I am advising 8 employees in an advertising startup, with a small market and a very tough competition (facebook, google, etc.) So management decided to wind down the operations to eventually shut down the startup. Has anyone been in this situation before? How do you wind it down without having big negative repercussions on your customers and avoiding to have to give their money back or perhaps lawsuits from investors as well as other stakeholders?
Hi Nidhi. There are not many good answers here. When you tear off a band-aid, whether you pull it slowly or fast, it is going to pull out some hair.
First off, I am not an attorney and I would definitely ask an attorney.
If you are in a poor financial situation which is going to mean that there will be some collateral damage, then that is a fact the team will have to accept.
They can file bankruptcy if needed (or not if it is not needed.)
As far as giving the money back to the customers, if you have the money to give back, then you should try to give it back if possible. The startup failed. In my opinion, you shouldn't be pocketing the customer's money. If it failed and you don't have the funds to give back, then you need to send out an email letting them know what happened and apologize, etc. I would be transparent and honest with them. Crap happens. Businesses shut down. It is a part of the process.
As far as lawsuits from investors or stakeholders, again, you may have to file for bankruptcy if the company does not have the funds to deal with these.
If the company has funds and they are just wanting to close up shop and take the money and run, well, that is something different altogether. Not sure I can comment on that. That would definitely be something you need to talk to an attorney about.
If they want to do right, then they should meet with investors, explain what happened and try to work something out.
Investors know they took a chance on this project and they could lose it. However, they also might have ideas on how to salvage it.
Hope this helps. Feel free to reach out directly.
I agree with Craig. I am an attorney, so will keep my advice more general. But the policy that limits liability for owners of corporations and LLCs exists is to anticipate this situation and help mitigate business risks and encourage investment. But these protections only go so far. So you need to make sure that your corporate documents and contracts were properly set up correctly from the start. Then, depending on the facts of your situation, decide whether bankruptcy or winding down on your own is the best option. There is also a procedure that allows for a creditor to force the company into involuntary bankruptcy (so it may not be your call). If there are a number of creditors and/or significant debt, I'd talk to an attorney sooner rather than later. Bankruptcy is an expensive process for both sides, but something that should be considered.
I would attempt to sell the book of business to a competitor, honestly.