The Question of Severance, etc.

Here is a general rule:  unless an employee has an employment contract or severance agreement providing for severance or the company’s employee handbook provides for severance, there is no severance due to a terminated employee.  The employee is “at-will” and can be terminated at any time.  BTW, I highly discourage employment agreements (except perhaps when hiring in a new CEO or other very senior person) and I also doubly highly discourage having the company’s employee handbook (if there is one) provide for severance.  From experience, the more flexibility the top level management team and Board have in dealing with terminated employees the better.

In reality, the severance issue raises its head often.  For example suppose a company had to fire its head of marketing who had done pretty good work for 3.5 years (arbitrary but meaningful time period).  Unfortunately his/her skill set did not keep up with company’s growth (or make up any other non-scandalous reason you like).  Should this employee get some severance to help them through the post-termination period?  Should the company continue to pay for health insurance for this person for a period of time?

I have discussed this with many VCs.  There is a big group that says severance should never be paid when the company is not profitable.  There is a considerable (though smaller) group that says severance should never be paid unless the employee is otherwise entitled (see above).  The reality is that every situation is different with its own set of emotions.  The emotions are a real driver in my opinion.  And obviously, it is easier to pay severance if the company has real cash flow.

My general thinking in a situation where a high ranking employee is terminated without cause is to give 1 to 3 months severance (depending on how long he/she was at the company, the employee’s actual need and the circumstances surrounding the termination).  For lower ranking employees my general thinking is none or maybe a “you are terminated and will be paid for the rest of the week”.  Also note that if an employee is terminated for cause (like stealing or harassment or other culpable conduct) the severance should be zero (and written severance agreements usually have this same “out”).

With respect to continuance of health insurance, this is a bit easier for the company to pay for a number of months b/c the amount of monthly premium is usually in the $300 to $500 range (much cheaper than the severance payment).  I can easily be persuaded to have a portfolio company pay for 6 months of insurance premiums under the right circumstances.

This is an emotional issue that merits independent thought for every high level termination.  One last critical point:  if you do pay severance, the employee should sign a broad release in exchange (releasing the company, the board, offices, etc., from all claims).