It was cool when you had hell of weed to smoke
And you bought a new home where you could keep your folks
I don’t see how this side of you could be provoked
It was all good just a week ago.
—Jay-Z, A Week Ago

When I started Loudcloud, I hired the best people that I knew—people whom I respected, trusted and liked. Like me, many of them did not have deep experience in the jobs that I gave them, but they worked night and day to make it work and they made great contributions to the company. Yet for many of them, there came a day when it was clear that I needed to hire someone with more experience to run the function I had previously entrusted to my loyal friend. Damn. How do you do that?

Should you do it at all?

The first question that always comes to mind is: “Do I really need to do this?” Who could I possibly hire who will work this hard and bleed the company colors like this?” Sadly, if you’re asking the question, you very likely already know the answer. If you need to build a worldwide sales organization, your buddy who did the first few deals is almost certainly not the best choice. As hard as it may be, you need to take a Confucian approach. You must consider first all of the other employees and second your friend. The good of the individual must be sacrificed for the good of the whole.

How do you break the news?

Once you make the decision, breaking the news will not be easy. It’s important to consider two deep emotions that the employee will feel:

Embarrassment – Do not underestimate what a large factor this will be in his thinking. All of his friends, relatives and colleagues know his current position. They know how hard he’s worked and how much he’s sacrificed for the company. How will he possibly explain to them that he will no longer be part of the executive team?

Betrayal – I’ve been there from the beginning, I’ve worked side by side with you. How could you do this? It’s not like you’re perfect in your job either? How can you be so comfortable selling me out?

Those are some powerful emotions, so get ready for an intense discussion. Ironically, the key to an emotional discussion is to take the emotion out of it. To do that, you must be very clear in your mind what you’ve decided and what you want to do.

The most important thing to decide is that you really want to do this. If you walk into a demotion discussion with an open decision, you will walk out with a mess: a mess of a situation and a mess of a relationship. As part of that decision, you need to be OK with the employee quitting the company. Given the intense emotions he will feel, there is no guarantee that he will want to stay. If you cannot afford to lose him, you cannot make this change.

Finally, you must decide the best role for him in your company. The obvious thing is to have him continue under his new boss, but this may not be the best thing for him, his boss, or his career. Your loyal employee will continue to have lots of knowledge about your company, competition, customers, and market that his new boss lacks. On the one hand, this can be a good thing—he can help get the new boss up to speed. On the other hand, when mixed with the intense emotions of embarrassment and betrayal, you might end up with a sabotage cocktail.

Another problem with this approach is that there is no way to paint him reporting to his old boss as anything but a demotion from a career path perspective. An alternative, if appropriate, would be to move him to another area of the company where his skills, talent, and knowledge will help. This kind of move will give him a chance to develop a new set of skills and help the company while he’s doing it. For young employees, getting experience in different areas can be super valuable.

Sadly, this is not a silver bullet since he might not want to work in another job; he might be hell bent on keeping his current job, so prepare for that as well.

Once you’ve decided to hire someone above your friend and decided on the alternatives that you’d like to offer him, you can have the conversation. Keep in mind that you cannot let him keep his job, but you can be fair and you can be honest. Some keys to doing that:

Use appropriate language – Make clear with your language that you’ve decided. In fact, use phrases like “I have decided” rather than “I think” or “I’d like.” By doing this, you will avoid putting the employee in the awkward position of wondering whether or not he should lobby for his old job. You can’t tell him what he wants to hear, but you can be honest.

Admit reality – If you are a founder/CEO like I was, it probably won’t be lost on the employee that you are just as under-skilled for your job as he is for his. Don’t dodge this fact. In fact, it’s fine to admit that if you were a more experienced CEO, you might be able to develop him into the role, but two people who don’t know what they are doing is a recipe for failure.

Acknowledge the contributions – If you want him to stay in the company, you should say that and make it crystal clear that you want to help him develop in his career and contribute to the company. Let him know that you appreciate what he’s done and that your decision is a result of what’s next more than what’s previous. The best way to do this, if appropriate, is to couple the demotion with an increase in compensation. Doing so will let him know that he’s both appreciated and valued going forward.

Through all of this, keep in mind that it is what is and nothing you can say will change that or stop it from being deeply upsetting. Your goal should not be to take the sting out of it, but to be honest, clear, and effective. Your friend may not appreciate that in the moment, but he will appreciate it over time.