Startup Layoffs: Why Responsibility Matters

Jack Dorsey’s recent decision to cut 931 jobs at Block is a sharp reminder that poorly handled workforce changes can quickly escalate into legal and public relations problems.

Startups, often focused on growth and funding, sometimes overlook critical employment law obligations. But even early-stage companies need to build strong HR foundations. Responsible handling of startup layoffs protects both the business and its people.

Plan Ahead for Workforce Reductions

Market shifts often force startups to make tough staffing decisions. But careless layoffs can lead to lawsuits and compliance issues. Large job cuts may trigger federal or state WARN Act rules, while even small layoffs require attention to anti-discrimination laws and proper documentation.

Startups should handle layoffs fairly and transparently, with clear processes that are well-documented. This not only reduces legal risks but also maintains trust with employees and investors.

Get Equity Agreements Right

Equity is a common tool for attracting talent when cash is tight. But unclear or poorly written agreements can lead to disputes. Startups should define vesting schedules, exit terms, and repurchase rights clearly.

Including “bad leaver” clauses helps protect equity structure when employees leave under negative circumstances. Without clear terms, founders may face legal fights over equity during mergers or acquisitions.

Avoid Compensation and Classification Pitfalls

Creative pay models—like equity or deferred payments—can cause problems. Employees must meet wage thresholds under labor laws, and equity alone doesn’t meet these standards.

Misclassifying full-time employees as contractors is another common issue. To avoid penalties and audits, startups must follow proper classification rules based on job duties and responsibilities.

Use Restrictive Covenants Carefully

Noncompete and nonsolicitation clauses can protect business interests, but their enforcement varies by state. In places like California, most noncompetes are unenforceable.

Startups, especially those with remote teams, must ensure these agreements are narrowly focused and legally valid. Vague or overly broad terms are often thrown out in court.

Take Workplace Allegations Seriously

Startup layoffs and internal changes can trigger complaints. Ignoring issues like harassment, misconduct, or compliance violations can hurt a company fast. Quick, detailed internal investigations show leadership and reduce risk.

Also, reinforcing confidentiality with exiting employees helps protect sensitive information. Regular reminders of nondisclosure obligations protect your competitive edge.

Prevent Founder Disputes

Conflicts between co-founders can derail a startup. Equal ownership often leads to decision deadlock. Setting up clear dispute-resolution steps—like buy-sell agreements or arbitration—helps keep the business moving forward, even during disagreements.

Legal Help Early On Pays Off

Many startups skip legal advice early to save money. But investing in basic legal support—like contracts, equity plans, and termination policies—can prevent costly issues later. Solid legal foundations support long-term success.

Build Smart from the Start

Handling startup layoffs the right way is about more than compliance—it’s about building a stable, trustworthy company. Founders who take legal responsibilities seriously protect their teams, their vision, and their future.