Do The Right Things – A Guide When Your Startup Fails

There is a story of an early stage startup which goes like this:

“Anton worked at a startup as a UX designer starting from 2018. He worked with 8 other people. They all are loyal to the company because they trust the CEO. They worked together for almost a year and everything seems to work as planned. But since the beginning of 2019, the salary was often paid late. They were worried but when they asked the business owner, he was just apologising and asking them to be patient. Being loyal to the company, these employees have faith that the CEO will tell them when the project is caught in a web of problems.”

From the story, we can learn that having a loyal employee is valuable, but how long do you think they can bear it if the company keeps paying them late for over months – or even years? 

See also: One Problem in Entrepreneurship You Might Not Aware Of

As a CEO, there is a likelihood that you will have a dilemma about what to do with your team when your company does not run well, especially when the startup fails to bring in enough cash to pay the employees. Yuval Ariav, an investor and founder of Fundbox, advised that as a CEO, you should be asking a tough question about your business management skills and practices when such tragedy happens to your early business. It is no doubt that being in a brink of failure is frustrating. And if you already have a few people on board, you should take good care of them. Here are some suggestions for you.

  • If your startup does not do well in several months and you know that you will run out of cash immediately, make all the cuts to reduce your monthly spend. Reduce non-essential expenses although it means you have to sacrifice your personal finance. For example, you should start reducing unnecessary travel money. If you rent a building, you can move to your garage or building with fewer renting cost. This might be hard but sometimes founders need to do a dramatic pay cut when needed. 
  • Then, be honest – be very honest to your employees about the condition of your startup now. As the business owner, you have to know when your startup does not run well. In this case, you should (1) identify what’s the cause and find a solution, and (2) think about your team on board, will you be able to pay them? Then, you should tell everyone about the condition. However, be cautious to not tell your employees 3 or 4 months in advance, as it might greater the chance of failure as employees will start pulling their foot out of your company. But telling them at the last minute will also damage your reputation as an employer. So, a piece of better advice is to tell them a few days before the peak failure.
  • Be transparent with the alternatives. You should discuss this with the whole team. Discuss the timeline for additional funding and what happens in the meantime to compensation. At this point, stock options will probably be the most effective retention incentive.
  • Lastly, you can give your employees 2 options: to stay or leave – but be honest that you cannot pay them in advance. And so, give them time to think and respect their decision.

 Read also: Lesson Learnt: What Do Young Entrepreneurs Do Wrongly?