Does shutting a start-up down affect your ability to do future start-ups?


6

I have a friend who is contemplating shutting his start-up down. Because he has more liabilities on the books than assets he would have to file for some form of bankruptcy (I think). My question is whether this could affect his ability to do future start-ups? He's in the United States too so the attitude here tends to be (especially in the bay area) that start-ups go under all the time and it's no big deal. However, his concern is that if in the future he is asked to sign something that indicates that he's never had a bankruptcy, foreclosure, etc. that he couldn't sign it.

I was always under the impression that this only matter from a personal bankruptcy perspective and that if you were the CEO of a corporation that went under it wouldn't matter. Am I incorrect? I know he should consult his attorney but am trying to give him advice so figured I would ask here.

Failure Bankrupcy

asked Jan 28 '10 at 09:57
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Tommy Maddox
156 points

4 Answers


4

I am not a lawyer so I can't comment fully on the legal aspects of bankruptcy. I did have the unpleasant experience of putting my company into Chapter 7 last year (liquidation bankruptcy). I now have a new company. It's possible that it might make it more difficult for me to sit on the board of a public company or get a line of credit with a bank for my business, but so farm it hasn't impacted me or stopped VCs from wanting to work with me.

I do not believe it will impact my ability to get a personal line of credit because as gmagana mentions, if you had a legal entity, it is the legal entity that is in bankrupt, not the CEO or owners personally.

In Silicon Valley, bankruptcy does not appear to have the stigma it may have elsewhere. In fact, to gmagana's point, if you can demonstrate that you've learned from it and bankruptcy wasn't just a tactic to get out from under your obligations, it's almost viewed as valued experience (but not one I'd recommend).

I would add that part of the reason I believe I have not seen negative effects is because I did my utmost to work with my key creditors. As a result, all of them either still work with my new firm or are willing to.

answered Jan 28 '10 at 11:26
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Edwinoh
686 points
  • +1 for working with your key creditors. It's beyond critical to work something out with creditors so that you do your best to take care of them. It can be a challenge but will help you in the long run. – Jarie Bolander 8 years ago
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2

Does he have a legal entity? When you talk about bankruptcy, it's the corporation that is bankrupt, not the owner(s).

Having said that, for the purposes of having another startup and pursuing funding, and so on, he would be talking to people that understand that bankruptcy is a tool/maneuver, and not some sort of marker of being always a failure.

People worth talking to would say "so what did you learn, and what are you doing differently this time?", rather than some other response. And these questions will be asked regardless of whether or not there was a bankruptcy. And regardless of whether or not there was a corporation or other legal entity involved.

The question of legal entities is not really relevant at all I think for future startups. The future startup should be measured on its own merits. The previous, failed startup will be used as a reference point for experience of the entrepreneur.

But other people on here know more about this, so I will defer to them.

answered Jan 28 '10 at 10:22
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Gabriel Magana
3,103 points
  • +1 for the corporation that is bankrupt not the individual. You can get into trouble if you personally guaranteed debt but most people don't do that. – Jarie Bolander 8 years ago
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1

If I were him I would probably talk to the creditors first and see what they have to say. If they know he will just file bankruptcy and is not doing well they may prefer to handle it a little creatively so that it works out better for everyone.

answered Jan 28 '10 at 13:16
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Tim J
8,334 points

0

in 2005 I worked for a startup.
The CEO ran it to the ground.
Today he heads a new startup.
Even VC's know only about 1 in 10 "doesn't fail" - refraining from the word "succeeds".

so, to answer your question- no. Not necessarily. It really depends on how well connected you are. What I said refers to being funded again, or being trusted again by others. If you're a self starter, bootstrapper - you don't need anyone's approval...

answered Jul 6 '11 at 00:53
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Ron M.
4,224 points

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