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CLOSING SHOP
June 2022
tl;dr Shutting down a disfunctional company is healthy and founders should dare not wait until
the last possible hour because that's good for everyone. You can do it much faster in Germany if you use the accelerated process.
FIRST COMPANY, LET'S GO
The first company I started in Germany in 2013 failed. runpat.com was SaaS Tool to visualize and tinker with
business
ideas, inspired by business process modeling. I met my two co-founders at university through my bachelor thesis
mentor. Back then the business model canvas and lean startup methodology were at peak hype and my thesis
discussed how to capture business ideas in a more formal way as well defined models, literal business models. My
thesis mentor had an entrepreneurial background himself and asked me if I wanted to turn my thesis into a
company. I said sure why not, not knowing much about what that actually meant. Reflecting on that moment, I'm
always a bit astonished at how nonchalantly I started my journey as a founder. Then again I guess a lot of tech
founders have similar stories.
FIRST FUNDING
After quickly building the first alpha version, which in retrospect it really
was, we launched it. And by launch I mean we published the tool and the website and waited for the
streams of users to come in. Or at least that's what we implicitly expected looking back. Just building stuff is
not enough, you have to get it out there. Technically and awareness-wise. After launching the first version we
raised our first-ever capital, 100K € from a local, semi-public investor. Without valuation, as a silent
partnership with interest payments. After the great growth from our business plan did not come to pass, we
raised another 100K € under the condition, that each founder would put up another 10K € privately to "share the
risk and increase commitment". I would not do something like that again. Firstly, the founders are already more
than committed. If not, the company is doomed anyway and no amount will change that. Secondly: As a founder, you
already invest your time (and lots of it) in the company. You forgo potential jobs, other opportunities, time
spend with friends and family as well as a good chunk of zen in your life. Additionally putting in money (other
basic starting capital) overextends you and is not a reasonable ask from investors. Especially german business
angels like the view "why should I risk my money, if you don't". My advice for founders is: If you meet an
investor like this, stay away. Investors that don't understand, that the value of the founder comes from their
time and ambition are not a good addition to your cap table. After raising the second 100K € plus our 30K € in new
runway did not bring the desired result and one of my co-founders quitting we decided to shut down the company.
THE BOOGIEMAN
Especially new founders think of this scenario as a kind of catastrophe: You failed your investors, partners,
and customers and
are a complete loser in the eyes of everybody that knows you. Of course, this is not remotely true. Shutting
down not
functioning companies is healthy. Not putting endless time, money, and passion into things that do not work is
healthy. Not feeling bad after you made a professional business decision is healthy. Of course, shutting down
can
be, and often is, an emotional issue. And that's fine, as long as it does not distract you from one simple fact: You
are stopping something that is not working in order to do something else that does.
LAST FOUNDER STANDING
As the last remaining founder and
CEO it was my job to wind down the company. I can truly say, that I was pretty zen with the act. The talks with
my co-founders were a bit intense, for we all lacked the experience of what was actually happening and as most
first-time founders do, we felt the impact of our company way bigger than it was in hindsight. We had a handful
of users, none of which relied on the tool very much, an investment, that was half subsidy from the state and
much less
marketing reach and interest, than we admitted. While this may sound bleak, I find it quite comforting, that
things that don't work tend to gather less traction and therefore limit the impact of failure for all involved.
I was actually surprised by how little impact our failure actually had. Nobody in my private circle was shocked
or cared too much for that matter. Put in one word, the response had been mostly "huh". All in all, after
deciding to shut down, I was in good spirits because the weight of an unsuccessful project was gone together with
a long to-do list. I can't remember where I read it[1], but there is a quote that stuck with
me through this rather anticlimatic experience:
"What at first seems like the end of the world often turns out to be a positive, transforming
experience."
Personally, I never felt the famous lack of german failure culture. Most people I talked to were really nice or
understanding about it and mostly neutral. There are a few technicals I wanted to share for a long time. There are 3
different ways in Germany to shut down a company (GmbH or UG):
- Insolvency
If you run out of money or don't have a reasonable perspective to avoid it you have to declare insolvency. In
this case, all payments are stopped immediately and the fate of the company is put in the hands of an appointed
insolvency manager. While this is not ideal, it sometimes is necessary. Depending on if the companies can be
saved or not it can be very complex. In this case and CEO you don't have agency anymore and are that the
risk your every current and past move is scrutinized.
- Default 12 Month Liquidation
If you are in a position where you still have money, you can decide on a controlled shutdown of the company,
called a liquidation. Your shareholder decides this formally a appoint a liquidator, tasked with winding down
the
company. This is what we did. The liquidator ends all business relationships and makes sure, everybody gets what
they are owed. Best case you still have enough money to satisfy everybody. we had enough, of course just not for
the return on the investment. In this case, the investor formally waived all claims and the company was square.
In the normal liquidation process, there is a one-year waiting period, where potential debtors can claim money
from the company. After the the company is deleted from the register is completely gone. While preferable
since you can manage the winding down yourself, this is still not ideal. It takes quite long until
everything is completely done formally.
- 3 Month Liquidation[2]
This is the version I did not know about and neither our tax advisor nor notary did not tell me. If the company
is doing a planned shutdown, but no money will be left to distribute anyway, one can skip the waiting period.
It is important to select this process when the liquidation is registered. It is not possible to do
this, after starting the process, which I tried for our GmbH, as soon as I learned this was a thing. The only
thing needed for this, apart from the formalities already required for the slow Version the only thing you need
is a guarantee by the appointed liquidator that there will be no money left to distribute to the shareholders[3].
DARE TO PLAN AHEAD
The final point I like to make is this: When you are in the trenches and fighting for your startup you just take it
day by day. Since just not dying[4] is a solid strategy it is in the nature of things to postpone
considering shutting down until the last second. Worst case: The company implodes at that point to the detriment of
all involved. Employees are let go on very short notice, customers need to find alternatives very fast and
partners have to rapidly adapt plans if they are involved in the company. Since this is always a complicated
situation
there is no easy advice to be had. Especially since in most cases, the failure is not 100% absolute. What I would
like to postulate is this:
Founders should dare not to wait until the last possible moment to shut down a doomed company. Do it
a bit sooner and give your partners, customers, and your team time to adapt to the new reality. Give your
team
this time to find new jobs and land on their feet, give your customers time to search for alternatives and migrate
their data with your help and give your partners a chance to find a replacement for you in critical projects. Every
founder doing this should be regarded as highly professional and be told so, for most founders' greatest fear is the
accusation of not pushing hard enough. If you are going through something like this, don't let it drag you down too
much. Wrap it up
and go do something new and much more awesome. The future looks bright.
Cheers
Timur
Do you have feelings or opinions about this post? Reach out: @ElTimuro
Footnotes
[1] If you know, let me know
[2] HAUFE: Absehen von Einhaltung des Sperrjahres bei Vermögenslosigkeit der Gesellschaft
[3] Disclaimer: I did not use this process so far (thankfully). I was told this is possible direclty
form
the district court
[4] http://www.paulgraham.com/die.html