Winding Down with Professionalism

The decision to stop is difficult. Ideally, one decides in a timely fashion and then professionally executes the startup’s wind-down. Surprisingly, this is the exception rather than the rule, so let’s discuss why it is worth doing.

Startup success statistics show that there will be far more failures than successes. However, success stories get virtually all the press, so figuring out what happens when a startup ends its run isn’t easy.

I started learning the surprising truth from talking with corporate lawyers who see the inner workings of many companies and investors who bet on many high-potential startups in hopes of achieving both the benefit of diversification and the wealth-building potential of a few real winners. When you ask experienced attorneys and startup investors about what they have seen on the failure side, you will discover a fact that shocked me when I first learned it: Most startup leaders facing a failure drive their startup right into the wall, running entirely out of money and disappearing rather than proactively identifying the trajectory, owning the failure, and handling the venture’s wind-down professionally. Unfortunately, employees who show up one day only to be told the company is shut down, investors who stop hearing from you and find that emails are ignored, and customers who are mystified about why they cannot get what they thought they were paying for are the ugly consequences of such an unprofessional approach.

Why?

Honestly, I find the pattern baffling, and this is not how I have approached a wind-down. However, I know that for founders who have often poured years of passion, energy, money, and resources into trying to achieve success, psychologically, it is tough and scary to admit defeat, so I suppose it is not surprising that they keep trying until they cannot try anymore.  

Consequences

The perhaps underappreciated downside to this approach is that it can really trash the entrepreneurial CEO’s reputation among important stakeholder groups like investors, professional service providers, suppliers, and good employees—especially if they want to build another startup someday.

A Better Way

Do not be the startup leader who runs out of money and slinks off into the dark, ghosting those whom you have recruited to participate in your venture.

Instead, reinforce your professionalism and integrity to those who have joined your startup journey by making mature decisions and handling the situation professionally (more specifics on that in a minute). Your reputation for leadership, professionalism, and managerial excellence will be credited to you when you potentially seek to go down that path again!

Advice for Executing a Professional Wind-Down

While not desired, it is not surprising that many startups fail. Anyone in the startup ecosystem who thinks otherwise is merely inexperienced. No experienced startup investors, founders, or service providers will be unaware of the risks. So, actually, when informed that a startup is not going to achieve its hoped-for potential, the response of those experienced veterans is often to experience a pang of disappointment and then say that they always knew it was a risky bet anyway. That means that, if handled professionally, it is not the end of the world if you have to shut down a startup.

While each situation is different, here are some things to consider if you are faced with a flailing startup. Note that the order of points below will likely vary depending on your circumstances.

• Always know what your cash limits are. Even when things are going well, I have always kept in mind thresholds for when I need to raise more money and when I need to start shutting down. Those levels would show up on my cash forecasts shared with my Board of Directors as blue and red lines, respectively, so we would always be planning ahead and not be surprised. Where those levels are set depends on how big an organization you have built, how fast you are burning cash, and how complicated a wind-down might be. By keeping that estimate of what it is likely to take to do an orderly shutdown in mind, you are prompted to start thinking in advance when the amount of money in the bank approaches those trigger levels.
   
• Make conscious, deliberate, and proactive decisions to avoid it before slamming into the wall. If you are running low on resources, look for ways to be more capital-efficient far enough in advance for it to make a difference. Think ahead and, if appropriate, take strategic and thoughtful action to reduce burn while there is still time to achieve the most critical de-risking/performance milestones to enable additional fundraising. Prune those roles that are not the most critical to success on the most important focus points. Ensure you engage your Board of Directors on these decisions so they are not surprised.
  
  
• Regularly step back and analyze your progress. Maintain situational awareness, pay attention to progress and trends, and push your high-level planning out at least a year. Intentionally take care that you are not getting so focused on the day-to-day that you miss the big picture. If the big picture of risks, opportunities, and resources starts to look dark, step away from trying to work it for a few hours and engage the difficult questions. You have many more options if you are consistently and proactively assessing the situation you are facing.
  
  
• When you decide that the right thing to do is shut down, draft a plan and talk to your Board of Directors. Remember that your Board of Directors shares responsibility and authority with you in finalizing the decision to shut down. Ensure you engage your Board of Directors to help vet and refine your plan. Sometimes, they may have other ideas to secure more resources, but be mindful that you must assess whether those resources will be enough to achieve some critical milestones. Agree on a plan of action to inform other stakeholders.
  
  
• Avoid sacrificing relationships. Treat everyone involved with your startup with as much honesty, integrity, and transparency as possible. Telling others bad news is hard, but ghosting them is abusive. Do not be surprised if some people react negatively and emotionally, but always try to handle every element as professionally as you can.
   
• Communicate with your investors about what is happening. Explain what went wrong and what the plan is for winding down. Consult your corporate attorney to ensure you have the details right, and then provide individual investors with the documentation they need to potentially claim a tax loss. It is relatively minor but makes a bitter pill slightly less bad.
  
  
• Take care of your customers. Communicate in advance so they have a chance to adapt.
  If you can, help them transition to an alternative. Remember that you want them to feel treated with care and respect, even in a bad situation.
  
  
• Plan to pay your obligations rather than stiff your suppliers. Reduce costs by notifying suppliers and winding things down in an orderly manner. Sometimes, you can negotiate an exit path from larger contracts. Remember that you want to avoid getting sued if at all possible.
  
  
• Provide laid-off staff with at least a small severance package and good references for their job search as they seek future employment. Investors who have been treated with respect may know of openings at other startups.
  
  
• Try to monetize any assets that you have. If you can, give yourself some time and resources to try to sell IP, physical equipment, and other assets.
  
  
• Remember that you will have ongoing obligations for various tax payments, franchise taxes, and other corporate items. Your corporate attorney can help you determine these obligations. Remember that the government expects you to pay your bills, and state law may dictate how quickly you can formally shut down your corporation.You likely want to avoid paying such expenses from your personal accounts or incurring legal liability.
  
  
• Give yourself some time to mourn the loss and recover. Having to shut down something you pursued passionately is hard. It is a loss to be mourned. Like any loss, give yourself a chance to recover emotionally so that you can make good decisions about what to do next. If you have handled the situation professionally, you may find that your stakeholders will help you with references, introductions, and support as you progress into your next career chapter.

Remember, since the failure of a startup is disappointing but not surprising, make the smart and insightful business decision to stop before crashing into the wall. Winding down with a high level of professionalism speaks volumes to those in the ecosystem about that leader’s professionalism. For example, I have had employees want to come to work for me again, suppliers be happy to engage again, and investors tell me that because of my professionalism in shutting down a venture, they wished to invest in my next venture. That is reputational value—and it comes from handling a wind down professionally as well as from building a startup that exits successfully. It can be a springboard toward creating the kind of reputation for professional management that supports your transition to a serial entrepreneurial career.