Startup Layoffs, Pt. 2 — Two Perspectives

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apocalypto head chop.jpgThere are two sides to every story, and two unenviable roles to a firing. While I don’t expect newly aroused sympathies to change anything, awareness of each other’s perspective can help make the process a little less painful. That is, if you believe yanking off a band-aid is less painful than pulling it off slowly . . .

Cutting expenses is one thing — delaying purchases, ditching the PR agency (God, they hate being the first to go), abolishing free soft drinks (really?). But cutting people is, well, personal. Leader truly get their mettle tested in the process. But since it’s not something managers do that often, I guess it shouldn’t be surprising how badly most of them handle it. Email? Over the weekend? Like the pink-slips of old, big-company cowardly. Bad form.

Notes for the ‘choppers’

All you managers under pressure –though I don’t expect arrogant CEOs to read this, much less heed the points — it’s time to act, or be acted upon. Look on the bright side: a headcount reduction gives you the opportunity to reshape the organization. Let’s face it, not everyone you hired ended up exceeding expectations. Even if the hiring process included a probationary period (it always should) to admit a mistake was made, during a RIF you get to lop off anyone close to the line.

Encourage yourselves with the conviction that the organization will be better, leaner, and more dedicated than ever before. Just remember that the folks you want to stick around will judge very carefully how you handle the process.

Some observations and considerations (nothing comprehensive) for you unenviable leaders:

1. Once the decision is made, move swiftly.

Bring all your appropriate managers into the process — they’ll surely have something to contribute. Then meet with them 1:1, provide them a directive (e.g., 20% cut), and let them own the decision for their people. Complete this process all on one night, off site — no closed doors, which only feed the rumor mill.

2. HR (if you have one) may or may not know best, but should be completely involved.
The HR managers that I hired for recruiting skills turned out not always to be the best HR administrators; nonetheless, they are employee advocates, and should be your sounding board. If you’re big enough to have hired an experienced HR person, they will have the forms and know the laws. On the other hand, if you’re a startup taking 20 people going down to 15, you probably won’t (shouldn’t) have an HR person. I’ve used PEOs (Professional Employer Organizations) such as TriNet (which make business sense up to a couple dozen employees, beyond which the fees dictate you wean yourself of them), and when we went through our Bubble 1.0 layoff (40%), they knew their stuff — had done quite a few, in fact. Helped us think of everything.

3. All the packages and details for outgoing employees should be complete before the button is pushed.
Prewire everything. Most of all, your IT guy/gal (if they’re on the hit list, you’d better solve that problem first). All the letters (I’ve found that including recommendation letters in the package buys a lot with people), instructions (such as the consequences of their stock options), copies of the Confidentiality Agreement that they signed at hiring, etc., should be bundled together. I’ve learned to lean towards trusting people to behave (although it hasn’t worked out 100% of the time), so I wouldn’t immediately cut off email, or block access to their computer. Big companies will always do this; if you’ve managed your startup well, with full transparency, there shouldn’t be a need. Sales and marketing people will often want to send out an email blast to customers and contacts; let them. Blocking them will only result in them doing it from their personal email. But passwords to Salesforce.com, VPNs, etc. need to be covered. Provide your managers with a comprehensive checklist for each employee.

Sequoia's solution.jpg4. Execute as simultaneously as possible — and with military precision.
This was impossible during my first big layoff, when we went from 175 to 125 (not to mention things were so out of hand, my finance director — who obviously did not expect to be terminated — ran around the building, screaming epithets, while I chased after him . . . swear to God), but for most situations it can be done, late afternoon, at most in two or three passes per manager. Have two people in the room, if you can. Everyone’s rehearsed, the package is delivered, and the whole thing takes two minutes. Remote workers will have to be done by phone (not email). Don’t expect anyone to sign anything on the spot — just collect keys, passes, etc., and don’t shame them by making them clean out their desks in front of others. Let them come back. Treat them with dignity.

5. Don’t drop another shoe
Make your cut deep enough to last. And when it’s done, gather everyone together and have a state-of-the-company address. Tell everyone what the runway looks like from here. Make them comfortable that you won’t be nicking away at things over the next few months, which only leaves everyone paranoid.

I expect there are more and more of you out there coming up on a crappy experience like this. (For more good reading on the topic, go here.) But there’s a happy ending. When it’s over, you’ve done your job (as described by Sequoia, at right), and you’ve done the very best you can for the outgoing — and bonded with the keepers — you not only attain a pride of passage, but things get better very quickly.

Notes for the ‘choppees’

Now, let’s take the other perspective. Some of you are going to be on the receiving end. And most of you — who thought everything was cool a couple of weeks ago — will be stunned to hear it. (Things probably were cool.) But the pressure from investors, coupled with genuine fear about the marketplace, has instilled a new mindset in your leaders: survival.

Some observations and considerations (nothing comprehensive . . . and this is not to be construed as legal or even professional advice) for you who are about to find the axe befall you:

1. Don’t flip out
Yeah, never thought you’d be on the list. Neither did I. But the highly charged moment of termination, when your stomach is knotted and blood is rushing to your head, is not the time to seek answers (much less revenge). Cooperate. No, I wouldn’t sign anything — there’s no reason why you shouldn’t have a day or two to read everything. Just know that, in the end, the company has the leverage — in your paycheck, severance, stock, and references/recommendations. If you really feel you’ve been wronged, get a lawyer.

2. Don’t expect much
Leaving the corporate world for the startup world, you said goodbye to lots of resources and perks. When I was fired from my corporate job (by a back-stabbing son-of-a-bitch bastard who needed my P&L because his was dying and oh, yeah, I didn’t see that one coming), I got nine months’ severance, outplacement services, and a glowing recommendation letter. When the VCs pulled the plug on a startup I joined as Senior Vice President of Marketing, I got two week’s pay. (I appealed to the CEO — who was obviously on the way out himself — and they upped it to three weeks.) In startups, you hope for two-weeks pay. (It’s all about conserving cash, remember?)

3. Center yourself
Go for a run, or take it out in the gym. There’s anger that needs to be processed, and you need to move past that to get to the next stage: excitement about what you’re going to do next. What make things especially hard for people in startups is that your world is pretty much tied up in your work. Sure, you have loved ones, but on an hours-per-day basis, when the company you worked for — the thing you were so passionate about being part of and helping build — suddenly goes away, that’s a big hole in your life. Take advantage of it. Indulge your family or loved one with some time. Plot your next moves. Maybe, start something yourself.

4. Move on quickly
You know what they say about a broken heart — nothing cures it like something sweet and new coming along. The sooner you get on with your life, the better. Spend as little time looking back as your mind will allow. The remarkable thing is, nine out of 10 times, people say (maybe not Stuart Sutcliffe) that life got better after leaving the organization. Whether or not you subscribe to the ‘everything happens for a reason’ theory, everyone I’ve crossed paths with who’s been through the shock of getting fired — even at my hand — ended up with no regrets.

There’s a lot of nuances I’m skipping over, some are location-specific, some company-specific.
Whereas California has nixed non-competes, they’re alive and well on the East Coast . . . and they suck. Companies may hold stock grants and severances (by law, they can’t withhold back pay owed) hostage to get non-competes signed, and they’re usually at least a year, sometimes longer. Ridiculous.

Then there’s your vested stock options. These conditions can be all over the map — now might be a good time to reread your Stock Plan and Stock Option Agreement. Is the company entitled to repurchase your vested shares? (I hope not). At what price? If not, you may have only 30 days to purchase them yourself. But again, at what price? The recent Fair Market Value may not reflect the economic crash . . . and you might find yourself having to write a check for several hundred (or thousand) dollars, or forfeit the ownership.

Just a heads up. But hey, things could be fine. Just because a half-dozen startups have already had major layoffs, doesn’t mean yours is about to . . .

Forewarned is forearmed.

Startup Layoffs — The Unkindest Cut

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Watch for RollingHeads.jpgLast week, Seesmic let seven of its 21 employees go — a full third of the company. Were they in a crisis? Depends on how you look at it. CEO Loic LeMeur had raised $12M, a Series B $6M of which came in June. But do the math: 21 employees, fully loaded is around $200k/month. Tack on bandwidth, storage, other hosting costs, legal and other services, marketing expenses, T&E . . . expenses are upwards of $300k/month. And with negligible revenue, that’s pure burn. At that rate, Seesmic would hit the wall in just over a year.

There comes a point in every CEO’s life when they realize that things have turned for the worse. Accompanying that realization — along with a gnawing knot in the stomach — is the stark reality that something needs to be done about it. These are the times that try . . . you know the speech.

CEOs worth their salt — or if they’re rosey-glassed types who prefer to ignore bad news, then the COO realists who watch their backs — keep an eye on the numbers, and know exactly when breakeven’s coming . . . or when the money’s going to run out. What changes things — and probably what changed for Le Meur — is the wellspring drying up. And at that burn rate, in this climate, he would have to start raising another round in six months (it always takes longer than you’d think).

Oh — there’s one other thing. Seesmic’s Series C would probably be at a lower valuation than Series B. You want to see things get complicated (ugly, even), go through a down round. New money makes out all right (it’s called the Alternative Golden Rule), but previous investors get squeezed. (Angels often get squished.) Employee options go underwater, plagues and locusts descend, and there’s a lot of wailing and gnashing of teeth.

So Le Meur did what he had to do.

Letting people go is a miserable experience. And no matter how carefully you plan it, how humanely you handle it, it sucks. Everyone knows startups are risky, but startup hires are the most passionate, dedicated folks around. (Yours aren’t? Sorry — you hired the wrong ones!) Meanwhile, company founders think only of success. They radiate it. And they make promises, explicit or implied, to every employee ‘join us, work hard, and you’ll be rewarded.’ I’ve said those words dozens (really, maybe hundreds) of times. So when it comes down to having to let people go, a promise is broken. To them. And to their families.

Layoffs suck. But they beat the hell out of running out of money.

When all financing options disappear, your world comes crashing down, believe me. Once you’ve been there, you take a far more pragmatic view of letting people go.

I expect in the current climate to see a number of RIF announcements. I hope they’re done right. (There is a way to do it right.) Because on those occasions when they’re not, things are going to be interesting. Unlike the first bubble, today everyone’s voice can be heard — blogging, twittering, commenting, we can expect to read (and hear, if people comment using Seesmic) about some remarkably uncivil behavior, especially on the part of first-time CEOs.

Next post: Layoffs done decent.

Sucks to be a Blog Network These Days

Having come from the blog network space, I have a mostly unique understanding of the difficulties encountered when running a content business. There is always a war between traffic and community, profitability and loss, long term projections and short term realities. It’s not an easy business.

It’s even more challenging when you’re a blog network. Unlike more traditional style content companies like Newscorp (owners of MySpace, AskMen.com and FoxSports.com) or the New York Times, blog networks attempt to take a relatively new medium, a blog, and lump it together with other relatively new media – blogs. There’s no counter-balance of strengths and weakness. They are all blogs, possessing the same inherent strengths and weaknesses.

One of the core problems with the “traditional”, if there is such a thing in the space, blog networks – and really any online media – is that the business model almost always comes back to advertising models of revenue generation. Historically, the advertising market has come and gone in a predictably cyclical way.

As expected, the advertising model is taking somewhat of a hit during these difficult economic times and only in the past two days, two major media players in the blog network space have had to cut pay, create layoffs or otherwise cut costs due to an impending, or in some cases already present, decline in online ad revenue.

Gawker Media, the second largest blog network and home to industry favorites Gizmodo, Gawker, Valleywag and Lifehacker has announced a restructuring of staff – laying off 60% of Valleywag staff, as an example, and increasing the staff on their flagship properties. Consolidation is the name of the game in this case.

Likewise, b5media (with whom I worked for several years), had an internal memo leaked (and TechCrunch published) describing a complete revamp of their compensation system “to reduce costs”. Many bloggers are taking significant pay reductions as the company streamlines their burn rate.

This on the heels of AOL/Weblogs Inc layoffs and pay reductions a few months ago and the very public walk-out of Profy staff when pay was to be reduced shortly thereafter.

Let me be clear. If you’re in the content space, you are dealing in a non-tangible asset. Therefore, the economic rules of asset valuation do not apply. There is no “market price”. There is no assessment value. There is no depreciation. If anything, content can appreciate over time. Typical rules do not apply and in a market where investors, advertisers and publishers are trying to identify concrete ideas and assets that they can count on as a sure investment, non-tangible assets will always take a hit.

Publishers, particularly publisher networks, have to look around and identify means to continue to generate non-tangible assets cheaply (yet fairly), and I imagine some models might end up looking to non-tangible compensation (such as community benefits) to acquire new publishers and content.

Problem is, bloggers have this idea that they can be rich by blogging. Some are smarter and think they can simply “make a living” by blogging, without ever uttering the rich word. Truth is, unless you’re a few important people in the world, it’s not happening. It won’t happen. There are other meaningful ways to benefit from blogging, and most of them are non-monetary.