Exit Plan B: Where is your parachute? 15 tips for winding down your startup

Much has been written about startup ideation, product development, scaling, and fundraising. But recent high-profile shutdowns have shone the light on some wide gaps in India’s startup ecosystem when it comes to company failures.

TiE Bangalore recently convened a diverse panel of entrepreneurs and industry experts to address such questions, titled ‘Exit Plan B: Best Practices for Winding Down your Startup.’ Many shutdowns happen voluntarily when the founders move on to other pursuits, or when they see the writing on the wall and close up shop due to changing market realities. Exits via mergers, acquisitions and IPOs can be favourable, but some exits via a shutdown can be downright ugly.

What are some typical business aspects founders forget, which can cause problems while shutting down? How should contractual issues with vendors be resolved? What is India’s startup ecosystem doing to assist founders in distress? What are the cultural changes in India that need to take place to support failures of startups?

The panel included Anjana Vivek – Founder-Director, VentureBean Consulting; Karthik Mahalingam – Partner and National Practice Head for Venture Capital, Shardul Amarchand Mangaldas; Tara Ollapally – Mediator, Centre for Advanced Mediation Practice (CAMP); and Vaitheeswaran K – entrepreneur and mentor, Co-founder of FabMart/FabMall/IndiaPlaza, and regarded as the ‘father of e-commerce in India.’

According to the recent report by IBM, Entrepreneurial India, 90 percent of Indian startups fail in the first five years. However, according to the TiE panel, only a small percentage of startup shutdowns are of an unpleasant or nasty nature.

As panel moderator, here are my key takeaways for founders and startup supporters on how to tackle the painful steps of shutting down a startup. ‘Fore-warned is fore-armed,’ and this list will help startups understand what challenges could lie ahead if things get ugly.

Ignorance is no longer an excuse

Given the number of resources online and the breadth of entrepreneurship networks, it is no longer an excuse for founders to say they are unaware of what it takes to shut down a company when things go wrong. Regulatory compliances and default penalties are issues founders should stay on top of.

Manage your cash flow

Use your cash judiciously and make sure you have good support in managing cash flow. That next round of funding may come later—or not at all; are you prepared? Make sure you pay your small suppliers also, not just your big creditors; the small suppliers may resort to unconventional means to get payments back.

Keep a dashboard of warning signs if something is going seriously wrong. This could include repeated delays in payment of salaries, taxes and vendor dues. Other red flags are high churn rate and lots of unfavourable media leaks.

Co-founder agreements

Ugly co-founder disputes can lead to a startup falling apart, or lead to complications during tough times. Blame games are not unusual when all seems lost. Make sure the founder agreement clearly reflects who has how much skin in the game, and what the terms of separation will be. Put in place mediation clauses that will permit opportunities for facilitated negotiation with a neutral mediator at an early stage of the disagreement; this can help prevent disputes from getting ugly and destructive.

Your strength is your weakness

Entrepreneurs by nature are optimistic and may often believe that some solution will appear and funds or other support will definitely emerge as long as they stay the course and slog on. But this can blind some of them to the fact that they need to spend some time thinking of avoiding a doomsday scenario, and develop an ‘Exit Plan B’ of shutting down.

There is a cost to shutting down

Shutting down is more than just having no need to go to the office; there are serious costs involved in auditing and liquidating assets, and transferring IP. Founders may even need to raise bridge funding just to close their startup.

This is India, get real!

A lot has been said about how difficult it is to set up a business in India; shutting down a company is perhaps the most painful in India as compared to many other countries. One entrepreneur in the audience said he shut his earlier company in 1994 and still has not received the official closure document from the government. As other cases have shown, what should probably be a civil case becomes a criminal case—that is the ‘reality shock’ of doing business in India, even if you have solid legal counsel.

In many cultures such as in India, professional mistakes are often confused with personal failure. It is important to separate startup error from founder failure. Indian society is not yet sensitised to such nuances of failure.

The fallout

When a company shuts down under unfavourable circumstances, the founders have to be prepared for the possibility of abuse from customers, which can get amplified even more in this era of social media. Suppliers get suspicious, and all kinds of rumours may circulate among employees (‘the founders have made their money, who cares about us?’). Entrepreneurship can be a tough and lonely journey, but the darkest loneliness can set in during times of failure.

Not every place is Silicon Valley when it comes to accepting ‘failure’

‘Fail fast, fail quick, fail cheap’ and other such mantras sound great in Silicon Valley but do not work as well in other parts of the world. Founders who have faced failure may easily get another job in Silicon Valley provided they show they have learned from this failure; they may even get treated as heroes and give keynote addresses. But in other countries, your family and social and business circles may ostracise you, and it may be hard to get another job for a while.

Founder arrogance

There have also been cases of brash founders who have an ‘entitlement’ mentality, and feel that they have arrived in life and that society owes it all to them. Many have successfully launched companies, but fail to handle the learning curve of scale or the humility quality in leadership—making colossal mistakes leading to eventual shut-down and flame-out.

Letting go of employees

Pay employees whatever has been contractually promised in the severance package. Sending ‘pre-signed resignation letters’ or termination notices via WhatsApp are not recommended practices. Malpractices in this area can lead to investigation by the labour department.

Dealing with investors

Many investors eventually take control of the startup, leaving founders feeling that they have no say in their company’s direction. Study existing shutdowns and company acquisitions/mergers to understand what the motivations of investors can be. Many of them may not show any moral compunction to help the founder in the shut-down phase, and may just wash their hands of the matter.

The role of mediation

Legal conflicts between founders and other parties do not always have to end up in an ‘either-or’ situation during a shutdown. There is room for skillful and experienced mediators to step in and find a resolution which makes all stakeholders reasonably satisfied. A clause for professional mediation should be included, for example, in vendor contracts and founder agreements. Other such recommended practices in mediation and negotiation have been proposed by TiE in their communication to founders, mentors and investors.

The psychological cost

There can be severe mental pressure during the downhill stage of a startup’s journey. Founders may be prone to depression and may even have suicidal thoughts. Counselling is key here, but unfortunately Indians do not generally go for it, instead trying to avoid psychiatrists and psychologists. Founding teams should spend time with counsellors and therapists where necessary to handle stress and depression, and not go into delusion or denial.

Statutory compliance

Get a good accountant and lawyer to advise you on all aspects of issues like RBI requirements, promoter communications, investor relations, financial disclosures, and tax payments. Make sure you understand bankruptcy and insolvency codes, and the role of government tribunals for closure.

Compliance applies to operational, funding and IP matters; see also the earlier YourStory article about compliance, fines and jail terms. Make sure that you don’t go to a lawyer or accountant only when it is too late; this is one of the most important investments you will make.

Communicate and share the journey

It is important for founders to share the ups and downs of their journey and the business realities of the company with their investors, advisors and directors. Stakeholders do not like nasty surprises. More forums are needed for founders to share their experiences with one another during tougher times.

Much of the discussion on failure in the context of startup growth tends to focus on failed assumptions or wrong product features (see for example my reviews of the books Fail Better, The Wisdom of Failure, and Fail Fast). But failure of an entire company is in another league altogether.

In sum, a healthy attitude towards the possibility of failure should be part of a founder’s long-term planning, and can open the door to renewal and reinvention. It’s common for critics to say ‘You don’t plan for a divorce when you get married,’ but at the same time it holds true that ‘When you fly, make sure you have a parachute!’