How founders should think about conserving capital, layoffs, and leading with compassion amid the chaos of a market downturn.

Today’s talent landscape is unlike anything we’ve seen before. I can’t recall a time in recent history where there were high levels of resignations at the same time as multiple rounds of layoffs on top of two years of a global pandemic. We are in the eye of the storm, so that makes this particular moment for talent and recruitment that much more unique and challenging.

A new report from Gartner estimates resignations in the U.S. will jump nearly 20% this year from a pre-pandemic annual average of 31.9 million employees quitting their jobs to 37.4 million in 2022.

At the same time, we’ve all heard the tech layoff stories and seen the recent headlines. Companies like Meta and Twitter have publicly announced hiring freezes. Meanwhile, over 20,000 tech workers have lost their jobs this year, according to the aggregator site layoffs.fyi.

Most of the early-stage founders we work with have probably never had to deal with layoffs before because they started their companies within the last 10 years during the tech boom. As a result, I’ve noticed that some of the obvious rules to follow in the HR playbook are either not being utilized, or have been forgotten.

In this article, we’ll share some tips on how to conserve capital during a downturn, retain your star employees by keeping morale high during periods of uncertainty, and, if necessary, how to best deliver layoff news to your employees.

If you’re the founder of a company, now is the time to lead. Great leaders who emerge in hard times will always be remembered for the steps they take, or miss.

Conserving capital during a downturn

First, sit down with your leadership team and plan for all three scenarios below:

  1. Complete downturn disaster: No cash on the balance sheet, no more revenue coming in, and less than 1-2 months of runway left.
  2. Not able to sell the company or fundraise at the moment, but you’ve conserved enough capital to get by. You can plan for longer sales cycles. Things are ugly right now, but you know what you need to do to weather the storm.
  3. No immediate impact, and business can resume as usual.

Take this time to re-prioritize the most important thing on your company’s roadmap, and figure out the right sized team to get the job done. As Garry said in a recent YouTube video, the objective is to get to “default alive,” meaning if you’re going to run out of money and you don’t have the metrics to get to the next round in the next year, do whatever is necessary to survive.

Put simply: Figure out a way to spend less money than the money you’re making. Here are some suggestions from Kat Steinmetz, our principal and in-house talent expert:

  • If sales are going down, save money by cutting back on marketing ad sales events. If there’s nothing to sell, you don’t need to book business trips to visit customers.
  • Go fully remote and cut all office and in-person expenses, make everything virtual for now. If you do have office space and can’t get out of a lease, consider subletting.
  • If you have a recruiting team, don’t let them sit idle while hiring is frozen. Repurpose them towards projects such as creative ways to cut costs while keeping company culture great.
  • Ask creditors to write off a portion of what is owed, which some companies will entertain in a downturn since they’d rather be paid something than possibly nothing.
  • Look closely at every contract and vendor relationship to explore if you can renegotiate terms. Especially in an economic downturn, companies are more willing to discuss this rather than lose the relationship entirely.
  • Convert your work week to 4 days instead of 5 and save 20% on payroll along with it. This would have a more positive effect overall compared to cutting pay without cutting hours and most likely won’t have a big effect on actual productivity or business outcomes.
  • A last option, if desperate, is to cut employee benefits and pay. This will have the biggest negative effect so only do this with care and caution. Other options to consider include implementing a temporary hiring or salary freeze.

Pay cuts have always been a sensitive and controversial topic, but recent data shows they are now viewed as a more favorable option. According to a recent study by the Conference Board, a non-profit research group, 537 public companies cut their top manager’s pay from the start of the Covid-19 pandemic.

Salary reductions did not just hit top executives, according to the data. 61% of the affected companies applied pay reductions to the base salaries of senior managers, and 11% of surveyed companies announced base pay cuts in 2020.

I agree with this advice and recommend considering a round of salary cuts of about 10% to 20% instead of enacting massive layoffs and furloughs. Why? Hiring an employee is arguably one of the most expensive parts of running a company (more on this later).

“As long as it’s handled and communicated properly, it can be a better way to go since losing people and knowledge, plus having to rehire can cost a lot both in actual time and money and in morale lost,” said Kat.

Don’t let your star employees slip away

It typically costs a company $4,425 over 42 days to fill an open position. This breaks down to just over $98 per day, plus any additional funds allocated towards recruitment, according to the career platform Zippia. With startups cutting back on spending, retaining top employees needs to become a priority (shout-out to investor Bri Kimmel for flagging this).

Now is the time to be even more transparent and clearly reaffirm the company’s mission, vision, metrics, and expectations, so the team knows what the priorities are. Then, rally and inspire the team so that employees develop an ownership mindset.

“You want your employees to be thinking along with the managers about saving money and working towards the greater good of the company,” said Kat. “Hold your employees accountable for being active participants and owners of the company, not just consumers.”

It’s important to remember that any information void will be filled with fear, and fear will lead to a mass exodus of star employees you actually want to retain.

“Be communicative, but at the same time, don’t be overly transparent. Find that balance,” said Kat. Her recommendation is to show up as a real human and don’t shy away from having challenging but necessary conversations. “Remember, you’re the leader, and people want to feel that ultimately, you’ve ‘got this’, but also that you have their backs.”

Offer other incentives to maintain company morale and employee loyalty. For example, can you offer a career rotation program? Develop a training program to learn new skills? Provide opportunities to take on new and exciting projects with another team.

If you do need to do a round of layoffs, don’t do it like this

If all other efforts to conserve capital fail and you need to do a round of layoffs, my number one piece of advice is to be thoughtful about who you need to lay off and just do it once. Often, that means cutting a little deeper than you think you need to, but that is better than a slow burn.

Think about it very critically, and be direct and compassionate with employees. Have managers deliver the news one-on-one instead of at an all-hands. Don’t be in the news headlines for laying off hundreds of employees with a prerecorded Zoom webinar. Think about what kind of signal that sends to the existing employees you are trying to retain.

The employees who remain will want to know if their former colleagues were taken care of. Did the company offer extended benefits? Help with job referrals? Share a spreadsheet of affected workers? Start a company alumni group? We recommend doing all of the above. Insider’s Melia Russell wrote this helpful article outlining other ways companies can soften the blow for employees affected by layoffs.

The small details really matter here because everyone talks. Former colleagues will reach out to current employees to say their goodbyes and share their exit experiences. You want those conversations to reflect leadership in a positive light.

Also, and this is an important point, don’t wait until a crisis to make significant decisions under stress, and don’t make promises regarding employment. One mistake we’ve seen founders make is coming out and saying, “we’re not gonna do layoffs.” You will at some point, and employees will remember what you previously promised.

“That seems so basic, but people do stupid, rash things without conferring with their lawyers or HR team, especially when they are under high stress,” said Kat. Her recommendation is to plan early when you are not in an emotional state and make decisions with your entire leadership team to make sure you’ve considered every option, opinion, and consequence.

There’s no way to sugarcoat this. Layoffs are brutal for both employers and employees. To ease the pain, we recommend this reduction in force (RIF) toolkit that provides frameworks and templates for businesses that have been forced to reevaluate their staffing levels during this time.

At the end of the day, employees deserve to know what’s going on, and they also deserve to be treated as individuals, not another line on your budget spreadsheet.

“If you’re the leader of a company, think about how you would want to be treated, and put yourself in the shoes of the lowest paid person at the company,” said Kat. “And I always advise when doing terminations to be direct, honest and compassionate.”