Times of economic crisis call for drastic measures. Any good leader knows this, and any good leader knows that those measures will be painful and will inevitably impact the long-term future of the company.

But there's a limit. Preemptively "right-sizing" a workforce and rescinding job offers goes over that limit. 

I get it. Millions of dollars in pandemic-recovery overspend. Overly optimistic projections. Short runways. Angry investors. Inflation. Supply chain. I get all of it.

I'm not here to judge. I've been on both sides of this issue, over two decades of leading and advising startups and tech companies. So I'm just here to tell you what's likely to happen in the long run, based on my experience.

Reducing Workforce Is (Mostly) an Accepted Corrective Measure

The truth about layoffs  --  and it's a truth that employers count on  --  is that the employees will usually understand and accept why they're being let go. In fact, they almost always come to grips with it as a necessary broken rung on the career-ladder.

One step back. Two steps forward.

But in my experience, this is only true when the company is facing a do-or-die crossroads  --  in other words, when the layoffs are about tossing a few employees overboard to save the rest. It's an unfortunate scenario. No one wants it. But people understand it.

However, if those employees get any sense that layoffs were preemptive, preventative, or unnecessary in any way, that understanding immediately shifts 180 degrees to a feeling of betrayal.

The Right Communication Is Critical in Tough Times

Good leaders communicate transparently in a crisis: "Things are great! Things are good. Things are worsening. We're letting people go."

In some cases, they put an overly optimistic spin on that communication: "Things are great! Things are still great! Things are awful. We're letting people go."

It's an unfortunate leadership choice, but one that can be forgiven.

The worst kind of communication requires only one small but incredibly disastrous change: "Things are great! We're letting people go. Things are still great!"

I know why this happens. It's because there's a constituency outside of the workforce  --  investors, customers, partners, etc.  --  that needs assurances that everything will be fine and that leadership is in control, especially during times of crisis. 

But to the workforce  --  all of the workforce, not just the ones that got laid off  --  this translates to "saying one thing and doing another." 

And that's exactly what they themselves will do moving forward.

Here's what they will say: They will agree to whatever package the company offers, because the company has pulled the rug out from under them and they'll take whatever they're going to get.

Here's what they will do: They will proactively destroy the company and its reputation whenever they can, without provocation. And they'll do it with a shocking honesty and a lack of emotion.

This Is How I've Seen It Play Out

The company will develop a reputation for pulling the rip cord before it was necessary. This is the worst possible hit a company can take to employee retention. Once leadership loses trust at that level, they don't get it back.

I've seen companies forced to pay a premium on future salaries as a form of insurance against being let go "for no reason." I've also seen companies have a hard time hiring the best talent without a guaranteed contract.

But in the worst cases, I've seen companies lose up to 50 percent of their remaining workforce. This happens because their loyalty has been shaken to zero. And if a preemptive round of layoffs happens when "things are great," the next round can happen at any random future time. 

Most of those remaining employees won't tell the company their intentions or concerns, they'll just start a job search and hop into whatever life raft pulls up.

And that's the most crushing blow. A company's talent is only at top productivity when they're totally bought in to the relationship between themselves and their employer. When the employer levels that trust, it puts a kink in that productivity that, in my experience, never recovers.

Furthermore, none of this will happen in direct sunlight. It will all happen off the company's radar, which makes it almost impossible to counter.

Layoffs for economic reasons should only be a company-saving last resort. And I can't stress this enough  --  job offers, once made, should always be honored. Full stop. Painful decisions are always required in business, they're just a part of leadership. But leaders should always make sure they don't sacrifice the future for short-term fortification. 

In addition to my role as a C-Level executive at a VC-backed startup, I'm working on a side project called Teaching Startup that delivers answers and advice from experts like myself and others at a fraction of the cost of a traditional adviser. Here's a free trial with no strings attached.