You hired your executives to lead the company to big milestones, but even strong leaders don’t always stick around. Roles, priorities, and ownership change, and sometimes, it just doesn’t work out. Eventually, parting ways with an executive becomes part of the journey.
When that happens, how you handle the departure matters because severance affects your company’s reputation, your ability to attract and keep great talent, and your financial health.
In this guide, we’ve gathered answers to questions finance and HR leaders often ask about executive severance, including how to structure it at different growth stages, common mistakes to avoid, and how to stay competitive while meeting the expectations of the board and investors.
What is executive severance and how is it different from severance for non-executives?
Companies typically grant executive severance to those whose roles were eliminated by a merger or acquisition, or those the company terminated without cause.
Exactly which roles qualify often depends on a company’s size and stage, with limited eligibility at early stages and expansion to other roles as a company matures. For example, Series A and Series B companies usually limit executive severance to the C-suite. At later stages, they may add executive vice presidents and, sometimes, senior vice presidents.
Broad-based severance for non-executives is often formulaic, such as a set number of weeks of base pay for each year of service. Executive severance follows a more consistent structure, typically six months to one year of base salary for C-suite, and up to two years for CEOs. It also comes with broader protections like equity treatments, bonus payouts, and extended benefits.
Why is an executive severance plan important for VC- and PE-backed companies?
In VC- and PE-backed companies, leadership transitions are part of the deal during hyper-growth. Priorities change quickly and roles don’t always stay the same as a company matures. A clear severance plan gives top talent confidence, keeps your board and investors on the same page, helps prevent overpaying or underpaying, and lowers legal risk.
Given the current market dynamics, a well-structured severance plan is especially important.
“Today’s market is pushing companies to become leaner, bringing increased scrutiny from investors on compensation governance,” said Christina Byrd, senior compensation advisor at Sequoia. “Since the post-2023 tech correction, there have been more frequent restructurings and leadership changes, with fewer investments, IPOs, and M&A deals.”
How does severance change by growth stage?
Your approach to executive severance should grow with your company. What starts as informal or ad hoc in early stage companies typically becomes more structured by Series C and critical by the time you’re approaching IPO. Here’s how severance planning changes across growth stages:
Series A-B
Startups at this stage typically offer minimal severance and focus more on equity. They don’t usually consider severance until a situation arises, such as needing to part ways with an executive or when a candidate requests a separation agreement during negotiations. This request often kick-starts a conversation about whether the company should set up a plan for all executives.
“The answer is yes, you should,” said Byrd. “It’s best to establish a standardized executive severance agreement as early as possible — ideally before initiating any high-profile executive recruitment.”
Growth Stage (Series C to Pre-IPO)
Because companies in Series C often bring in more executives to support IPO or M&A readiness, severance becomes more formalized. At this stage, it’s common to see packages that include six to 12 months of severance pay, partial bonus payout, and some equity acceleration.
Pre-IPO
Companies nearing IPO typically offer more competitive severance packages to attract experienced, IPO-ready talent. These packages often include accelerated vesting of equity and extended COBRA coverage.
But more than just attracting talent, companies at this stage also need to think about disclosure and governance.
“As a company approaches IPO, understand that the executive severance policy will be disclosed in a proxy statement after going public,” Byrd said. “It’s something that the advisors who guide your shareholders on whether to support your compensation practices will review.”
What are the common components of an executive severance package?
While executive severance varies by company, there are several common components you’ll see in most packages:
Base salary continuation
This typically ranges from six to 12 months for C-level executives, and up to 24 months for the CEO.
Bonus payout
This is less common, but when offered, it’s usually based on either a prorated or target bonus amount. Companies focused on conserving cash often exclude bonuses from severance.
Equity acceleration
Acceleration allows the executive to vest some or all their unvested equity upon termination, so they can exercise shares they might otherwise lose.
- Double-trigger acceleration requires two conditions: a change in control (such as an acquisition) and the termination of the executive without cause. This structure is widely considered a best practice, especially for companies nearing IPO or recently public because it protects the executive while avoiding automatic payouts during a change in ownership.
- Single-trigger acceleration means equity vests automatically upon a change in control, regardless of whether the executive is terminated. This approach is rare and can create friction with investors, especially for companies approaching IPO or already public.
Extended exercise window
Companies may give executives more time to exercise their vested stock options, so they don’t have to make quick financial decisions under pressure. This is more common at later stages.
Other common elements are:
- COBRA or healthcare continuation
- Outplacement or legal fees
- NDA, non-compete, and release of claims
What are the most common mistakes companies make when drafting or negotiating executive severance?
Even with the best intentions, companies can miss important details when drafting or negotiating executive severance. Here are some of the most common mistakes and how to avoid them.
Overly generous terms without board alignment
Sometimes a savvy executive negotiates favorable severance terms early on, and those terms quietly become the de facto policy for others — without ever being benchmarked against the external market. Without a formal framework or board involvement, this can lead to misalignment and unintended precedent.
Lack of clarity on equity treatment
Companies often fail to clearly define how unvested equity will be handled in different scenarios, especially around change in control, termination without cause, or resignation for good reason. That lack of clarity can lead to confusion, disputes, or even litigation.
No clawback or restrictive covenants
Not including clawback provisions or enforceable NDAs, non-competes, or non-solicits can leave the company exposed if the executive leaves on bad terms or joins a competitor. Clawbacks allow a company to reclaim compensation, including bonuses or equity, if certain conditions aren’t met.
Inconsistent severance across C-suite or similarly leveled roles
Offering different severance terms to executives at the same level, or without a clear rationale, can lead to internal friction and undermine perceived fairness, especially during transitions and downturns.
Not updating severance terms as the company matures
Just like your compensation philosophy, severance policies should strengthen as the company grows. What made sense in Series A won’t be appropriate as you approach IPO or expand your leadership team. Regularly reviewing and benchmarking your policies will help you stay competitive and aligned with your stage.
How should CFOs approach severance planning with their board and investors?
Severance planning is about balancing business strategy, governance, and investor expectations. Here’s how CFOs can approach the conversation.
Benchmark against peers and stage-appropriate norms
Use market data to guide severance design. And revisit your benchmarks as the company grows and moves into new stages.
Align with compensation philosophy and long-term goals
Your severance strategy should reflect how you think about risk, retention, and executive transitions, especially if you’re aiming for IPO or acquisition.
Model financial impact of severance scenarios
Run scenarios for various outcomes, such as executive exits with equity acceleration so you understand the potential costs and prepare accordingly.
Get legal review and aim for consistency with offer letters and equity plans
Review severance terms with legal counsel to confirm alignment with offer letters, equity agreements, and your board-approved plans.
How do companies balance being lean with staying competitive?
Early stage and resource-conscious companies often face a tough challenge: staying attractive to top executive talent without overcommitting financially. Here are ways to maintain balance.
Conserve cash, but offer strong equity upside
You don’t need to offer overly generous cash compensation to stay competitive. For example, instead of 12 months of severance, you might offer six months of base salary, paired with a meaningful equity grant that includes the potential for acceleration under certain conditions.
If you’re being especially cautious with cash, you might limit severance to six months of salary and forgo a bonus payout, depending on your overall compensation strategy.
Conserve equity with smart vesting structures
Designing equity grants with cliffs or performance-based vesting can help manage dilution and reduce what you owe if an executive exits. For example, you can set a one-year cliff followed by monthly vesting, or tie vesting milestones to revenue targets, product launches, or funding rounds.
“If your executive compensation philosophy emphasizes performance-based vesting, you’re better protected from having to accelerate equity in a termination scenario,” Byrd said. “You can say, ‘We’re not accelerating unvested equity because the performance targets weren’t met.’”
Stay flexible early on, but formalize over time
In the early stages, keep severance terms simple and negotiable. As your company matures, standardize policies to keep things fair, reduce risk, and align with your investor’s expectations.
For example: At Series A, offer letters may include basic severance terms. But by Series C or pre-IPO, implement a formal executive severance policy reviewed by legal and approved by the board.
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