10 things to know when shutting down your startup

How you shut down will shape your legacy

If you are a startup founder faced with shutdown, I’ll start with this — I am sorry. I have been there myself, and there is no sugarcoating it: what lies ahead sucks.

There are a lot of ways you might have arrived here. Maybe it was sudden. My friend Andy Ellwood’s company shut down in the aftermath of a horrific plane crash which killed his lead investor and 40% of his cap table. It’s hard to imagine a more brutal and unforeseen end.

Or maybe, like me, your last year has felt like a slow-motion train crash. Despite all your efforts, you’ve watched the end inch closer with each passing day.

No matter how you got here, the reality is this: you are here. It’s time to shut it down. And while what lies ahead is hard, I do believe this: how you shut down your company will be among the most important things you do as CEO.

It will shape your legacy, and how your team, customers, and investors remember you. Your job as Founder/CEO is now to shut it down with the same thoughtfulness and professionalism that has hopefully defined your entire journey.

Step 1: Deciding to Shutdown

The first step in your process is getting to the decision itself. This post is not a guide to the reasons companies fail, but we start here because how you arrive at the shutdown decision matters.

You should make it in consultation with your most trusted advisors — your co-founder(s), your board of directors, your lead investor, your partner or spouse, your lawyer, your mentors. The counsel you will receive will be far more valuable in this moment, when things are most difficult, than what you will hear when everything is sunshine and rainbows.

In the months approaching a potential shutdown, you should be actively meeting with your key investors, advisors and core stakeholders. You should be signalling the reality and stakes in your investor updates and all-hands meetings, and speaking regularly with board members. Our lead investor, Graham Brown from Lerer Hippeau, met with me weekly in our final months and his counsel was wise and compassionate.

Deciding collaboratively with your closet advisors will ensure that while difficult:

1. You are confident the decision is the right and only one

2. You will have “left it all on the field” in pursuing all other options (ie: saving or selling the business)

3. You do not blindside your stakeholders who have supported your journey.

Step 2: Talk to Your Lawyer + Build Your Shutdown Budget

There are legal and financial implications to shutting down. Some carry personal liability that can survive the end of the company. I say this to scare you into immediately calling your lawyer. This should be the top-tier counsel who handled your company’s formation and financings.

For me, that was Dan Lang at Goodwin. He walked me through the steps from decision to dissolution, helped me analyze our cash situation in that context, and understand our obligations. (He was also kind enough to provide feedback on this post for me).

At the center of this conversation will be your “shutdown budget.” This starts with asking: How much cash do you have in the bank, and will that cover your liabilities? Can you liquidate any assets for cash?

Here’s a generalized “waterfall” of those liabilities — in order of who gets paid out first if you cannot cover everything:

1. Employee wages — You are legally bound to pay any earned wages, and may be personally liable if you cannot. Different states treat certain payments to employees (e.g. accrued vacation) as wages so be sure to ask your lawyer.

2. Government taxes and fees — Think income taxes, franchise taxes, sales taxes, and dissolution fees. Again in certain situations you are personally liable for these.

3. Bank debt — Any venture loans, lines of credit or senior secured debt come next.

4. Vendor payments/general unsecured debts — These come second to last. Did you sign any vendor agreements that include personal guarantees (e.g., your office lease)? If so, talk to your lawyer.

5. Employee severance — Only if the above are fully covered can you consider this.

6. Equity Holders — Only if you satisfy all credit obligations can you pay anything to equity holders.

Step 3: Chart Your Actions with Your Co-Founder

Once you have a handle on the budget, get aligned with your co-founder. My co-founder and I sat down together, walked through the numbers, and sketched out the tactical plan for everything we had to do from that moment on.

Tools like Sunset can help you manage this workflow, but I personally just used a Google spreadsheet to track everything.

What matters most here is alignment between you and your co-founder. Make sure you're both clear on the steps, who will manage what, and ready for the many questions that will come.

Step 4: Tell Your Team

Telling your team comes first. If you've led with transparency and authenticity, most people should be expecting it. But surprises do happen, especially if you have more junior people or have been more hesitant to share the reality of the situation until now.

You need to be fast, decisive and authentic with everyone. Call a meeting, and hold it immediately. Don’t sugarcoat anything. If you get emotional, that is ok.

Explain the situation and how you got there, but focus on what this means for your people: they will want to know the last date of their employment, when they can expect their final paycheck, if they’ll be able to maintain health insurance via COBRA, and if they should expect any severance. Also provide clarity on returning equipment.

Reminder: It is a small world, and so it’s almost certain that you will end up working with some of these people again. So treat people right, you never know where you will cross paths again. (The same applies for steps 5 and 6 below).

Step 5: Tell Your Investors (and Bank)

Within 24 hours of telling your team, send a formal note to all investors. If you want to see an example, here is the letter I sent our backers.

If you’ve been communicating transparently, this shouldn’t be a shock. But take time to write a thoughtful final investor update. Explain the decision, what you did to try and avoid this outcome, and why it didn’t work. Have your lawyer review it before you send it.

In addition, you should send personal thank-you and/or notification emails to your major backers.

If you have a venture loan, talk to your attorney before informing the bank. There are scenarios in which other payments need to be made before loan repayment. And if you can pay a drawn loan back, ask the bank for a credit on any early prepayment penalties — good banking partners will often work with you.

Step 6: Tell Your Customers

Communicating to employees and investors will feel emotionally taxing, so I would recommend you lean on your product/marketing/cx team to help draft customer communications.

You should inform every user and customer of your product what is happening, and what they should expect. This should include details such as:

1. You are shutting down the company.

2. Your product will no longer be available after [insert date].

3. How you will be treating and/or deleting their data.

In addition to any customer-wide communications, you should reach out to your champions, your design partners, and any customer who has meaningfully supported you. Thank them.

Expect customers to reach out with questions. Make a point of personally replying to everyone.

It is worth noting that unless there is something special in your terms — check with your lawyer — you will usually not owe customers refunds. We did not receive any refund requests, but it is more likely if you have larger contract values.

Step 7: Pay the Bills + Severance

You’re now through the most emotional steps, but what’s left is the most tedious: paying bills, making final filings, and tying up every loose end.

Follow your liability waterfall in order. Ensure every payment is deliberate and you have documentation/receipts.

Step 8: Shut It Down

On the agreed-upon date, you and your co-founders should:

• Shut down your production systems and all customer-facing services.

• Delete all customer and production data. It’s the right thing to do, and a potential liability if left unmanaged.

• Copy down any valuable data for later, such as personal contacts.

• Shut down your website and business applications.

Notes here: If you did a SOC 2 audit, your software inventory will be helpful. And if your domain has value, consider selling it to free up any remaining cash. (It’s probably the only asset with intrinsic value that a software company owns).

Step 9: Distribute Final Cash

If there’s any cash left, you should return it to your investors. It’s the right thing to do, and you are obligated to do so.

But first, consider offering modest severance — including for yourself — to your team. Be transparent with your investors and/or get board sign off on this.

Step 10: Take Care of Yourself

I will not lie to you: this is going to feel excruciating. You almost certainly have poured part of your identity into your company, and made many sacrifices.

As with any death, you will go through the stages of grief. You may feel guilt, shame, or imposter syndrome. You’ll worry you let people down.

But remember: this will be hardest on you. Your team, your customers, your investors — they all knew the risks. You poured your identity into this.

If you have left it all on the field, and have shut it down with professionalism and care, don’t be surprised when these people reach out to you to ask if you are ok. And do not be afraid to ask for help — from co-founders, investors, team members, mentors, friends. If I can help, just reply to this newsletter or reach out directly.

So be sure to take care of yourself. Win or lose, being a founder isn’t about the outcome. It’s about the journey — not just the memories created and relationships formed, but the personal transformation you have gone through.

Remember that your journey has undoubtedly changed you. The only thing you can control now is making sure that it changes you for the better.