Ask The VC

When to Shut Down Your Company

jason@foundrygroup.com — Mon, 19 Oct 2009 21:02:30 -0700

Last week we started the blog series (written by Roger Glovsky), How to Wind Down Your Company. The response and comments were great! Keep them coming. This week we tackle the hardest problem of all: deciding when to shut down your company.

It is not easy an easy decision, especially for entrepreneurs. Starting a company is about creating a vision, persuading others to believe in the vision, turning an idea into reality, and pursuing a dream. The last thing an entrepreneur wants to do is to shut down his or her dream.

So, how do you make the decision to shut down your company? When do you decide to shut down your company? The short answer is: When the company has no other alternatives.

What are the alternatives?

Financing. If the company burns through the Series D funding, why not just raise Series E, F or G? There are plenty of letters in the alphabet, aren't there? No. Not every business problem can be solved with money. The business model may have changed. Competition may be too great. Technology may have failed to perform. Or the customer just didn't buy enough of the products. And the Series A, B, C, and D investors may already have been burnt by prior down rounds, cram downs, or failed expectations.

Sale or Merger. This may be the best option for an entrepreneur, if it is available. The sale or merger of a business is often regarded as a success even if the sale price is well below the amount contributed by investors. Why? Because the sale price may not be disclosed. The typical press release of a failed business simply states that a small company was acquired by a big company and that together the new combined company plans to do great things. The big company may get strategic assets (often technology or intellectual property) at a discount and the small company preserves its reputation. Win-win. The public may not ever know that the business failed.

Bankruptcy. The company could file for bankruptcy and leave it to the courts to handle it. This can be an expensive and inefficient process. Why? Because the courts have required procedures to ensure fairness to those with potential claims including lenders, suppliers, customers, tax authorities, employees, investors, shareholders, and others. The process of sorting out potential claims takes time and the resulting delays may reduce or destroy the value of certain business assets. Often, the disposition of business assets can be handled better outside of bankruptcy through private settlement processes.

Crash and Burn. You could simply leave the company on "autopilot" and let the business hit the wall at 200 mph. As I mentioned in my first post, the end result is "crash and burn". Complete loss of life. No one walks away. It isn't pretty. The business dies and no one takes responsibility for its failure. No regard for any of the trust relationships created during the visionary, start-up and operating phases. Just "oh well, we tried." The problem is personal assets could be at risk and the law may hold directors, officers, and stockholders (or other business representatives and owners) responsible long after the business entity ceases to exist.

Deciding "there is no alternative," should not be a last minute determination. In most companies, you can see the end coming well in advance. Either the company is gaining customers or losing them. The energy is either flowing into the management team or out of it. The products are either shipping with fewer bugs or more bugs. The cash flow is either improving or getting worse. If you are paying any attention to the business at all, you know what's happening.

Shutting down a business is really a process, not a decision. You don't just wake up one morning, look at your to do items and then write "wind down company" at the top of the list. It's a process. You have to go through the painful, possibly agonizing process of evaluating your alternatives. You should consider carefully who will be affected by the shut down and seek advice from trusted and knowledgeable sources. You should consult with your board of directors (or other governing body) as well as your legal counsel and financial advisors. In the end, you need to make a thoughtful, well-reasoned decision and then take the necessary actions. The earlier you deal with the issues, the more alternatives you will have and the easier it will be to transition to the next venture.

During the mid 1990's, I was President of a software development company faced with the decision of shutting down its business. We were selling Mac software to enterprise customers at a time when almost every major corporation in America stopped using the Mac in the workplace. And we were competing against other vendors, including Apple, that were literally giving away a similar product for free. We had some good years and were profitable, but we were selling into a legacy systems market and saw the end coming well in advance. We reviewed various options with our board of directors and made several attempts to develop new products and pursue other opportunities, but in the final analysis, we decided that the various options did not match our talents or resources. Instead, we wound down the business and simply distributed the remaining assets to the stockholders.

You don't have to "pull the trigger" right away, but you do need to begin planning well in advance. Whatever you do, don't wait too long to start the process; it gets messy. What do I mean by "too long"? The company can't meet this week's payroll. The Company doesn't have enough money to pay its taxes. The company already missed a loan payment. You are wondering what happens to your personal guarantees when the business fails.

What is the likelihood of business failure? I can't vouch for the information, but here are some interesting statistics. We would like to hear your war story about winding down a business. What made you decide to cease operations? What actions did you take? What alternatives did you consider?

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 blogs for iLaw2.com and 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.

Know Your Communication Strategy When Raising Money

jason@foundrygroup.com — Mon, 19 Oct 2009 07:26:51 -0700

Today’s interesting post is from Matt Eventoff and talks about how startups need a communications strategy while raising money – not all that dissimilar from a disgraced politician. Thanks Matt!

How To Wind Down Your Company – New Series

jason@foundrygroup.com — Wed, 07 Oct 2009 09:51:47 -0700

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?

Thoughtful Analysis on the Dynamics of the VC Industry

brad@feld.com — Tue, 25 Aug 2009 09:58:11 -0700

I tend to stay out of the “VC is dead, long live the VC Industry” discussion but I couldn’t avoid Bill Gurley’s fantastic post titled What Is Really Happening To The Venture Capital Industry? All I can say to this post is “what Bill said.”

How to Run a Great Board Meeting

jason@foundrygroup.com — Fri, 07 Aug 2009 10:47:47 -0700

Today, the great post is by my partner Brad. He has a great post on how to run a great board meeting. Should be required reading in my opinion.

Ruminations On Whether Seattle VC’s Suck

brad@feld.com — Tue, 04 Aug 2009 08:51:05 -0700

Today’s post of the day is from Andy Sack titled Do Seattle VCs suck? In it, Andy states:

“Moreover, I wanted to explore the question: Do Seattle venture capitalist suck as much as their public opinion suggests? In a nutshell, the local venture community is getting a bad rap. However, it's also easy to understand why entrepreneurs have come to view them the way they do. Here are the pros and cons as I see them.”

Andy currently runs Founder’s Co-op in Seattle. I’ve made and lost money with Andy in the past and he’s had plenty of exposure to VCs (good and bad). Useful stuff and relevant to all VCs (not just Seattle ones).

Another Way VCs Outnegotiate Entrepreneurs

brad@feld.com — Sat, 18 Jul 2009 08:55:07 -0700

Jeff Bussgang from Flybridge has today’s great VC post titled In VC deals, Price Doesn't Matter - But The "Promote" Does. While I personally dislike the phrase “promote” to describe the concept Jeff is describing (I think “founders post-deal ownership value” - or FPDOV - is a much better phrase, although I realize “promote” is catchier.)

If you are an entrepreneur negotiating a VC financing, you should read this post carefully. Jeff does an excellent job explaining one of the key ways that VCs outnegotiate entrepreneurs while making the entrepreneur feel good about the outcome.

Finding Companies to Invest In

brad@feld.com — Wed, 08 Jul 2009 11:54:02 -0700

Today’s great VC post is from my partner (and co-author of this blog) Jason Mendelson. Jason post Where Do Venture Capitalists Find Their Companies? has a detailed breakdown, from Jason’s point of view, on where VCs find (and look for) companies to invest in.

And – as a bonus post – Mark Suster has a dynamite rant titled Is VC too Fat and Happy?

How To Cold Call A VC

brad@feld.com — Sat, 20 Jun 2009 10:55:58 -0700

Mark Suster of GRP Partners in LA continues to crank out great posts, including today’s titled Getting Access to the Old Boys’ Club (how to approach a VC).

I like investing in LA (we’ve got three investments there – Oblong, Topspin, and Memeo) and I’ve got a long term evil plan for the city. In the mean time, I’m going to be speaking at Twiistup 6 in LA on July 30 in case you are interested in coming and hanging out with a bunch of startups in the LA scene.

Betting on A Big Wave

brad@feld.com — Tue, 16 Jun 2009 08:54:48 -0700

Mark Suster of GRP Partners is blogging like a fiend and has the best VC post of the day titled Sorry Guys – It’s the Size of the Wave, Not the Motion of the Ocean. Entrepreneurs – wander over and take a look. Plus, he’s got some title alliteration.

When Failure Is An Option

brad@feld.com — Sun, 07 Jun 2009 22:56:09 -0700

Today’s great post is from David Cowan of Bessemer Venture Partners and is titled Israeli Venture Keynote: When Failure Is An Option. Embedded is his keynote presentation from last week at the Israeli Venture Association Annual Conference. While David focused on lessons for venture capital in Israel, they apply broadly to venture capital anywhere in the world, including the United States.

Key Characteristics of a Great Startup Culture

brad@feld.com — Sat, 30 May 2009 20:06:16 -0700

Today’s great VC post is by Greg Gottesman (a managing director at Madrona Venture Group) and is titled Thirteen key characteristics of a great startup culture. It shows up in John Cook’s column in TechFlash – the article is solid and the comments (all 66 of them at this point) are priceless. I’m baffled by the super-negative anonymous commenters as they add absolutely nothing to the conversation. If you are going to be critical (which is fine – and often helpful in sharpening up the ideas), be bold and comment with your real identity!

Start-up Cost Projections For First Time Entrepreneurs

brad@feld.com — Mon, 25 May 2009 19:12:24 -0700

Q: At a pub in Los Gatos, CA a casual conversation with some young, first time entrepreneurs lead to an interesting comment:
"...the business plan outlines our estimated (operational) expenses but how do I know an investor is not going to look at these numbers and say...'are you f'ing kidding me' and right then and there we can loose this guy (his interest)..."How can an entrepreneur build these projections most accurately and in a way that will maintain credibility with potential investors? What could be defined as the "best practice" for entrepreneurs dealing with this subject?

A: (Brad) As I’ve said in the past, I’ve never met a financial plan for an early stage company where the revenue side was correct. However, I’ve met plenty where the cost side was correct (or – at least – appropriate). The key here is simple – you want to have a cost structure that makes sense, covers all the bases, but doesn’t assume a big revenue ramp to be supportable.

If you are in the very early stages (e.g. a few people and an idea), recognize that your investor is likely going to be funding you for about 12 months to see how things play out. The biggest mistake first time entrepreneurs make is that they fall prey to the idea that they need to put together a five year P&L forecast and cash flow projection. I can guarantee – with 100% certainty – that this model will be wrong. As an investor, I don’t really care about this; rather I want to see how you are thinking about getting to “the next stage” of your business. You get to define the next stage, what it’ll cost you to get there, and what things will look like when you get there.

If you are a first time entrepreneur, go find an experienced entrepreneur to act as a mentor. She can be a first line of feedback your cost model and likely will know a few “financial people” that can help you put together a simple, yet credible model. In addition, when you spend time with potential investors, don’t try to bluff. Tell them it’s your first time building a model like this and that – while you had help – you know you lack experience and are looking for feedback. Try to engage the investor in the process. Listen the potential investors feedback and iterate on your model.

Simple message – don’t be afraid to ask for help.

Communications Advice for Pitching Venture Capitalists

jason@foundrygroup.com — Tue, 12 May 2009 16:09:08 -0700

Today's post is from Matt Eventoff - a communications consultant who has good tips for entrepreneurs who are pitching VCs.

I reinforce that having a clear message is really important. If you get off on the wrong foot in a presentation and can't clearly definite your value proposition, you risk losing the interest of the VC and never getting it back.

2009 New York Venture Summit

brad@feld.com — Sun, 03 May 2009 14:25:56 -0700

The 2009 New York Venture Summit is happening on June 17th at Digital Sandbox in New York City. The summit will feature 50 early stage and emerging growth companies as presenters, interactive panel discussions and lots of networking. The agenda looks strong as does the speaker list. The cost for investors or entrepreneurs is only $395 if you register online now.