The art of the bellyflop – what to do when your startup is not working out

By Louis Lehot, a business lawyer at Foley & Lardner LLP in San Francisco and Silicon Valley

Building a new company requires dedication and tenacity, but sometimes, even startups that show great promise do not work out.  Failure can happen for many reasons.  Sometimes startups misjudge their markets, and sometimes the markets are not ready for radical innovations.  But if you are facing a startup failure, you can still face it gracefully by projecting three areas into the future.

Preserving relationships.

Most founders will fail at least once, and will try again.  Place a premium on preserving positive relationships from the failed startup and bring them forward to the next one.  With all the focus on technology, legal structures, and other impersonal aspects of running a startup, remember the human aspect of business.  The responsible thing to do as a leader is to tell your team first.  Do it in person if at all possible.  Your employees wouldn’t have joined you if they didn’t believe in your vision, so honor that dedication by making sure that they know what is happening.  Even if after the closure they part ways with you entirely, they can leave on good terms and with mutual respect.  Tell your investors personally too.  They were the ones who believed in your vision enough to risk their own money.

Preserving a path forward.

A failing startup does not necessarily mean that everything in the company is failing.  Consider ways to preserve the value of your company.  Does your startup have something that you can’t bring to market on your own?  If so, you may want to consider pursuing a merger or acquisition.  Investors may still reap some benefit from the merger or acquisition, and some employees may be able to keep their jobs.

Does your startup have something of value that lies outside of your current market?  Many startups begin as spinoffs of their parent companies.  Just look at Roku, Stack Overflow, and even Intel.  By spinning off the internal project, you can ensure that at least part of the company can continue without the baggage of the failing part.

Another option is to pivot the company.  In the last year, we saw many companies do exactly this.  Thanks to the pandemic, sit-down restaurants pivoted to takeout.  While restaurants were still typically in the red, takeout sales soared last year. Similarly, retail stores pivoted to online stores, essentially squeezing several years’ of e-commerce growth into one.  Pivoting, of course, carries a number of risks since investors and employees signed up for your original vision, so understand that pivoting will put a great deal of stress on everyone until your company settles into its new role.

Preserving accounts. 

If closing your doors permanently is the best option, do your due diligence to ensure that you account for all assets and liabilities.  Closing a company can involve as much legal complexity as starting one.

Again, don’t forget the human aspect.  Recognize that the closure’s effect on you will be significant too.  Avni Patel Thompson described shutting down Poppy, a startup that aimed to connect parents with caregivers, as a difficult process emotionally, especially when helping employees find other jobs:  “You work so hard to find these amazing people, and then it breaks your heart like, a thousand times to hear how you’re going to have to go give them up to other people.”

In the end, not every startup will succeed, but there is no shame in failure when you and your employees have done their best.  Count the costs in time and money.  Maintain good relationships with all involved.  How you end this endeavor is at least as important as how you began it, and a graceful exit can help set you up for success in your project.

About the author :

Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley.  Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from garage to global.

Read more articles by Louis Lehot:

Louis Lehot – Ideamensch

Louis Lehot – ChiefExecutive

Louis Lehot – IPWatchdog

Louis Lehot – Medium