When the economy turns uncertain, many founders find themselves staring at a single cell in a spreadsheet that suddenly feels heavier than anything else in the business. Revenue projections have softened, investor replies take longer to arrive, and the finance lead quietly highlights a line that says something like, “Runway: 7 months at current burn.” By this point, hiring has already slowed, marketing budgets have been trimmed, and non essential projects have been paused. Eventually, someone suggests the next step in a neutral, almost clinical way: reduce headcount. This is how many layoff decisions are born. They are rarely driven by cartoon villains who enjoy cutting jobs. More often, they come from leaders who feel cornered by the numbers and the pressure to keep the company alive. In that tight corner, layoffs begin to look like the one move that proves they are serious about survival.
The financial logic behind this is straightforward. For most companies, payroll is the single largest expense. Salaries, benefits, bonuses, and related costs make up a big portion of monthly burn. When revenue becomes unpredictable or starts to decline, the very thing that once signaled strength, a growing and specialised team, suddenly feels like a fixed weight pulling the company downward. A large headcount translates directly into high monthly commitments. When cash balances fall faster than cash comes in, cutting people appears to be the fastest way to extend runway without rebuilding the business from the ground up.
Investors and boards are very aware of this reality. During boom times, discussions focus on growth, market share, and speed. During downturns, the tone changes. The emphasis moves from aggressive expansion to credible discipline. A founder who presents a detailed, measured cost reduction plan often appears more in control than one who continues to push pure optimism. A headcount reduction becomes a signal, a way to show investors that leadership understands the shift in the environment and is prepared to act. Layoffs then serve not only a financial purpose, but also a communication function to the market.
Inside the company, the narrative is often framed in more strategic language. Leaders talk about refocusing on core products, consolidating around profitable segments, or removing layers of complexity. In some cases, this is accurate. Years of easy capital can create bloated structures, duplicate roles, and pet projects that would not have survived under stricter financial discipline. A reduction can force clarity about what the company actually exists to do and which activities truly matter to customers. However, there is a harder truth that many leaders avoid saying aloud. Layoffs are sometimes used as a shortcut to avoid confronting deeper issues in the business. It can feel easier to remove people than to admit that the pricing model does not work, that the product positioning is off, or that the go to market motion never fully clicked. One round of layoffs can buy a few extra months of runway without forcing leadership to redesign their strategy. In that sense, employees become an absorbent layer that takes the blow for earlier decisions that did not pan out.
The way layoffs are used also differs across stages. In large corporations, workforce reductions are often applied through ratios, targets, or spreadsheets. Entire departments, regions, or functions may be cut based on cost metrics or strategic priorities that are set several levels above. The decision makers might have never met the people who are affected. In contrast, early stage founders usually know their team members personally. They remember the early hires who took below market salaries, those who relocated, and those who stayed through chaotic phases. Letting someone go in this context is not only a cost decision; it is an emotional and moral burden. Yet even in startups, the math of survival does not disappear, and that tension can be brutal.
Another reason companies resort quickly to layoffs is that many alternative levers are slower or politically harder to pull. In theory, a company could aggressively renegotiate vendor contracts, shift to more flexible office arrangements, reduce or freeze executive compensation, or experiment with shorter work weeks and lower pay across the board. Each of these options demands complex negotiation, coordination across many parties, and often real sacrifice from senior leaders. By comparison, a headcount reduction appears simple. It is a single dramatic move with immediate impact on the profit and loss statement. That simplicity is part of why it is chosen so often, even when it is not the most thoughtful option. There is also a psychological dimension. During periods of uncertainty, leaders crave actions that restore a sense of control. They cannot change interest rates or macroeconomic conditions. They cannot force customers to spend more in a downturn or guarantee investor appetite for the next funding round. What they can do is decide the size and structure of the team. That decision feels concrete and decisive. Sometimes, layoffs become a way for leaders to reassure themselves that they are doing something, even if the deeper strategic problems remain unresolved.
For founders and early stage operators, the real work should begin before the crisis arrives. It is worth asking what would happen if revenue dropped by a meaningful percentage for six to twelve months. Which parts of the business would come under pressure first. Is the team sized only for the most optimistic scenario, or has the company been shaped to flex with different cycles. The organisations that handle uncertainty best are not those that never touch their headcount, but those that have prepared for different futures and built resilience into how they work. This is where scenario planning becomes practical rather than theoretical. A founder does not need a large strategy department to run basic models. Start with current burn, then map out multiple versions of the future. One version where growth slows, one where it plateaus, and one where it declines significantly. In each case, identify which costs could be adjusted, which projects could be paused, and which functions are absolutely critical to protect. If, across every scenario, the only serious lever is to cut people, that is a signal that the business is too rigid and too dependent on a single form of response.
If a company has already reached the point where layoffs feel unavoidable, the focus shifts from the decision itself to the way it is handled. The financial benefits of a reduction can easily be undermined by the cultural damage of doing it badly. The people who remain do not simply feel grateful that they still have a job. They observe how their colleagues were treated, and they update their beliefs about leadership. They notice whether there was honest context or only jargon, whether managers showed up in person or hid behind email templates, and whether executives took any visible pay cuts or allowed all the pain to fall on those with the least security.
Leaders also need to be candid with themselves about their motivations. Are they cutting because the numbers genuinely demand a smaller organisation, or because they feel pressure to follow what other companies are doing. Are they using layoffs as a way to avoid the discomfort of redesigning the product roadmap, rethinking the go to market motion, or confronting a misaligned strategy with the board. It is possible to shrink the team, extend runway slightly, and yet end up in the same crisis a year later if nothing fundamental changes.
Behind every headline about layoffs during economic uncertainty, there is a quieter story about identity and growth. Many founders learned to define success through headcount, office size, new roles, and constant hiring announcements. In an environment of cheap money and aggressive growth targets, building a larger team felt like proof of progress. When the cycle turns, those same leaders are forced to learn a different skill set. Restraint, careful prioritisation, and leaner structures become the new test of maturity. This shift can feel like failure, even when it is simply a different phase in the life of the company.
If I were sitting with a founder who feels boxed in by that spreadsheet, I would encourage three hard but necessary reflections before touching the team. First, define the smallest version of the company that can still deliver real value to its customers. Second, identify the structural changes that would reduce the likelihood of landing in the same situation again, such as diversifying revenue streams or redesigning processes. Third, decide how to communicate the decision in a way that honours those who leave and preserves as much trust as possible for those who stay.
Layoffs will likely remain one of the tools companies use when the economy becomes uncertain. The point is not to pretend that they can always be avoided. The point is to refuse to treat them as the first or only solution. For founders, the challenge is to build organisations that treat financial numbers as early signals to adjust, not last minute alarms that demand drastic action. When leaders do that work early, they gain more options than simply reducing headcount. And if the moment arrives when letting people go genuinely seems necessary to keep the business alive, then the responsibility is to own that choice fully. Leaders need to stand in front of the decision, not hide behind legal language or generic statements about “market conditions.” A company might emerge leaner once the dust settles. The more important question is whether its leaders emerge with their integrity, and whether the people who once worked there would still speak of them with some measure of respect.
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