Startup running out of cash - do they need to notify employees with long notice period?

Question

I work for a fintech startup in the UK as a senior dev. The company has two products, one is a low-value financial tool A, and the other is a (mostly vaporware) client onboarding "suite" B.

After 3 years, we have 1 client for product A, and none for product B. The management is trying to sell product B, but there are no signs of this happening.

Now I have heard a rumor that the cash will run out in 6 months, unless there is a major client or more investment.

I have also heard that the main plan for investment is a rights issue, which entails trying to convince the existing shareholders to invest more (mainly because nobody else will invest).

I have a 5 month notice period and I know that some other senior employees may have a similar notice period requirement.

Should the company tell employees as soon as they are theoretically unable to pay x months ahead, i.e do they have to have the cash to cover employee pay in the event that no more cash comes in?

My long notice period felt like a good safety net, but now I worry that the management are likely to risk running out of cash and being unable to pay this.

Answer 1

If the company cannot operate, it is worthless and will be shut down

This sounds meaningless and obvious on the face of it - but it's exactly why the company cannot signal that they are going to go broke before they actually go broke.

As an investor, you are buying a part of a company with the view that it will grow and eventually be worth more than you paid. This means that any company you are investing in, needs to have potential to grow. Implicitly, to keep growing - the company obviously needs to keep operating.

When the company runs out of money, and can no longer pay it's staff - it can no longer continue operating (no staff = no work). At this point, it's a worthless company.

The important point though; is that if you know the company is going to be worthless in the future - it is also worthless right now. That is, from an investor perspective, any money they invest - they know - will be lost.

As the company may still have some assets at this point - it is then clear to the investor that the company must be liquidated, so they can recover as much value as possible. The company will cease to exist.

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What this unfortunately means for you, is that for the company not to be immediately shut down - somebody (with money) needs to believe that it will continue existing in the future as well. That is, somebody has to believe that the company will find the money it needs to pay you - and will eventually turn a profit.

In short, this gives you a situation where the company cannot tell you that it's going to go broke ahead of time. It either finds the money, and business continues as usual - or it doesn't, and is very immediately closed.

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Note, this is not the same as "needing to layoff some staff" - certain jurisdictions had laws about minimum notice periods before mass layoffs. These situations assume the company would continue to exist, just with a smaller workforce.

Answer 2

I've been involved - mostly indirectly - with a few companies that ran out of money and were unable to pay their workers. In no case did they give any kind of advance notice, and while I can't state it definitively I conclude that there is no duty to tell workers or anyone else (except maybe owners) about the financial state of the company.

Revealing that a company is short of money puts the company at a severe disadvantage. Investors are less likely to invest, suppliers are less likely to extend credit, workers are more likely to leave.

Answer 3

I've been in a very similar situation as you have described. The questions you have to ask are:

• What will happen if / when the money runs out?
• Do you want to move to a more financially secure company?

Let's tackle the first having worked with devs that were on a 3 month notice period (both by the company and by the employee) they were given only 1 month notice. The company I was with didn't fully run out of money but the cash was running out quickly and was months away from insolvency. If the company goes bankrupt you'll not get paid anymore from the point it goes bankrupt end of no discussion. If you want to risk that it's up to you. If you are lucky the company wll tell you 1 month beforehand that the money's all gone rather than give you 5 full months notice. The most likely scenario for startup type companies is that they'll get you to work right up to the bitter end which will include some days after your pay date with a bunch of excuses as to why the pay is late. You'll have to terminate the contract at some point.

Now the second you might want to move on to another company before the ship sinks this is a good idea but you have to give 5 months notice which brings you dangerously close to the point which they can't pay you. My suggestion is to look for and secure another job then negotiate with your company. Mention in the interviews you have a long notice period but it's negotiable. I never gave the full 3 months I only work 6 weeks of the notice. Others mostly worked 1 month. In this regard you are in the position of power as the company really doesn't have the means to seek any damages if you leave early. My suggestion here would be to just put on the date the new company wants you to start and tell them you have to leave for that date end of discussion. I would give at least 1 month notice period then in terms of damages you'll be looked upon in good light if it goes to court. Companies can only seek the difference in what they paid to cover your role vs what they would have paid you and they have to have proof that they paid ths difference.