Winding down isn’t an easy decision to make, but it’s even harder when the process drags on for months without a clear resolution. Having a plan and checklist with concrete goals and an established timeline is critical to a well-managed process. In this post, we’ll discuss the necessary steps and tips for how best to create, manage, and execute your wind-down plan.
When you’re still considering available options for your business, we recommend talking to 3 people when you have nine, six, and three months runway left:
It’s never been easier to incorporate, start, and run a company than today. There are tons of tools, guides, and quick ways to get compliant, pay your employees, and register in new states. However, unfortunately, this is still not quite true for winding things down. A dissolution process can be quite complex depending on your corporate structure and financial position. Because of this, we highly recommend discussing with your legal counsel what this process might look like for your business before taking any actions yourself.
As a note, many lawyers and accountants prefer not to do dissolutions, especially when there is little to no money left. That’s why we recommend starting these conversations or finding help when there is still runway left so you’ll have some foundational aspects lined up in case it comes to that.
Your accountant or bookkeeper can help provide a second set of eyes on your business operations, runway, and expense management. They’ve likely seen their fair share of startups and other businesses, and they’ll have advice on steps you can take both proactively and retroactively to manage the accounting side of the business.
Most founders who shut down (ourselves included) can feel extremely isolated and alone during these times. You’ve most likely sunk years into this entity, thought about it night and day, and have desperately wanted it to survive and thrive for years to come. Making the difficult decision to say it’s not working and it’s time to move can feel heartbreaking and often requires time to heal. However, talking to those who’ve done it before can help normalize the situation and show you that you’re not alone. The unfortunate fact is that most high-risk endeavors don’t work – meaning you are not the first and most definitely not the last entrepreneur who has had to go through something like this.
As a note, our team at Sunset is comprised of founders who’ve had to shut down their startups in the past as well as lawyers and CPAs – together, we’ve dissolved hundreds of companies. We’re always here to help or provide any guidance, recommendations, or simply be a sounding board to chat about how things are going.
Wind-downs can burn a couple of months’ runway (when factoring in legal costs, accounting costs, federal taxes, state taxes, sales taxes, employee severance, vacation pay, etc.). Founders who have 6 months left of runway should make sure their business is in good standing, and founders with 3 months left of runway should consider starting the wind down process sooner rather than later. We’ve seen several founders whose aim is to take their bank account to zero, and we’d highly recommend against this path.
If there is little to no money left in the bank, it might be necessary to look into bankruptcy or insolvency proceedings - which are far more complicated, expensive, time-consuming, and potentially litigious than a voluntary wind-down.
As mentioned in the steps above, talk to accounting professionals to help give you a sense of your burn rate, your remaining runway, and the cash you have available.
More funding gives you more time to execute the vision you set out to accomplish. Down rounds have been more common in the past 9 months, and even though it’s hard, founders should consider taking one over not raising. Typically, we see founders try to go back to their original investor pool to try and raise a bridge round and then potentially expand from there.
As we know, this market is far more difficult to raise than in previous funding cycles. We have anecdotally seen that some investors are requesting whatever capital is left back vs. supporting a hard pivot if the business is not working. Furthermore, according to Pitchbook, this is the most investor-friendly environment of the last decade. It’s a difficult position to be in in the first place, but with the current market conditions, it’s important to be realistic about the fact that inherently you’re on the back foot, making it harder to find more capital.
If there’s enough time to explore a strategic option, like an acquisition, it’s worthwhile to set a fixed period to explore that. You are the expert in your space, and oftentimes the founders are the ones best positioned to make a list of potential acquirers (either through a stock sale, asset purchase sale, or acquihire). These explorations should be specific, collaborative with investors, and time-boxed.
As a note, acquihires and asset purchase sales are often less complicated and time-consuming to complete than a stock purchase sale. Asset purchase sales also give tax advantages to the buyer and the ability for them to pick and choose which assets/liabilities they want to take on vs. ones they do not. However, with both an acquihire and an asset purchase sale, you’ll usually have the corporate entity leftover to wind-down post sale.
If at the end of the time period nothing’s materialized in the form of acquisition or funding, it’s important to stick to the next step of that plan and continue with the wind down. Investors can be understanding of founders who realize the value of returning capital efficiently after this exploration.
After following some of the steps above, you’ve potentially come to the point where a decision needs to be made as to the future of your business. Again, we recommend making this decision when there is still a few months runway left so that you have enough cash for whichever path you go down.
If you decide not to raise additional funds and not get do a stock purchase, it may be time to wind down your corporate entity.
Once you’ve decided to shut down, it’s important to make sure the right people know at the right times.
Early and upfront communication with your investors is almost always the best course of action. To be honest, they probably already know based on your investor updates (or lack thereof), and they also probably want what’s best for you and for the business too.
Depending on your relationship, some investors may prefer a phone call or zoom chat over an email. These conversations are obviously difficult, but most founders end up starting another company and great communication and honesty can go a long way during these difficult times.
If you decide to notify via email, we’d recommend individually writing these to each investor on your cap table (not a BCC to a mass list). These investors took a chance on your company and invested capital into your business - it’s great to thank them for taking that risk and being with you on the journey.
They can advocate for you in fundraising discussions, try to facilitate acquisitions, and in general, advise you on the best way to handle the business. They’re also shareholders and will eventually (legally) need to be notified.
You’ll want to continue this communication as the wind-down proceedings occur. We often recommend a bi-weekly email update to your investors, talking about the status etc..etc. etc. etc.
It isn’t easy to decide to shut down, but it also isn’t easy to learn the company you’re working for is shutting down. It’s important to be clear, communicative, and transparent with your employees — they took a bet on you and will have your back, and it’s important to be honest with them. Tell them what’s going on, what they can expect (in terms of timing, severance, pay, etc.), and the path you’ve decided for the company. If you can, help them find new jobs or give them referrals, do it.
The last group of people to notify are your customers. Just as you did with your employees, it’s important to be transparent and honest with your customers about what’s going on. If you anticipate shutting down and can stop taking new customers early, do it. At some point though, you’ll have to communicate to existing customers that your service will be ceasing. If folks paid for more than they’ll get (e.g. they paid for an annual subscription), either refund them for the missing months or negotiate another kind of deal.
At the end of the day, shutting down a company isn’t an easy process, but it can be the right choice in some scenarios. It’s also a difficult process to go through alone. We’re always happy to chat with founders who aren’t sure of how to navigate the process, even if you don’t end up using us. When we were shutting down, it felt lonely and confusing — we want to help founders avoid the pain of the process that we’ve been through before, and hopefully make the transition to their next endeavor that much easier.
