tl;dr – Make sure you properly transition any employees being terminated or moved into a non cash paying consulting role, review your contracts and negotiate with everyone, and look for alternative financing including the recent SBA disaster loan.
No preamble here let’s get right to it. Everyone is worried about their runway. Here are three things you can do to help your startup.
Transitioning Your People
I’ve seen clients look to lengthen their runway by letting people go or transition them over to a 1099 contractor. Here are some things to keep in mind when making these tough decisions.
If you are letting them go:
- Have you reviewed your employment agreement with them?
- Have you properly followed the termination provisions in the agreement?
- Will you owe any severance?
- Do they have unpaid wages?
- Have they accrued any vacation time that needs to be paid off?
- Remember to halt any vesting to service based equity as they are no longer providing a service to the company
- Consider creating separation agreement where they waive any rights against you and the company (and you limit your risk) in exchange for additional compensation.
- Make sure to understand the employment laws of your state.
- Make sure to pay employment taxes.
If you are transitioning them to a 1099 contractor so you can compensate in equity instead of cash:
- Are they really a contractor? They should not be performing substantially the same job and same hours under a new title as this will likely be viewed as employment. In that situation items like minimum wage and unemployment tax requirements apply
- Treat them like a real contractor. Here is a post discussing the difference
- Check your stock plan and grants to see if vesting from earlier equity grants will continue. Look for whether vesting continues while “in service” or only through “employment”
- ISO to NSO Conversion as only employees are eligible for options.
Remember that any unpaid wages to employees as well as unpaid employment tax can produce personal liability to founders. Any change to employment terms or status needs to be in writing with proper protocol followed by the startup.
Negotiate with Everyone, Even Your Lawyer
Now is the time to revisit your contracts and agreements with everyone. Is your landlord willing to cut your rental rate for a short period and try to make up that lost capital in the back end? Can your attorney defer fees or instead of being compensated in cash will they accept equity or trade as payment? Can you build your accountant a better website? Can you change a vendor’s payment terms from net 30 to net 60? During these times everyone needs to be a bit more creative in how to lengthen their runway and still provide value to their partners.
You should also review your contracts to make sure you can deliver on your promises and check renewal terms. If you can’t because you are understaffed, then you should go back to your customer and see if you can quickly revise terms to give you a longer time frame or a smaller order. You don’t want to fail to perform and then risk your company developing a bad reputation and open yourself up to a lawsuit. If there is an expensive contract with a vendor that you do not believe you need to retain then make sure to terminate/renegotiate the agreement before it renews.
This is going to be the hardest part in all of this. I’ve seen angel investing slow down as the angels are trying to manage their portfolios during this chaotic time. It is likely that financings will be harder to come by and when they do, they will be less friendly to founders as investors protect against downside risk.
Here is a previous post on alternative financing. And here is a link for the SBA loan program that has been put in place recently to deal with the fallout of the Coronavirus.
Stay safe and please reach out to friends, family, and colleagues when you feel overwhelmed.
We will all get through this together.