How A Venture-Backed Software Company Wiped Out $3.1 Million in Secured Debt

October 23, 2023by Mike Cronin

From the Desk of Dr. Doom, Chief Restructuring Officer:

Trigger Warnings: Disgruntled Employee

Dr. Doom, Chief Restructuring Officer

Silicon Valley, 2017. A land of dreams, where some soared high while others plummeted. For over a decade, I’d made my mark not in crafting dreams but in closing their chapters, wearing the title of Chief Restructuring Officer with a mix of pride and gravitas. In my line of work, the phone’s ring often spelled despair. And that particular call was no different. Mary, a vibrant and gritty founder, spilled her tale of woe, the uncertainty evident in her voice. “We’ve got Apple waiting, investors hesitating, and a debt slowly suffocating us.” 

Startup founders fear debt and bankruptcy

When I stepped into their office the next day, the air was thick with tension; you could cut it with a knife. Joseph, the ambitious and focused co-founder, sat at his desk cluttered with papers and empty energy drink cans, bearing the weight of a startup on the verge of collapse. His intense demeanor had cracks; the pressure of $3.1 million in secured debt and a further $2.9 million owed to unscrupulous vendors was evident. The gloom deepened whenever Carl, their chief engineer, shuffled past. His every footstep echoed with resentment. The discontent of their colleague wasn’t just palpable; it was deafening. Once the heart of the team, he morphed into their Achilles’ heel. 

Then there were Jerry and Tad, the investors. I perceived they once believed in Mary and Joseph, but their faith had wavered. They felt stranded between the rock of promised purchase orders and the hard place of further funding. Their trust was strained, and they were looking for a way out. 

I looked at my notes:

  • $3.1 million in debt
  • $2.9 owed to vendors
  • Disgruntled head of engineering.

Turnaround or Wind-Down?

In this case, the disgruntled employee plus minimal revenue points towards a wind-down.

The first piece? Carl. For all his grievances, he held the key to their Intellectual Property. “He’s checked out, but I think he’s still got one foot in the game,” I mused. “We need him for the M&A, and to do that, we got to get him 100% on board.” 

Next came the daunting task of the wind-down. Contrary to popular belief, shutting down a startup isn’t just about closing doors. It’s about ensuring that every unresolved string is tied, every unsettled account is balanced, and every bruised relationship is mended—or at least addressed. “I have a plan,” I declared one evening. With Carl’s reluctant assistance, we orchestrated the sale of their software, ensuring a return of $2 million. It’s not the exit they dreamed of, but the secured creditor was pretty enthused it got paid. Mary saved her reputation with the banker, knowing she could use them in the future for her next startup venture. 

Founder realizes she’s behind on collections, affecting her cash flow.

Engaging with creditors was, by no means, a walk in the park. But being a Chief Restructuring Officer always has the advantage. These conversations are always charged, teetering between hope and hostility. However, by being upfront, we gave back 70% to the Senior Creditor. The contentious past divestiture was a thornier issue, but even that was persistently settled.

While handling their debts, I discovered another oversight— outstanding A/R. Mary’s face reddened when I pointed it out, but this was no time for blame.  With a bit of restructuring, 90% of it was soon collected.

Weeks blurred into months, and what had once seemed an insurmountable challenge slowly morphed into a tale of redemption. The startup was shutting down, but with dignity intact. We had navigated the storm, addressing everything from H1B issues to final tax returns. As I stood overlooking the now-empty office, Mary approached, her voice tinged with gratitude. “Thank you,” she whispered. “This could’ve been so much worse.” The journey was complete. I had helped guide this startup through the treacherous waters of debt and uncertainty, leaving them with a sense of closure and the knowledge that they had faced their challenges head-on. The lessons learned would serve them well in their future endeavors. #SiliconValley #StartupLife #Redemption

Facing startup wind-down, bankruptcy, or debt? Ravix Group is your expert in startup liquidation, finance, & accounting. Manage your VC-backed startup journey right with industry professionals from Ravix Group

The names have been changed to protect the traumatized. 

Mike Cronin

Michael leads the Advisory Services practice of Ravix Group. He has been handling the wind-down and liquidation of Silicon Valley companies for the last 25 years. Prior to joining Ravix Group, Michael spent 17 years with Diablo Management Group, Inc., where as a Senior Consultant, he managed orderly wind-downs, liquidations, and Assignments for the Benefit of Creditors (ABCs). Additionally, Michael has served as Bankruptcy Plan Agent and Finance Manager for distressed companies and deal-related escrow accounts. His industry experience is broad and diverse, from high-tech manufacturers, online service-providers, and software companies to event-planning start-ups and grocery chains. Michael is forthright and works with all deal constituencies, whether investors, shareholders, creditors or ex-employees with a consistently high degree respect and concern. Michael’s ability to address both big-picture issues as well as a deal’s fine details serve him well in addressing the needs of the Silicon Valley’s varied start-ups. Michael graduated from the University of California Davis with a Bachelor of Science Degree in Managerial Economics. He began his professional career with Andersen Consulting (now Accenture), where he spent four years designing and implementing management information systems for a diverse client base of Fortune 500 Companies. Michael remains proud of his early experiences interning with the Oakland A’s and Senator Pete Wilson, as well as his first childhood job selling found golf balls back to the hacks that lost them.
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