October 23, 2026
No federal law, and almost no state law, requires a startup to pay severance to an at-will employee. You owe it only if an offer letter, employment agreement, severance plan or consistent past practice promised it. What you do owe on every termination is final pay on your state's deadline, accrued vacation in states that treat it as wages, and pay in lieu of notice if a WARN Act layoff applies. Startups pay severance anyway because it buys a signed release of claims, and at an early-stage company 2 to 4 weeks of base salary is typical, with 3 to 6 months for executives, often plus a contribution toward COBRA premiums.
Key takeaways
For an at-will employee, no. Federal law doesn't require it, and neither do the laws of nearly every state. The obligation comes from your own documents and conduct. If an offer letter or employment agreement promises severance on a termination without cause, you owe it. A written severance plan, or a habit of paying everyone the same formula, can create an obligation too, so treat each decision as a precedent.
Three things look like severance but aren't. Final pay for hours worked is always owed, on a deadline set by state law. Accrued vacation is treated as earned wages in some states, including California, and must be paid out at termination. WARN pay applies to larger layoffs: the federal WARN Act requires 60 days' notice of a plant closing or mass layoff for employers with 100 or more employees, and states such as New York have their own versions with lower thresholds. See How Do I Run a Layoff?
Final pay deadlines vary by state. California requires final wages, including accrued vacation, immediately at an involuntary termination, with a penalty of up to 30 days' wages for willful delay. Massachusetts requires payment on the day of discharge, and late payment carries mandatory treble damages. New York allows payment by the next regular payday. Check the rule where the employee works before the conversation.
Because severance buys a signed release of claims: the employee agrees not to sue the company over the employment or its end. It closes off discrimination, retaliation and contract claims, though some claims, like unemployment and certain wage claims, can't be released.
A release is a contract, so it needs consideration, meaning something of value the employee wasn't already entitled to. Final pay and accrued vacation don't count. The severance payment, a COBRA contribution, an extended exercise window or accelerated vesting can each serve as consideration.
At early-stage companies, 2 to 4 weeks of base salary is typical for non-executive employees. Some companies add a week per year of service, which is easy to apply consistently. Executives commonly receive 3 to 6 months of base salary, and their packages are usually negotiated at hiring rather than at departure.
Health coverage is the other common piece. Federal COBRA applies to employers with 20 or more employees, and many states have "mini-COBRA" laws for smaller employers. The departing employee pays the full premium plus a small administrative charge, so covering a few months is a meaningful benefit. Some companies pay the premiums directly and others pay an equivalent taxable cash amount; ask your benefits provider and tax advisor which approach fits your plan.
For most employees, decide at the time. A severance promise in an offer letter is a commitment you'll owe even to someone you let go for poor performance, and it removes the leverage you need to get a release. A good startup offer letter is at-will, has no probation period and says nothing about severance. See Startup Employment Contract Guide.
Executives are different. A senior hire will often ask for severance up front, which is reasonable. The agreement should pay only on a termination without cause or a resignation for good reason, with both terms defined tightly, and should condition every dollar on a signed release. For a sale of the company, the common structure is a double trigger: extra severance or accelerated vesting only if the company is acquired and the executive is then terminated without cause or resigns for good reason within a set period. See Single Trigger vs Double Trigger Acceleration.
A separation agreement states the severance, the release, the return of company property and the employee's continuing obligations under their CIIAA. For employees 40 and over, the federal Older Workers Benefit Protection Act adds strict requirements before a release of age discrimination claims is valid, at employers with 20 or more employees. The agreement must be written in plain language, refer to the Age Discrimination in Employment Act by name, advise the employee in writing to consult a lawyer, give them at least 21 days to consider it and allow 7 days to revoke after signing. The agreement isn't effective until the revocation period ends, so pay severance after that.
In a group termination, meaning two or more employees let go in the same program, the consideration period is 45 days, and you must give each person a written disclosure listing the job titles and ages of everyone in the decisional unit who was selected and everyone who wasn't.
Unvested shares and options are forfeited on the termination date. For restricted stock, the company typically has a right to repurchase unvested shares at the price paid. Vested options stay exercisable for the post-termination exercise window in the option agreement, usually 90 days. Under the tax rules, an incentive stock option exercised more than three months after employment ends is treated as a nonqualified option, which is a question for the employee's tax advisor.
The board can also extend the exercise window or accelerate a few months of vesting in exchange for the release, at little cash cost. Extending an ISO's window changes its tax treatment, so the employee should talk to a tax advisor. See What Happens to Startup Stock When You Leave the Company?
In McLaren Macomb (2023), the National Labor Relations Board held that offering a severance agreement with broad confidentiality or non-disparagement clauses violates federal labor law when the employee is covered by the National Labor Relations Act, which includes most non-supervisory employees at non-union companies. As of late 2026 the decision still stands, though the Board's General Counsel has asked the Board to overrule it. Until that happens, keep these clauses narrow for non-supervisory employees and add an express carve-out preserving the right to discuss working conditions and to communicate with government agencies.
The federal Speak Out Act also makes a non-disclosure or non-disparagement clause signed before a sexual harassment or assault dispute arises unenforceable as to that dispute. State laws go further. California's SB 331 requires separation agreements to preserve the right to disclose unlawful acts in the workplace, using statutory language, and to give the employee at least five business days to consult a lawyer.
A lump sum after the release becomes effective is simplest and ends the relationship cleanly. Installments on the payroll schedule preserve cash and let you stop paying if the employee breaches the agreement, but keep the person on your books for months and can affect unemployment benefits in some states. Severance is wages, so withhold taxes either way.
Severance can also be deferred compensation under Section 409A, and violating 409A puts tax penalties on the employee. Mechanically, severance paid by March 15 of the year after termination generally fits the short-term deferral exception. Longer schedules can rely on the separation pay exception, for payments made only on an involuntary termination that total no more than two times a limit tied to annual pay and finish by the end of the second year after the year of separation. A release period that crosses a calendar year end creates its own timing issue. Have a tax advisor review any agreement that pays over time.
Example. A 25-person startup lets go a 42-year-old engineer in California who earns $120,000 a year. Weekly pay is $2,307.69 ($120,000 ÷ 52). The company offers 3 weeks' base salary, $6,923.08, plus 2 months of COBRA premiums at $750 a month, $1,500, for a package of $8,423.08 in exchange for a release.
The company also owes, release or not, her final wages through the termination date and 5 days of accrued vacation, $2,307.69 ($120,000 ÷ 260 working days × 5), paid at the termination meeting. That amount can't be the consideration for the release.
Because she's 42 and the company has 20 or more employees, she gets 21 days to consider the agreement and 7 days to revoke it after signing. If she signs on day 10, the agreement becomes effective after the revocation period ends, and the company pays the $6,923.08, less withholding, on the next payroll and the COBRA amount as scheduled.
She was granted 40,000 options at a $0.50 exercise price 18 months ago, with 4-year vesting and a 1-year cliff. She has vested 15,000 options (40,000 × 18 ÷ 48), and the other 25,000 are forfeited. Exercising all her vested options costs $7,500, and she has 90 days to do it.
For more, see What Do I Need to Do When an Employee Is Fired?, How Do I Run a Layoff?, What Do I Need to Do When an Employee Quits? and How Do I Put an Underperforming Employee on a Performance Improvement Plan?
If you're letting someone go and want the separation agreement right the first time, contact us.
