Of the most popular posts that Brad and I have created are our series on Term Sheets, Compensation, and Mergers and Acquisitions. One of the subjects that we’ve wanted to tackle has been the dissolution of companies. It’s never fun to think about failure, but it happens a lot.
Unfortunately, we haven’t gotten around to it yet, so it was with great joy that my friend Roger Glovsky elected to write the series himself. This is post one of the series and I’m really excited to introduce Roger to our readers. Take it away, Roger.
This is a follow-up to Jason Mendelson’s recent interview on how to handle start-up failures. It is a timely topic for entrepreneurs who may be running low on cash or worrying about “hitting the wall.” Jason offers critical advice about how entrepreneurs should manage their relationships with directors and investors and why they should reserve enough money to wind down operations in an orderly manner. Although much has been written about how to start a new venture, very little has been written about how to shut down a failed venture. It was Jason’s suggestion that I write more about it. This is the first in a series of blogs about how to deal with business failure, how to minimize liabilities, and how to keep your spirits up and your business reputation intact.
Every entrepreneur or investor who lived through the dotcom bust has their “war stories” or knows an entrepreneur who failed. In fact, the venture capital model is based upon failure. The NVCA estimates that 40 percent of venture backed companies actually fail (another 40 percent produce moderate returns and only 20% actually have high returns). Therefore, failure is part of the business of investing and starting companies. The key to success may be in knowing how to deal with failure, which is what we want to discuss in this series of articles. There may be more than one way to successfully fail and we hope this series will encourage more people to discuss (or perhaps debate) the proper way to shut down a business venture.
Start-up failures are legendary. The classic image is that of a race car driver that hits the proverbial wall at 200 mph. The end result is “crash and burn.” However, if you crash and burn, you don’t live to race again another day. As an entrepreneur, hitting the wall means running out of money and burning bridges; you will likely end up destroying relationships with all the people who supported your start-up venture. If you value the entrepreneurial life, then you may want to do a second or third start-up. You don’t want to hit the wall at 200mph. You want to walk away, and live another day to do a new start-up and pursue a new dream, and this time win the race. Brad Parker, a successful entrepreneur, once described professional racing as a “series of controlled crashes”. I think the same theory applies to start-ups. The operative word is “controlled”. The question is how do you wind down a business in a controlled manner so that you can preserve your relationships and start a new venture again someday.
When a business fails, anyone with a financial interest could have a potential claim on the failed entity including investors, lenders, trade creditors, employees, suppliers, customers, and the government (e.g. the IRS or state taxing authority). If those interests and claims are not properly addressed during the wind down process, the officers, directors and stockholders could be held personally liable. How you treat each of the affected persons is critical to successfully shutting down a business. From the moment you first decide that failure is a possibility, it is important to take control of the process and work with legal counsel as well as tax and accounting professionals to properly address the issues.
The articles that follow will strive to outline the process for shutting down a business in practical terms. The questions we intend to address are: When should you decide to shut down a business? What approvals are needed to shut down a business? Who do you tell first? How should assets be disposed of? What is a fair price for the sale of assets? How do software and web-based businesses differ from traditional bricks and mortar? What happens to intellectual property like software and domain names? What happens to customer lists and customer information? How should debts be paid? What business obligations can you be personally liable for? What business records do you need to have? How long do you need to keep them? When is the business officially terminated? These are just a few sample questions. Feel free to suggest your own.
We welcome your comments on this topic and encourage you to share your own real-life experiences in shutting down a business. Why did you shut down your business? What steps did you take? What would you do differently? How would you advise others?
Roger Glovsky is a founding partner of Indigo Venture Law Offices, a business law firm based in Massachusetts, which provides legal counsel to entrepreneurs and high-tech businesses. Mr. Glovsky is also founder of LEXpertise.com, a collaboration and networking site for lawyers, and writes a blog called The Virtual Lawyer.
The above content is intended to serve as a general discussion of the subject matter and is provided for informational purposes only. It is not legal advice and should not be construed as such. Do not act upon this information without seeking professional advice or rely on this website or use the content as a substitute for consultation with professional advisors.