Company…” (or “Why I Took This CEO Job”) so you can remind everyone of the dream and reignite the vision.
Then take a good long town-hall style Q&A so you let all the concerns come out into the open where you can deal with them. If necessary, promise a follow-up date to resolve open thorny issues.
Many CEOs ask, how can I rebuild morale after a layoff?
The best cure for low morale is winning! If you do this right, then the company will be on a healthier track and the milestones you have set as short-term objectives will all be achievable. As the new, smaller company starts to successfully hit its goals, confidence will rise.
We are operating in uncertain times right now, so keep in this mind as you calibrate achievable goals. Give yourself and your newly redirected team some extra weeks to figure out how to operate in this new normal.
This is a time to over-communicate. Repeat the plan frequently like a megaphone to ensure that everyone is aligned and everyone understands the new vision.
As the company gets smaller, you may actually pick up speed. If you’ve approached layoffs the right way, you have retained the best people and deployed them in a more effective way. With smaller meetings and fewer people who need help and oversight, your performers can do more work.
Junior people who are asked to do more may actually skill up faster in this environment and enjoy their jobs more than before. You can more quickly teach this talent how to be seasoned professionals. Have faith that cutting more heads will not leave the company as anemic as you may fear.
Another confidence builder for the team will occur when they see you hiring fresh employees again. Newly arrived people are sold into the new strategy and carry no baggage from past mistakes. They should be people who come in with new skills that were absent before and are better aligned to the forward needs of the business.
And when you only have a few open headcounts, your team can afford to interview more widely and to be more selective. So the average quality goes up. The chance to hire exceptional new people and to rebuild morale is yet another reason why you want to cut extra deep.
Keep in Mind
Hundreds of CEOs may be grappling with the same tough scenario right now. Now more than ever, your employees need you to be a leader, whether or not they will be on your payroll tomorrow. Be decisive and act swiftly, so that everyone can find the best home for their talents going forward.