This "our idea didn't work out, so we are letting you go" probably happens more than we realize. Props to Jason for being open and honest about it.
One of our partners had agreed to terms on a project that required us to staff up. When the project fell apart on their end the whole thing was cancelled. We just didn't have the budget at the time to keep those people on.
It absolutely sucked. We tried to be generous with severance.. but these were people who had just turned down other jobs to take this one. We just kind of dumped them back into the market. It absolutely sucked.
I vowed then and there to never hire people unless I was absolutely positive the money was in our bank account.
Perhaps as someone round here suggested some time ago, you should treat these companies as film projects. A group of freelancers get hired in to complete a project then when their work finishes they go on to the next project?