Winding Down Your Company
Winding Down Your Company

How do you wind down a company gracefully? We talked to our founders and lawyers who have been through the process to find out how to navigate these challenging waters.

How do you wind down a company gracefully? We talked to our founders and lawyers who have been through the process to find out how to navigate these challenging waters.

Beth Scheer

Because more than 70% of startups fail, we help our founders wind down companies. We are asked a lot of questions about how to handle things from a legal, financial, people and administrative perspective. How do you wind down a company gracefully? We talked to our founders and lawyers who have been through the process to find out how to navigate these challenging waters. This guide will provide details to make sure your key stakeholders, including your employees, investors, partners, customers and vendors are taken care of as you prepare to shut down your company. Questions and comments are always welcome at

beth@homebrew.co.⁠

⁠

Understanding your Liabilities and Risks

The first question you should ask yourself is how much cash do you have left. This will dictate everything. What can you give your employees in terms of pay and severance? This dictates the tone you set with your vendors as well as the tone for how long you as a founder will have a job. You have to make the decision early enough so that you have enough cash to successfully wind down the business. In certain states you have to pay people severance (2 weeks is generally considered appropriate). We recommend being more generous on the benefits side since COBRA coverage can be very pricey and stressful for families. Some companies extend this benefit for up to a year.

💡Note to founders: Before you get to this place, have a frank conversation with your investors. Figure out M&A opportunities earlier -- not with 2 weeks of money left. You need to have leverage when you go into those conversations. This will help create a clean and managed wind down. Have cash for severance, rent and any outstanding liabilities. Anticipate and plan ahead.

Your counsel of record is probably not the best person to do your dissolution work. The reality is that your company’s large law firm doesn’t need to do the dissolution documents. Find a smaller solo practitioner if you know things are going to wind down. You’ll save time and money. Dissolution work is straight forward. Once it’s clear that the company is going to wind down, you need a good strategic advisor. Shift into money saving mode. Have a list of smaller firms on hand so you can transition gracefully. Just because your company counsel got you this far, you don’t need to use the same firm to wind down.

How to think about debt

What type of debt can you NOT leaving hanging?

Employer portion of Social Security

Employer wages

PTO/accrued vacation

Why are these types of debt so important? You could be personally liable for the money. You must understand personal liability laws in your respective state. What are you responsible paying for after a company shuts down and what is not your responsibility? In CA, you can be sued for unpaid wages when a company shuts down. Founders are liable for payroll taxes and any amounts withheld from employees’ wages.

More information on paying employment related taxes can be found

here.⁠

⁠

Secured vs. Unsecured Lender

If you have a secured lender, like Silicon Valley Bank for venture debt, it means that any assets you have, including cash, are considered collateral against the loan venture debt. So if there is risk of the company becoming insolvent, they can take whatever cash is in your account. If there is secured debt, you have to start communicating early in the process. You don’t want investors to provide bridge capital and then have that money swept by a lender. Remember, the lender has the power because they generally require that you to deposit all your cash with them. If you have an unsecured lender they can’t automatically take any of your assets.

General Thoughts from Homebrew Founders

Communication is key - Be transparent, communicate regularly and consistently. The more you communicate with your stakeholders, the fewer surprises there will be and the more collaboration you can expect from those around you.

Double check everything you do and don’t rely on others to cross your “t’s” and dot your “i’s”. The process of shutting down a company is exhausting and you may want to cut corners to reach the finish line. You need to go full throttle until all the dissolution papers are signed. Otherwise, you could be liable for things you breezed over. You don’t know what you don’t know so do not overlook any details during the negotiation process.

Treat the process like a sales or fundraising process. It’s not over til it’s over.

When you first start the process of winding down or selling a company, treat it like a sales or fundraising process. Push as hard as you can until the end.You will get tired. It may take at least a year and will not be fun. The biggest risk is that you give up. At times you may feel like you aren’t getting anything out of it other than your time. It is physically and emotionally exhausting. NEVER just give in on any clause or task. This holds true to every piece of the negotiation process.

Don’t rely on other people negotiating for you.

You and your co founder (if applicable) need to double check the work. The lawyers or accountants may forget to file something and you could be at risk. Be absolutely sure that with every governing body that each document was received and categorized correctly. You may be personally liable if something is not done correctly. Don’t rely on accountants, lawyers, or advisors.

How to think about Communications

With investors

Call and meet with them when possible. News about a wind down should not be communicated via email. Have a script ready. “We are selling the company or shutting the company down by X date.” As soon as you know what is happening, inform all investors by phone or in person. Let them know the timeframe. Manage expectations on timing.

With employees

First things first...take care of your people. They are your most important stakeholders. Inform current and past employees (anyone who owns exercised common shares) that the company is winding down. Schedule 1:1 meetings with each employee and let them know how much longer they will have a job. Provide a timeframe for the last payday and health insurance term date. If you have an internal HR or recruiting contact, this person is the point person for helping every employee who is facing a job search and transition. If you don’t have an HR person, designate someone to be the “go to” person for your impacted employees. The HR contact can work with your investor/talent network if applicable to circulate names to companies who might be hiring. Some VCs have in-house talent partners who welcome the opportunity to get connected with recently “displaced” employees and are more than willing to help out. A one page guide for people who have lost their jobs can be found

here⁠

With customers

Set up an auto response email for current and potential customers so they know the company has shut down. Make sure customers have options regarding what to do with their data. Best practice is to provide a list of resources so they know where they can migrate their data.

Financial/Accounting Process

Pay all outstanding bills and collect final invoices. Review credit card bills for the last 18 months and cancel any software subscriptions. Put a freeze on all credit cards. Call payroll providers and let them know when you are shutting down the company. Do this at the beginning of month so employees can have a month of health insurance. Do a waterfall breakdown/analysis for how much each share of preferred stock is worth. Take this number, go to each investor and based on how many shares they own you will know how much to send back to each investor. The bank will wire out the money. Let each investor know the money is coming and confirm receipt. Close the account then email lawyers and tell them to file the final dissolution paperwork. Confirm that the bank account is closed and double check everything. Sometimes the investors request a “flow of funds calculation” to ensure that the fund is receiving the correct amount from what is being distributed. This document shows what all shareholders are expected to receive.

Make sure you find a great accountant (ideally a referral from a founder) who has been through this process before. If you are selling a product to customers, make sure that sales taxes are taken care of. File your final tax return with the federal and state tax boards. You can’t file final dissolution until final tax returns are filed. Call and double check that every document was received and filed. File the final dissolution paperwork.

Trademark/Patents

What happens to the IP/Intellectual Property after a company dissolves? Assuming the wind down is voluntary, the assets remaining after paying all the creditors are distributed among the owners according to their ownership percentages or by some other agreement. The successor owner of the IP will be determined at that time.

https://law.stackexchange.com/questions/5913/what-happens-to-ip-owned-by-a-defunct-company⁠

⁠

The Legal Process

The dissolution documents have to be filed AFTER your final tax returns are submitted. Make sure you coordinate with legal and accounting simultaneously. Have legal start drafting all dissolution documents (transfer of ownership, IP). You should negotiate up front with legal how much the cost will be for dissolution documents. You need to budget for what is left in your bank account. Lawyers will be less likely to over bill you if you set a budget beforehand.

Where do we go from here?

Figure out who may be a potential buyer. Work with your investors and advisors to come up with a list and leverage introductions. A list of competitors or customers could lead to an acquihire. If an acquihire isn’t possible, you may be able to sell your technology to customers or competitors.

Summary

Shutting down a company is not an easy or enjoyable task for founders, employees and investors, but it’s something that happens often in startups. Communicate regularly with your stakeholders and follow the necessary steps to take care of everything. Ask questions as you go along and be prepared to make mistakes. Your advisors and your investors should be there to help you along the way. Hopefully, you won’t have to go through this more than once, but if you do, you’ll be well prepared.