What you need to know as a startup leader about dealing with redundancies

Most of Australia’s startup founders launch their businesses with the best of intentions, but the past year has been challenging with consistent and widespread redundancies.

It’s understandable that signs the VC funding market might be starting to thaw would inspire hope that the worst of the tech wreck is over.

However, we think founders should remain cautious, as there’s still a long way to go and a lot of misunderstanding about redundancies.

Dead cat bounce for VC funding?

The latest quarterly report from Cut Through Ventures reveals that more than $810 million was raised across the three months to June 30, up 20 per cent on the first quarter. That’s encouraging, but cash-strapped startups should take a few things into account.

The total of $1.5 billion in funds raised for 2023 so far is completely overshadowed by the $10 billion capital avalanche during COVID-19. The recovery is long and we won’t reach those levels previously seen for a long time.

In response to the survey, 61% of respondents recommended bridging rounds from existing investors, who might be exhausted without further cost cuts. Another 30% said startups should delay fundraising, which again raises the possibility of cost cuts.

With the spectre of a recession looming, more than 86% of respondents said they would decrease their spending levels or keep them steady.

Finally, reports of more traditional incentive schemes at Atlassian and Canva, as well as increasing expectations of redundancies among staff, are instructive for the rest of the sector. This isn’t over.

While this is more anecdotal, some of the work that comes across our desk also indicates redundancies are still happening across the Australian startup landscape, at least for the moment. 

Redundancies happen anyway

It’s also worth pointing out the myth that redundancies only happen during a bear market. Granted, they definitely peak during periods such as this.

But startups frequently engage in routine redundancies because they’re growing, not because they’re shrinking (or more accurately, just not growing fast enough).

As technology companies mature and require specialised skill sets, redundancies occur to pave the way for new hires with the necessary skills to drive the company forward. Founders often didn’t anticipate that success would involve letting people go, but this is the reality.

We’re also sensing an increase in mergers and acquisitions in tech, although it’s too early to say if these are genuine green shoots or the result of cash-strapped startups joining forces to stay alive.

Nevertheless, M&A activity almost always results in duplicate roles within the workforce, ending in the necessity of letting some people go.

A redundancies checklist

Redundancies are more confronting than complex. But there are some considerations for founders to make sure they’re adhering to their legal requirements.

According to The Fair Work Act, the company must demonstrate that the person’s job is no longer needed, which can be tricky.

The employer also has to go through a notification and consultation process if the employee is covered by an award. It’s often assumed that the white collar workforce is not subject to these protections, but many CEOs are not aware or have forgotten that IT workers may be subject to the Professional Employees Award.

If the leadership team deciding on the redundancies doesn’t consult closely with the hiring team, mistakes can be made.

You also need to give written notice to Services Australia if you’re considering making 15 or more staff members redundant at the same time.

The employee’s payout will be subject to the National Employment Standards, which are based on years of service, plus any additional entitlements such as accrued leave or payout of notice period. Companies in this position usually have a bit of a feel for what these are going to cost, but it’s useful to map them out especially if you’re in negative cash flow.

The employee must also be provided with a Letter of Termination, which must include the reason for their termination, their last day of work, notice period and whether they will be paid in lieu of notice, their last day of work, redundancy entitlements and notice that redundancy pay will usually result in waiting periods for Centrelink payments.

The biggest challenge

But the biggest issue founders face and the main reason they make mistakes executing all of this, is because the process is emotional for all concerned.

First and foremost for the employee that’s lost their job, for the remaining employees wondering what is next, and for the founder whose confidence will be shaken.

Clear and transparent communication with everyone involved is the key. Treating your outgoing staff with care and attention reduces legal risks by lowering ill-feeling that could result in employment claims. It also reinforces to the remaining employees that staff matter to the organisation, even when they are no longer strategically important to the business. That’s essential.

And finally, founders need to accept that redundancies are an indispensable part of building a business. The startup will not be defined by it, unless it’s handled very poorly.

There’s a way to go before we can say definitively that normal economic conditions have returned and funding markets can be relied upon.

In the meantime, founders should focus on optimising their business to survive this uncertainty and thrive when the dust settles. In a lot of instances, that’s going to mean making difficult decisions to let people go – hopefully in the right way.

• Anthony Bekker is founder and MD, APAC, of Australian-US technology legal advisory firm BizTech Lawyers. Elizabeth Ticehurst is an employment and industrial law specialist and of counsel with Biztech Lawyers.