What Happens When a Tech Startup Fails?


No matter how great the idea behind your business is, it can go under at any point. Well, believe it or not, this is the harsh reality of the business world. The business landscape keeps changing. Your business idea or product should evolve according to that. Without that, your business can fail. 

But what after that? Depending on the size of the company, failure could impact investors, employees as well as customers. But what happens with the CEO and co-founders when a tech startup fails after a few rounds of funding and possibly with some revenue.

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Corporate Structure and Finance
The finances will be determined depending on the structure of the company. Often, startups are listed as limited liability companies, LLCs, S or C corporations, (Pvt Ltd companies in India)  or something along those lines. If you are the sole proprietor and CEO of the company, then you become liable. Your name becomes interchangeable with the company’s name. So, if your company has debts from the bank,, you have to take care of it after the company is closed. 

However, if you are involved with an LLC or a corporation, then legally you are a separate entity, and you can walk away without any liability if the business goes under as long as there is no loan or debt with your personal guarantee behind it. 

Aside from these two things, if a company has a different type of financial situation, then the question of liability will be treated differently. For instance, if the company is extremely profitable and has some cash on hand at the time of closing, the owner or the board  can take a few steps. Banks or financial institutions will first collect the outstanding debts which could also have different priorities of payment based on the contracts.. And then they would pay out the creditors and lenders. If the cash is finished, then the company might decide to liquidate assets to do so. In this phase, the investors will get some money for contributing to the startup. But in most cases, venture capitalists and other investors end up losing more than they gave unless the IP of the company is worth a lot more to someone.

Aside from these options, filing for bankruptcy is another option for businesses. This is basically an option given by law to a company or an entity to declare that they are in no situation to pay the debts. For this, the company needs to submit a complete valuation of the assets and debts and will have to work together with the court and the debtors to come up with a feasible solution. In the case of personal bankruptcy, entrepreneurs can file for Chapter 7 or Chapter 13 bankruptcy. But filing for chapter 11 for businesses is often a good option. Even if you file for Chapter 11 bankruptcy, the court may allow you to continue operating your business.

The Closing Process
If you are a CEO or involved with a struggling business, you will need to go through an unpleasant process to "close" the business. Firstly, it is necessary to determine whether the business is salvageable or not. A tech business failing financially is not always the result of poor financial performance. A lot of things can happen to a business. The market demand for a specific product can decline. The competition can increase. The technology or the app you have developed might not be working as you expected it to. In many cases, after losing money on paper, a company can still remain afloat with new investments or debts and eventually become successful. 

This is where the board of directors and investors come into the picture. They consult with the entrepreneur to figure out how to keep the business running.  They can also decide that it is time to close it. Or they can unanimously decide that the company needs new leadership, a new CEO, at this crucial time. 

If the decision is to close the business, first the CEO needs to inform the stakeholders and lawyers and find out a proper plan to do this. Then the employees should know about it. Releasing a press release can be a good way to make it public. 

This will be followed by the liquidation of the assets and the payment of debts and tax liabilities. The leftover money, if there is any, will be distributed among the shareholders. The staff members will be released from their responsibilities. The business accounts will be closed. Finally, the company will close its doors. 

Technology and Intellectual Property
Most of the time, a tech startup comes into the business with new technology that is designed to solve customer’s problems. When the business is closing, it does not have to be the end of that technology or intellectual property. During the liquidation process, the technology can be bought along with the patent by other shareholders or interested entities. As a lost resort there could even be an auction-based if multiple interested parties are there.

Communicating with the Market
This is the final step. After all of these, the entrepreneur can address a letter or a press release to the shareholders, investors, and the market about what went wrong in the business. This is taking accountability, which will help the entrepreneur and their peers learn more. 

To conclude, closing a business does not have to be the end of the world. It can be both a lesson and a new beginning. For the best of entrepreneurs, failures are inevitable, and from failures, they always learn. So, if you are in a situation where your company is about to close, don’t be disheartened. Do the right things first and reflect on your lessons. Soon you will find another way to create something new, and build something massive. Remember, "Haar ke jitne wale ko baazigar kahte hai". (Those who lose to win later are the true champions.)

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