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SubtleRed
SubtleRed
Stealth

Founder wealth gains in failed startups

With the host of startups closing down, was curious to know what does founder net worth usually result in and how do they generally make money for them along the way. Few questions-

  1. Do founder sell percentage of own shares in Series A and B raises? I would assume there would be some checks on this but want to know what's the practical reality of this and if this happens what's the amount a founder can make through this

  2. If the startup is clear it has to shut down, what typically happens? Acquisitions? Insolvency?

  3. Assume a Series B level startup with valuation around 150 cr with say 10 Cr annual revenue and 40 cr losses and 30% founder stake and it's clear it has to shut down. In the absence of any acquisition, what money comes to the founder

14mo ago
Learn_
Learn_
Stealth14mo

well placed to answer this. We recently shut down. we had raised about 4.8 mn USD and were operational for 3 years. When we decided to shut down we had about 500k in the bank. The primary reason was so that we could clear all our dues and liabilities well. We paid 2.5-3 months of severance, laptops to our team. Then we had to clear a lot of statutory payments, which were usually taken care of from the monthly cash flows. Then we hired a high charging consulting firm to ensure proper due diligence of closure process so that there are no surprises later, whether it was around taxation, vendor payments or any contracts. Then we hired a law firm for the closure process. After all this, the company was left with about 150k USD on the books. This money was paid out to us two founders as severance payout. In the 3 years of operations the founders in general averaged at less than 25% of their market salary, which meant depletion of personal resources completely. The severance amount received by each of us was as good as 60-80% of our market salary. Net net, financially, less money earned from salary + severance than would have earned in 3 years of my market salary job. Hope this helps :)

SereneMain98
SereneMain98
InMobi14mo

@Learn_ thank you so much for writing this down

And while you lost out on cash/money, I do hope your journey was better than any desk job out there :)

Curious - out of the $150k that was left, how come investors didn't ask for it back because they typically have the first right, don't they?

Watsay49
Watsay49
Stealth14mo

Cavaet, founder payout at end is not a necessity but depends on the investors.

Theoretically, investors have the right to get that amount

Demon
Demon
Stealth14mo
  1. No. Typically no liquidity after series a/b
  2. Distress Acquisition is a face saving mechanism for founder and VC. People who have lost market respect go for company insolvency.
  3. None. You only make money after your startup becomes so valuable that VCs want to increase their shares by buying your equity and letting you keep the money than investing in the company for growth. That is generally true for a large company. The other way to make money is to get acquired. You can now see why there is an incentive to get acquired than build a big company. Its a lot less money than it looks from outside. Source : Brother is CEO of a series B startup.
Baingan
Baingan
Student14mo

a startup has a sub 2% chance of being successful, and so the default when you startup is failure. Insolvency is also invoked typically at an earlier stage (seed/pre-seed) if you have cofounder conflicts and the company cannot continue. the term "market respect" is not the only reason for a company to shut down. I have seen people shut down their startups due to cofounder conflicts/bad timing and start new ones which became unicorn too.

Demon
Demon
Stealth14mo

If cofounder conflict happens before series a, the company is not significant enough to be discussed. If it happens after series a, VC investing into the company is an idiot for not setting up guard rails.

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