In an economic climate like this, layoffs are a necessary evil. But what most founders don’t realize is that you shouldn’t just optimize for efficiency — you must treat people with respect.
Layoffs are terrible, but they don’t have to destroy a company’s culture or reputation. If you handle them properly (like the one we ran at Carta in 2020), layoffs can improve your reputation and morale. You have to optimize for humanity, not just efficiency.
Here are 10 steps to running humane layoffs:
Update your financial model
What is your current burn multiple? What do you expect top-line revenue to look like? Make a conservative estimate and build in a buffer in case economic conditions worsen in the next six to nine months.
Figure out how much runway you need. The delta between where you are and what you need is the amount you’ll need to cut.
The more ownership the CEO takes of the situation, the faster the company will recover.
Narrow your focus
Now is not the time to be spinning multiple plates. Focus your company on the one or two things that matter most and eliminate all nonessential projects.
Cut all non-headcount expenses
Yes, about 80% of a company’s budget is concentrated in headcount. But before you start cutting employees, reduce your non-headcount operating expenditures as much as possible. What contracts can you kill? Where else do you have frivolous spending? Every dollar saved is a dollar that could be invested in your team.
And tuck in your top performers. Another thing Better did wrong was multiple rounds of layoffs (three in five months, to be exact). One round of layoffs hurts; more than one round devastates a company’s morale.
Making only one round of cuts will probably mean cutting deeper than you want. Importantly, you don’t want to reduce salaries — you actually want to increase salaries and equity for your best performers. Build those calculations into your one-cut plan.
Design criteria for who to cut and consult with employment legal
You should eliminate:
- All open roles (unless absolutely critical).
- Roles that aren’t necessary for your new growth projections.
- Poor performers.
It’s critical to loop in employment legal at this stage to mitigate risk and ensure you have a legal opinion.
Run a diversity impact analysis
Look at your current percentage of underrepresented minorities (URMs) and compare that with the number of URMs impacted. Click in if you find discrepancies.
Practice the Golden Rule
Treat departing employees as you’d want to be treated. What would you want on the way out? To feel financially secure and appreciated for your work.
This starts with severance. In this climate, two weeks of severance is inhumane. Four weeks is an absolute minimum.
Then, extend employees’ post-termination exercise (PTE) window and remove the cliff for employees who’ve been with the company for less than a year. Equity concessions should not factor into your four-week severance calculation. This will require board approval, but it’s energy worth spending.
Finally, cover COBRA for two to three months. This is just one more way to show employees that you care.
Be sure the CEO takes full responsibility
There is only one person who makes this decision and only one person who should accept blame: the CEO. This is not on managers. The more ownership the CEO takes of the situation, the faster the company will recover and the easier it will be on the managers who have to deliver the bad news.
Finally, run the layoff event the right way
Train your managers in advance. On the day, have the CEO share a statement in front of the whole company. Make sure it includes what’s happening, why it’s happening and how the CEO takes full ownership of the decision. Explain that if you’re impacted, a meeting with your manager and HR representative will show up on your calendar within a reasonable time frame.
A week later, hold another all-hands for everyone remaining with the company. Use it as a chance to talk about what you learned, how the company will move forward and how you value the people who remain. Instill confidence in the future by communicating the company’s runway and operating model.
At all stages, communicate often, transparently and humanely
People will remember this day for the rest of their lives. They can remember it one of two ways: Either you surprised them with bad news and treated them like cattle, or you did all you could to look out for them and help them navigate to the next chapter.
Layoffs are awful, but when handled humanely, they can actually improve morale, strengthen your brand and give you the best chance of succeeding in a tough economic climate.