Entrepreneurs and investors spend a lot of time thinking about putting together the right team. But just as getting people on your team is important, getting people off your team is important, too. How you say goodbye, however, must be handled properly because doing it wrong can cost you your business.
There are four circumstances under which a person can leave your company based on two variables. The variables are “how” and “why”. The how can be that they decided to leave or you fired them; the why can be for good reason or for no good reason. They can be summed up in a nice two-by-two diagram (see above).
Startup team members can be closely linked to the company financially through their investments, legally through their contracts and intellectual property, or emotionally through their relationships within the team and outside of it. These links must be handled properly at time of departure in order to minimize possible fallout. Each quadrant in the diagram above provides context for the fair treatment of a departing member.
Quadrant A: Fired for Good Reason
All members of the startup team are expected to pitch in, do their part, and play nice with the others. Failure to perform the tasks and projects assigned can provide a good reason for termination, especially if a team member has received repeated warnings. In fact, unless there are repeated warnings and opportunity for correction, you likely do not have a good reason to fire someone (see “No Reason” below).
When a team member is fired for good reason, the company should minimize the impact on the company by shifting most of the suffering onto the individual that is being fired. If they had equity compensation, then steps should be taken to retrieve the equity so that the company won’t be left with a possibly disgruntled absentee owner (investors hate this). Cash investments should be paid back (without interest) to sever all financial ties with the individual.
Leaving a company under these circumstances is most uncomfortable. This is good because the consequences of not doing your job should provide at least some deterrent for employees.
Quadrant B: Fired for No Good Reason
Sometimes, there are people on the team that are no longer needed, or the company can no longer support them. Perhaps the company changes strategy and no longer has a need for their skills; or, perhaps they can outsource the person’s role for less money. If the person was working hard, doing what was asked, and being a team player, then the company has “no good reason” to fire that person. I once had to terminate an entire department of hard-working telemarketing people because we decided to no longer do telemarketing.
We live in an “at will” world, so a company can fire someone regardless of the reason. But, contrast the circumstances of Quadrant B with those in Quadrant A. In the case of no reason, the company needs to bear a larger amount of the suffering. Bearing the burden of the termination serves two purposes. First, it provides a penalty to the company for letting people go for no reason and two, it assures other employees that they won’t get hung out to dry if and when the company’s strategy changes.
In the case of firing for no reason, an employee should be allowed to keep the equity they have earned, or receive compensation in exchange for the equity. The compensation they receive should reflect what they had to forgo in order to earn the equity, not the value of the equity. So, if I worked for no salary in exchange for equity I should be compensated for my time at a rate in line with what I would have earned otherwise even if the stock has no value. This may create a strain on the company finances, but it is the right thing to do.
Quadrant C: Resign for Good Reason
There are a number of “good” reasons why a person can resign from a company. For instance, let’s say the company decides to move to a new state and expects you to uproot your life and move, too. Or, perhaps you were the marketing guy and your manager tells you that you are now in charge of cleaning the toilets. Another example: your manager wants to cut your salary or other compensation when other employees don’t have too. These are things outside of employees’ control that aren’t really their fault (unless they are, then see Quadrant A).
In these cases, the employee should be able to leave with similar treatment as if they had been fired for no good reason. The company consciously made decisions that made a person’s life uncomfortable (even if it was unavoidable). Therefore, the company should suffer the consequences of their choices. If a company acts selfishly under these circumstances, they will damage the relationships with existing employees.
Quadrant D: Resign for No Good Reason
Sometimes, a startup employee decides to leave with for no reason other than he or she feels like it. Maybe they became interested in something else, or they don’t believe in the company anymore. Maybe they’re just bored. In other words, the company did nothing explicitly wrong, but the employee left anyway. This is probably the most common circumstance under which someone leaves.
In these cases, the employee is basically leaving the company in the lurch and should be prepared to bear the consequences. Like in Quadrant A (fire for good reason), the company should seek to minimize the damage of the person’s departure. It can be painful for someone to leave under these circumstances, which is good. It deters them from leaving the company on a whim which increases employee retention.
In all cases, fairness is critical. How you treat people under different circumstances is a testament to the kind of company you are and what you want to be. Being fair may be inconvenient, but in the long run you will become a better company. Investors, employees, partners and even customers will have more respect for you if do the right thing.