Startup Layoffs — The Unkindest Cut

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.