A crucial task when shutting down a startup company is notifying and paying employees for their paid time off (PTO). First, it’s important to take care of the employees who chose to help you with this venture. Many founders will go on to start other companies, and you don’t want any negative feelings from employees which might follow you to your next startup.
In addition, in most states paying employees for their PTO is required. Startup executive teams and board members are fiduciaries and can be held personally liable for unpaid PTO. Employees who don’t receive their PTO can sue you personally, and you could be required to pay the money plus penalties and court costs. So it’s critical to shut down your company correctly, both to take care of your employees and avoid liability.
Start shutting down while you have funds
There are other expenses related to shutting down your business besides PTO, so you need to begin the process while you still have cash available to pay all your obligations. Many employees may have two weeks to a month of PTO accumulated, so some payouts could be fairly large. If your financial picture isn’t looking good and you’ve exhausted all your fundraising potential, we recommend that startups that are closing start reviewing their financial commitments at least three months before their runway ends and they reach their zero cash dates. Budget to pay out your PTO.
If your company has unlimited PTO, you actually don’t have an ongoing liability. You’ve told everyone they can take as much time off as they want and you don’t track it. While that aspect of unlimited PTO sounds good, there are some downsides.
Bottom line: Take care of your employees
Paying your employee’s PTO is a requirement you’ll have to meet when shutting down your startup. It can create a significant liability and, if you launch another startup, you will probably work with some of the same people again. So we recommend you take the long-term view and take care of your employees. If you have questions about your PTO obligations or any other aspect of shutting down a startup, please contact us and we’ll be happy to answer your questions.
