How do I lay people off?
My startup has been growing steadily for three years now. I bootstrapped it and we are making over five million dollars a year now. I know we could be doing so much better with some extra marketing budget and I believe that if we continue to invest ahead of our revenues, it will pay off big for everyone.
Nine months ago, we landed our largest customer ever. That deal alone was two million a year in revenue, but we needed to staff up quite a bit to serve the customer. It’s a crazy story (and not our fault) but after two months, the customer changed their mind. But because I knew I could get a few more customers to fill up the slack in no time, I kept the new hires on even though it meant we were losing money every month.
At the same time, I started trying to raise my first round of venture capital. But I guess the big client pulling out spooked the venture capitalists because after six months, nobody has committed to investing yet. We still haven’t signed the big customers we were expecting to, and now we are a few months from cash-out.
Can you introduce me to any venture capitalists I haven’t talked to yet?
Hi Anxious Warrior,
First, the good news. Congratulations! You have a real business. You have done something most people never accomplish. Five million a year in revenue is a lot of money and you are on a great path.
Now for the bad news, it is time to lay people off. You are too late for venture capital. If you haven’t succeeded at raising a round after the first few months of trying, your deal can be considered over-shopped and nobody will invest simply because nobody else has invested. You should have done layoffs as soon as your big customer pulled out. It is always easier to rip the bandaid early and quickly, but you are not too late if you act now. Many startups don’t have the benefit of as much revenue as you to fall back on.
Layoffs are scary, even to seasoned startup founders. Layoffs are like forrest fires, they appear to devastate everything in sight. But scorched earth is fertile ground for future growth.
Let me tell you the true story of John’s almost failed startup. John started a company you have probably heard of before. He bet everything he had on it and nearly went bankrupt getting it started. After raising a small seed round from angel investors, he hired a couple top engineers and a couple programmers with little experience but a lot of promise and passion, Jordan and Levi. John had a thing for guys with less experience that made it up with passion; he always saw the potential in people.
The startup hit its stride and venture capitalists invested millions of dollars. In a year and a half, John and his crew of four grew to forty, but his revenues never caught up. So when John set out to raise a third round of funding, he ran into serious trouble: nobody was interested in investing.
John didn’t have a lot of options and was running out of cash quickly. After much deliberation, he put a spreadsheet together. It laid of 70% of his staff, leaving only the best engineers. He went into the office early and with a heavy heart. He called the people on his list to his office one by one. There was nothing he could do to prepare him for this, he just had to bring empathy and compassion for the chaos he was about to bring into these people’s lives.
Levi was the last person to come into John’s office that day. He entered with an expression you might find on an old family dog being dropped off at the pound. John had to make a lot of difficult decisions that day, but Levi was one of the hardest. Jordan’s skills had improved quickly and he was now running a lot of the day-to-day systems himself, but Levi was still finding his stride. Even though Levi wasn’t paid a lot, this was a major crisis and John had to cut to the bone. John knew that no matter what he said, it would take time for the wound to heal. John promised to help Levi and all of the people on his list that day find new jobs.
After Levi left, the once vibrant office felt as hollow as the sound a marble makes while bouncing around an empty spray paint can. John called the few remaining employees together to explain what had happened and why. It was a painful speech. Stunned silence hung uncomfortably in the air for minutes afterwards.
Then Jordan raised his hand.
If I take a pay cut, can we bring back Levi?
John wished it were only that easy. Jordan’s salary was about the same as Levi’s so a 10% pay cut would hardly be enough to cover Levi’s salary.
Yeah, I’d take a pay cut to bring back Levi.
The entire team spontaneously volunteered to cut their salary enough to cover all of Levi’s salary including benefits. Jordan called Levi’s cell phone. Levi had been walking around the block for an hour trying to think about what he was going to say to his pregnant wife. Jordan did not explain anything on the phone, he just said to come back up. When Levi came into the conference room, the team embraced him with a big hug.
Layoffs always suck, it never gets easy. But sometimes layoffs are essential to keeping a business from failing completely. The pain and anxiety you feel is a natural and normal part of the process and doesn’t reflect on you as a manager, entrepreneur or leader. There is little you can do to prepare yourself for the task except to stay open to life, don’t give in to your inner demons. Your team can rally after a layoff and come together in unexpected ways. Give life a chance to surprise you.
“When we love, we always strive to become better than we are.
When we strive to become better than we are, everything around us becomes better too.” ―Paulo Coelho
Be brave, fellow warrior. Scorch the earth. Act from compassion. Strive to do your best in this difficult situation. Strive to be better than you are. And most of all find gratitude for this moment.
About the Author
Lucas Carlson is a hands-on consultant, author and entrepreneur. He helps founders discover opportunities for growth, both for their companies and for themselves. He was the CEO and founder of AppFog, a popular startup acquired in 2013 after signing up over 100,000 developers and raising nearly $10M in venture funding from top angels and VCs.