Is My Startup in the Zone of Insolvency?

October 31, 2023by Mike Cronin

The term “Zone of Insolvency” often floats around in financial and legal circles, but pinning down its meaning is like trying to catch smoke with your hands. No mathematical formula or financial algorithm can reliably signal when a business enters this nebulous zone. The irony is that you usually only realize you’ve been in this zone once it’s confirmed that the business is, indeed, insolvent.

If you’re a startup, you’re nearly always flirting with the “Zone of Insolvency.” One day, you’ve got two weeks of runway, and then that bank transfer from one of your investors bridging you saves the day. Six months later, you’re waiting on a payment from a customer, and you’re not sure if you’re Gusto payroll will clear. In both cases, you’re in the zone, but as with all startups, cash flow is like a roller coaster. 

Can’t meet your liabilities? Some insolvency professionals will argue you’re officially in the zone! If a startup uses that litmus test, get comfortable in the zone. If we equate the “Zone of Insolvency” with a “zone of possible failure”—a point in the future where a business may not meet its liabilities—then almost every pre-revenue startup finds itself in this zone. Given that most startups operate in constant uncertainty and financial risk, this would mean that virtually 100% of pre-revenue companies are perpetually in the “Zone of Insolvency.”

The Zone of Insolvency implies that a startup’s fiduciary obligations officially switch to secured creditors being the first paid back. So, entering the zone has real implications for how a startup distributes its cash. Suppose a startup chooses to enter the zone. In that case, we highly recommend one of our experts in managed wind-downs to manage increasing the value of your debts and reducing liabilities to ensure a maximum payment to your secured and possibly your unsecured creditors. 

At Ravix Group, we help you determine if it’s the right time and, more importantly, how to wind down. Entering the Zone of Insolvency typically starts with an ABC – Assignment to the Benefit of Creditors. That’s when you transfer your company to a person, Chief Restructuring Officer,  who will operate the company while the assets are liquidated and sold at the highest value possible and 

Wondering if your startup is ready to officially enter the Zone of Insolvency? Meet with one of Ravix Group‘s Chief Restructuring Officers today by completing the form.

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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