Founder Things

How to Shut Down Your Company

. 4 min read . Written by Helena Price
How to Shut Down Your Company

I’ve had enough people ask me to write this post, so here it is. I hate writing it, as much as I hate that some of you will find use for it. I will keep it relatively simple and straightforward—the same as if I were talking to you on a founder 1:1.

First of all, I’m sorry you’re going through this. If you haven’t noticed, you’re not alone. A recent VC friend described what’s happening in Silicon Valley right now as “carnage.” Throughout this process, it will be helpful to remember that you are victim to greater systemic shifts as much as you are victim to your own mistakes. The faster you can accept the circumstances and get to work on shutting down, the better the outcome will be for you and everyone involved.

When is it time to start planning a shut down?

The simple answer: right now. It doesn’t matter if you’re profitable right now, or you have a signed term sheet in your hand—things can always change, and you need to be prepared.

There are three main paths you can take, ranging from ideal to not ideal, and they all require different budgets.

  1. Sale process via broker. This requires at least six months of runway, and your company needs to be an attractive asset (i.e. valuable IP/growing/profitable). A sale is not guaranteed.
  2. If you have at least three months of runway in the bank, you can pursue an ABC, or Assignment for the Benefit of Creditors. Essentially, you hand over your company to an ABC firm, and they run it through an accelerated sale process to maximize the return to creditors and investors. It may sell as an entire entity, or it might sell for parts. Either way, the company now belongs to the firm, and they assume both the upside and the risk.
  3. Bankruptcy.

When it comes to choosing a direction, it’s simple math: the sooner you begin planning, the more options you have.

And don’t expect to be making this decision alone. The people you should be working with on a shut down plan are the same people who helped you create your entity: your counsel. Have them walk you through your options and make recommendations for brokers or ABC firms, if it’s appropriate.

Your board, if you have one, as well as any secured lenders you have, will legally have to approve your plan, so keep that in mind and be ready to present multiple options for brokers or ABC firms to the stakeholders involved.

If you’re totally out of money and out of options, the only thing to do is talk to your counsel ASAP. This is their job. They help set up companies, and they also help wind them down.

What About Raising More Money?

I’m sorry to be the bearer of bad news, but if you’re out of runway, your regular fundraising days are over.

Investors have tightened their grip on capital, and no one reputable wants to invest in a company that is in a distressed position. You may find someone who wants to rescue you, but I can almost guarantee that the terms will be predatory. It is not worth it, I promise.

The only exception is that if a small check would be the difference between a bankruptcy and an ABC, an existing investor would likely write a check for that specifically. That’s a relatively easy argument—they either lose their money in a bankruptcy, or invest a small additional amount to potentially get a return.

So, in short, if you are out of runway, you should not be looking for new investors. You should be pitching existing investors about funding 2-3 months of runway for an ABC process as an alternative to bankruptcy.

Anything else I should know?

Here are some other crucial bits of knowledge that should guide your process.

  1. Remember to budget for severance. You will have to lay off your team, and when calculating runway, make sure you have enough to pay them severance. This is optional, obviously, but it’s your company, and you ultimately have to decide the kind of founder you want to be. Again, this is why the sooner you begin planning a shut down strategy, the better.
  2. Blaming yourself, or anyone else, is a waste of your energy. There is never one point of failure, and there are greater systemic shifts at play. Don’t blame anyone, and don’t indulge any investors, media, etc who want you to point fingers.
  3. People are going to be unhappy with you, and some will blame you. Try to not let this get to you. Just stay focused on the job in front of you.
  4. Know when to step away. In an ABC, for instance, founders are typically not involved in the process. Be available if they need you, but otherwise, respect the arrangement and understand that the company is no longer yours, and the outcome is ultimately out of your control.
  5. Lead with gratitude. Be sure to recognize the employees, investors and mentors who stuck by you until the end. Reach out to them personally and let them know how much you appreciate them. Help your employees find new jobs. Stay gracious in press interviews. Focusing on gratitude will not only earn you some good karma, but it will help you stay positive and level-headed amidst the chaos.

So, in short, the best time to create a shut down plan is now. I’m sorry you’re going through this, but all you can do is do your best, and you will get to the other side, I promise. Now go email your counsel, stat.