The ‘right’ way to downsize

What years of working with startups taught me about laying people off

A little over a year into launching StrongLoop, an enterprise API startup eventually acquired by IBM, we were out over our skis. It was my doing — having built a vast top of funnel, we expected our product to have a specific sell-through rate and I’d optimistically hired in engineering, customer support, marketing and sales. However, the sales cycles were long, burn rate was too high and we had too many highly skilled people who were a little bored. It was time to orchestrate a reduction in force.

I’d been laid off a few times myself, once from a pivoting startup and again during the downturn of 2001, so I knew what it felt like. I’d also been a manager at a larger company that laid off employees, so I’d seen the corporate playbook. But as the CEO, I had personally sold these people on our vision, cramming into a small substandard office with them for months or years — it felt very personal. Back then, the job market was robust: I didn’t worry about team members finding new jobs. Today is more uncertain.

With many startups under the pressure of a pandemic-fueled economic crisis, I interviewed several CEOs who have had to orchestrate COVID-19-related layoffs to capture (what I believe) are some best practices to downsize correctly and compassionately.

Put people before projects

One company had a pending product launch, yet a few renewals were pushed due to COVID-19-based uncertainty. Meanwhile, the board had decided to extend runway to have more options. The question was: Should the company complete the product launch and let employees know they’re losing their jobs after? Or should they tell employees ahead of time, risking a loss in focus while some members of the team (correctly) start looking for jobs?

The CEO described her thinking as, “We should treat each employee as the best version of themselves, assuming they have the utmost integrity.” She also noted that anyone working on the launch would likely want to see it through as it would be an important accomplishment for future interviews — so pragmatically the risk was low.

The whole company was informed of the layoffs before launch, which proceeded with success on deadline without loss of features. The CEO did a masterful job with the whole process implementing many of the next ideas, which surely is part of why it went well.

Rationalize the change

Leadership must be open with employees about the situation. People can buy into decisions if the context is clear and the course of action sadly inevitable. Before making layoffs, CEOs consider all paths — explain what those considerations are and which parts are being implemented. Involve employees early — articulate the options, the potential outcomes, solicit opinions and voluntary furloughs. Giving people advance information and a degree of control will make them feel part of the process, rather than a victim of it.

One of the CEOs showed a slide with all three of their potential plans and superimposed a scenario with 50% of expected revenue. The current plan ran out of cash in a few months, the minor reductions plan ran out in nine months, and the drastic cutbacks plan let the company exist for 18 months. It was clear that if these steps were not taken now, there was a good chance nobody would have a job later in the year.

Answer questions before they’re asked

Many believe that companies should break the news in one-on-one meetings since employees should be treated as individuals. That may be true, but not for all businesses and not at the start. Stringing out the news throughout staggered one-on-ones leads to whispers and causes unnecessary anxiety for yet-to-be-consulted staff. These decisions affect the whole team, so many find that holding an all-hands meeting helps get everyone on the same page and reduces the cruelty of waiting.

After the news is out, quickly reach out to those who are impacted. This is a time of high anxiety, and there will be confusion and questions. Leaders can ease this by clearly communicating next steps, details of any severance packages, impact on healthcare, 401(k) and so on. Answering questions before they are asked means affected employees can focus on future priorities, not the details of the here-and-now.

Support the transition

Mark my words — every employee who is separated will remember how it was handled. Doing so compassionately isn’t just the right thing to do — it can create karma that can pay dividends when those co-workers later resurface at companies with which you want to do business. So be as helpful as possible to outgoing employees.

CEOs can extend stock option exercise periods, provide a reference, offer advice, signpost opportunities, tap their network or provide access to upskilling opportunities. Some leaders make it a personal priority, providing regular mentorship until a new position is found. Don’t overcommit, but do the most possible to set up your colleague for the best landing.

For those still on the team

Actions won’t just be judged by the friends who are let go, but by the ones who stay. The message sent now will inform the level of engagement of the remaining staff for the task ahead. First, CEOs should urge the team to support outgoing colleagues. Next, consider those shouldering burdens like salary reductions. Awarding more equity and bringing forward vesting periods are gestures CEOs can make. Additionally, maintaining transparency about the health of the business is important for remaining employees who have their own life decisions to make.

Layoffs are never easy, but one of the most important things to remember is to take off the boss hat. Detach from the reality that this is hard for you (the CEO). Instead, focus on them. In other words, use empathy and remember to show gratitude — when someone is leaving, it’s incredibly important to part on good terms and ensure they feel that their contributions are valued and recognized as having moved the company forward.

It’s only human.