Startup Therapy Podcast

Episode #16

Ryan Rutan: Yeah. Why is it that everybody talks about starting companies, but nobody ever tells us how to shut them down. Maybe it's because by the time startups go into this dark, hazy abyss called shutdown mode, things get really quiet. We stop hearing from founders are investors, start talking about other hot new investments and the media moves on. This doesn't change the fact that most startups fail. It doesn't diminish the need for a clear process. When it happens today on the startup therapy podcast. We'll cover how to wind down a startup with as much grace as possible. This is Ryan Rutan from startups dot com back for another episode of the startup therapy podcast. As always, I am joined by my partner Wil Schroder. Will we talk a lot about starting companies? We talk a lot about growing companies and optimizing them for all sorts of stuff. But one of the things we don't talk a lot about is what the hell happens when we have to shut them down.

Wil Schroter: Yeah. And I mean think about it this way, that's usually the outcome. I mean when we talk about the failure rate of startups, most startups are going to fail. So if we spend a disproportionate amount of time talking about how to start them, probably spend a little bit of time on how to shut him down.

Ryan Rutan: Totally agreed. All right. Well, let's dig in.

Wil Schroter: Yeah, Well look, there's a lot of bad ways to shut down a startup. But let's agree that, you know, no matter what shutting a startup down as bad. So for those that are even thinking about it and you know, it's unfortunate that we have to have this talk. But hey, we have to have this talk right for those that are even thinking about it. There's 20 different ways to shut down a startup ranging from run out of the building while it's, it's flaming, you know, and burning down and saying, you know, so long suckers, good luck with this right to the other end, which is actually just as bad staying in the burning building until it's nothing but rubble along with you with it at the bottom right now. Both of those are terrible ways to shut down a company, What I've learned having gone through the experience myself and then certainly coaching other founders and doing the same. There actually is a fairly graceful way to shut down a startup where you and all of the other people involved, uh, can be treated as fairly as you possibly can. Even in the wake of just, you know, this big calamitous event.

Ryan Rutan: Are you talking about joining witness protection?

Wil Schroter: That's, that's what it takes. I know some founders that would have gladly chosen that as their default option. It's always my plan. A, it's always my plan just escape. But look like we said, most startups are going to fail. That's the nature of what we do. So as founders, I think it's incumbent on us to teach others as well as learn ourselves what to do when the time comes, you know, with that in case of fire drill, uh, you know where to go and really how everyone's affected because at the time and I'll just set this up a little bit at a kind of a higher level. I think at the time when the startups is on the brink of heading the wrong direction, founders just kind of know, right, It's kind of like when, you know, a relationship is going the wrong direction, uh, you don't want to admit it, you can't necessarily put it all on a piece of paper. You just sort of no,

Ryan Rutan: yeah, it's, it's, it's one of those gut feelings that that tends to tends to be correct. But here, you know, something I never thought about before if you're handed the framework for handling the situation and you now have, You know, the, the permission to wind one down gracefully, I'm not going to say that this would always change the outcome and save the startup, but it would certainly change the mindset of the founder at the minute that they have that realization because I'm going back in my own history and thinking like when you do have that realization, you stiffen up, right, you get scared and all of a sudden you start to make different decisions because you're in fucking panic mode. Right? And so do you think that having a framework, you think the discussion we're about to have today, maybe it won't save companies from going out of business, Maybe it will only help make this process easier. But I feel like there's at least some remote chance that it could change outcomes by just not freezing up, not becoming the deer in the headlights by still becoming a proactive founder through the entire life cycle of the business. Even if that does mean shutting things down

Wil Schroter: for this discussion, let's assume stuff's going to shut down right? And and and and and and and here's what, here's what's kind of interesting about it. Yes. In this discussion, things are going to shut down. However, this is what I was alluding to a minute ago as founders. We don't really believe that you will be shitty founders if we actually believe that the first sight of a problem that things were absolutely going to shut down our problem and we should talk about this today is we hang on way too long. We are the captain at the bottom of the ocean and the last person on the ship, you know, long past the point. Everyone else's is already paddled back to shore. Right?

Ryan Rutan: Me and my co founder, Davy jones down here.

Wil Schroter: Yeah. If you think that, you know, you're the only one holding on too long, man, you and every you, everyone else and and Ryan, you and I have been through this ourselves and our own companies have had some successes, but we've had plenty of failures And I've wrote some stuff to the very bottom of the Mariana trench of the ocean? Right. I mean like as far as it could possibly go and here's what I do know, and this goes back to your framework question it is possible to shut down a startup in a methodical, intelligent, mature way that deliberately treats each of the stakeholders, including yourself by the way, with respect and with consideration that they normally don't get caveat, everyone is still going to be disappointed, right? Maybe best case, right? You know, and it doesn't end with a party,

Ryan Rutan: like it does shut this down so well, let's celebrate that never happens.

Wil Schroter: It doesn't, but like anything else in life, there's certain things that even in a shitty situation you can go out like a gentleman gentlewoman, right? You know what I mean? Like you can, you can treat the situation with the kind of respect, here's the challenge, chances are hopefully this is the first and maybe only time you'll ever do this. So why the hell would you know how to do it properly. And just like we were talking about, No one ever talks about it whenever walks you through this stuff. So we're gonna do it. That's what we're gonna do today. We're going to walk you through, how to shut startup down gracefully, How to make sure you don't pull yourself further into the trench or the bottom of the ocean, which typically happens and how to walk away with it with a renewed set of conditions. Awesome.

Ryan Rutan: So do you want to take this from a stakeholder perspective? Who do we talk about first? Who, who, who is important here?

Wil Schroter: Uh, well, let's definitely talk about the stakeholders and if you're like, most startups, uh, the founders, and you're at a point now where you're starting to see things go sideways, uh, you're looking at your staff, right? And you're saying, well, sh it, what am I going to say to all these people? And let me Ryan, if if you would let me just talk about it from my own perspective, having been through this a few times, what I, what went through my head when I thought about letting go of staff was every meeting that I had with them prior and up until the point where they got hired, right? Tell everybody

Ryan Rutan: exactly

Wil Schroter: the moon

Ryan Rutan: just happens to be at the bottom of the trench in the middle of the

Wil Schroter: sea and you feel like such an asshole because you meant it, you know, I mean, I hope you meant it, you, you know, I'll be sitting across from somebody trying to convince them to quit their job in some cases, you know, put up some steaks whereby maybe they had, you know, a spouse, kids, etcetera, and now I'm thinking they went home and they told their spouse that same story kind of sold them on my narrative, right? And and and their spouse and their family and their friends, everybody kind of bought into that narrative and everybody buys the dream and now they're gonna go home and they're going to be like, yeah, you know, this guy is full of ships and and worse, you know, our relationships on the line, right? You know, these are people that I cared very much about, spend a ton of time with, right? And now I'm disappointing him. It reminded me when I first went through it, like breaking up with my girlfriend 50 times in a row on the same day, right? And then

Ryan Rutan: Talking to all of her friends and her family and spending the next 10 thanksgiving with them. Yeah, it's it's awful.

Wil Schroter: And so I would do anything to avoid that fate. Now, here's here's where that becomes a problem that that I will do anything. I will do a ton of things to avoid that fate. Which could also include things that I shouldn't have done. For example, I won't tell them again, this isn't me being maniacal or evil. I'm trying to do the best thing, but I won't tell them that we're about to get shut down because I want them to believe that I've got this, that I'll take them through thick and thin. I'll run through walls that they don't have to worry about it. And so I won't tell them. And in this case I'm using me in the in the broader sense, you know, all founders, I won't tell them that, Man, we've got 2-4 weeks left to live, right. And then this thing is over because we think we're going to pull the rabbit out of the hat, right? You know, we, we think we're gonna land that one deal, we're gonna close that one investor, we're gonna do that one thing at the 11th hour that that turns this into a harrowing tale.

Ryan Rutan: You know, if we thought about it in the right way, we would tell them that it was going to end in four weeks that, you know, we're, we're terminally ill with this business because then we get the miracle of the turnaround, I don't think that ever was still there. Like it's a miracle I'm still

Wil Schroter: around, Right? Well, we'll think about this, man, think about how hard we worked to recruit all of those people, especially in some cases, we're talking about competitive job markets, particularly things like engineers and marketers, highly employable people at the first sign of trouble, have the opportunity to just go get another job now, not everybody does. And, and even if you are highly employable, I think people underestimate the amount of friction it does take to switch jobs, so most people will hold under their job longer. Um, just because again, it is a high friction thing, but still, as the, as the founders were sitting here thinking, man, it took so much to get that engineer to come work for me, right? If I send an early false signal that this business isn't going well and then they quit and then I actually still need them because you know, I, I land that funding round or I land that one customer, etcetera. Well, fuck right. You know, then I lose on both accounts. I lost the engineer and I pulled the company around, right? Which, you know, isn't, is doesn't mean anything. If I lost the people that I needed to pull it around

Ryan Rutan: with, that's exactly right. Yeah. Now now I saved the ship, the crew are all in dinghies, hundreds of miles. What am I supposed to do

Wil Schroter: now sucks. And so, so I've been through this a couple of times where I've had to sit down with the staff and say, listen everyone, we're out of money, right? Like we've got x amount of time left. Here's what I found number one, there was never a case where this was a surprise to anyone, right? I mean, it's not like our employees have no idea what's going on, right? We

Ryan Rutan: figured it out when you stopped getting haircuts and shaving

Wil Schroter: right? It's like, and, and so the mistake I would have made, would would not give them enough credit as if they're waiting for this definitive Answy, uh, before they have any context whatsoever that I've been stressed out 24/7 or that, you know, they're seeing some past due bills show up, right?

Ryan Rutan: You know, it's really funny, it's really funny because we pat ourselves on the back for hiring these really, really smart people. And then when we get in these situations, we assume that they're, you know, they're dumb enough not to understand what's going on. Like let's, let's remind ourselves, we hired really smart people. They probably know what's going on,

Wil Schroter: right? And and so what I found to be particularly helpful is to kind of break this warning system down into two stages, right? And I just think it's just the right thing to do, right? You know, and you can manage it. However, it makes sense in your own or but what I, what I learned after shutting a few companies down was that if I could give some folks some early signs not to say that the sky is falling today, but to say shit seems a little bit off. Right. For example,

Ryan Rutan: at least get at least get your umbrellas and this guy

Wil Schroter: might not be exactly. And I said, look, ah, here's the deal. We've got four months of runway left in the bank. I'm not saying we're going under. I'm just saying that we have four months left right here are the things that we're going to do over the next four months to right the ship, right? Here's who we're gonna be pitching here. The deals that we're looking to sign so on and so forth. But what I just did there is I gave my staff an opportunity to at least get off the boat if they needed to versus when they have to.

Ryan Rutan: And that's just the right time looking around for which direction to swim if it sinks right land. Is that way?

Wil Schroter: Here's the other thing that I don't think anybody ever tells you, your staff doesn't hear this information and immediately they're only responses. Go fund yourself. I'm going to go get another job, right? Sure. There will be some people that do that. And by the way, don't you kind of want them to get another job in all

Ryan Rutan: fairness, Isn't that interesting, right? Because the right team reacts to this information in a positive way, right? Not saying it's a positive situation. But when you tell them, here's our four months of runway, Here's what we need to accomplish in that four months to turn that four into 5-10-15 to forever. And then you watch them do it. You help them do it. You empower them to do it. You know, not to say that you have to use a scare tactic to motivate your team hopefully. But if you've got the right team, if you've done a good job hiring, you've got good people around you that joined for the right reasons. This isn't a negative message. It's a negative situation with positive messaging.

Wil Schroter: And if you landed early where you're still on the right side of the message. The right side of the messages. Everyone, I'm trying to give you a transparent sense for what's going on again. It's not game over. But you know, we're down to our last life kind of thing, right? Here's what I've seen. I haven't seen anywhere near what people tend to think it is, which everybody runs for the exits, seen a little bit of that. Here's what I've seen. I've seen folks come up to me afterwards and said, hey man, are you alright? Right. Holy cow actually showed two way empathy, right? Of course they did because they cared about you to begin with, right? They didn't sign up to be on your ship for no reason and they want to see this work. I've seen folks come to me and say, hey, you know, I could actually go without salary for a longer period of time, Maybe my spouse works or maybe I got savings, et cetera. Or people come to me and say, hey, I have a clever way to cut some costs. Amazing you all of a sudden realize and I think it's important you're not in this alone. And I think the shutdown process as this thing starts to get closer and closer to D day founders feel more and more retracted, more and more alone. I know I did, right. You know the last thing you want when you're close to shutdown mode is to be popping out of cocktail parties talking about here, shut up is failing right? You curl up in the fetal position and you know

Ryan Rutan: what? It's a good point though because by giving them the opportunity to support you, maybe they will write without the opportunity they certainly want, right? We, we, you know, there's the, what's the phrase? There are no atheists in foxholes. There are no assholes in foxholes either because the assholes left, whoever does stick around is there for the right reasons and they will support you, right? Maybe to their own detriment. But that's their decision, right? We're all grown ups in this. And so I think that, you know, your, your point is, is spot on. We need to treat them like grown ups. We need to give them the information that they need to make whatever decisions they need to make for themselves. And a lot of people will make decisions that are good for you and for them and that's fine.

Wil Schroter: And it's, it's not unreasonable to ask for help. Right? I mean, again, founders don't really think about this. They say, Hey, the weights on me that the company is going the wrong direction. It's all me. It's all me that's an incredibly self centered way to look at your company, right to assume you're the only person that has the responsibility for the welfare of the company. And frankly it's a giant miss to take that away from the staff Now again, when you sit up there and you tell your staff that you have three months to live, you know, based on the amount of runway in the bank account. No one's gonna high five you right. This isn't, there's also, this also isn't about making you feel good, right? That's not their job necessarily either. But it is an opportunity to say, Hey, we're all in this together. I believe very strongly in what we're doing. And this is a hurdle that we're going to try to get past. And and chances are, I have to say this chances are you won't chances are if you're that far along, companies rarely get past that mark and we'll probably get into that a little bit more into the discussion. But as it relates to the stakeholder that is your staff and those people that you care about. The only way to do right right by them is to give them as much advanced warning as possible.

Ryan Rutan: That's right. Yeah. That's the wrong answer. Every time is, oh, by the way, we ran out of money two weeks ago. And so the work that you've already done is going to go uncompensated. Sorry. Right. That's you can't do that right. You've got to give them as much lead time as you can let them make their decisions again for better for worse for for their own sake. It's the only option, right? I really there really is another option. The other option is is unconscionable for me.

Wil Schroter: Well, there's also a few other considerations and I'd be remiss in not bringing this up. There are some complicated labor laws that prevent you from allowing people to show up for work knowing that they are not going to get paid. I mean, these are some of these labor laws depending on your state, your jurisdiction, your country, etcetera, fall into the do not pass, go go directly to jail level. Um,

Ryan Rutan: Unfortunately don't prevent you from doing that. But if you do that, they prevent you from doing anything else outside of an eight by 10 cell in an orange jumpsuit for the foreseeable future. Yes, there are real consequences to this,

Wil Schroter: correct. And, and again, I, I don't want to unnecessarily terrify people because many startups run into this where hey, I might not be able to pay the staff, et cetera. What I'm trying to say is even though it does happen, a fair amount, that doesn't necessarily make it legal in most cases. And there's lawyers that are far far more versed in this than I am. All I'm telling you is I've been through enough of this to know. It's not something you can ignore wholesale.

Ryan Rutan: I disagree. I think you should be terrified because not paying people might be slightly terrifying. Going to go into prison is terrifying. I don't think there's any other than terrifying about that.

Wil Schroter: So, yes, you're terrified. You know, as we said at the top of the show we're assuming in this case that you absolutely are not going to be able to pace the people at some point, we're talking about the path where, where things, you know, don't come back to this, this rosy comeback victory. We're saying that not only you have to let the staff know ahead of time, but when you get closer to the point where you're actually going to have to not pay people, it has to sync up with your last payment that you can make to them. If you have a week and a half worth of payroll in the bank and you need to make two weeks, you are already out of money. You've already not made payroll. It's important to note. So let's talk about who else you're going to have to talk to because it's a fairly long list.

Ryan Rutan: Let's let's go up a step really quick because, you know, we, we jumped in with staff and I think that it's probably one of the most important discussions, but I think there may be one that comes just ahead of that, because it may dictate whether or not you have that conversation and this is with co founders and partners because yeah, because if you're not sole founder in this case, it may not be entirely up to you as to when to have this conversation and when to be honest, and so, and I've seen this happen, I've had this happen to me where I felt like we were on the brink of disaster and I wanted to start and this isn't this isn't me, you know, trying to make myself sound great. I helped to run this thing into the ground, but I had realized that and I wanted to start to have these conversations and I had a very optimistic partner who felt like we would be able to make this work and and to pull up and in the end we did do some things that did course correct. We end up letting go about half the staff do it. We were able to maintain some of the company and it did continue into operations for a couple more years, but it was a huge, like, and when I say huge, I mean it almost turned into a fist fight at some point. That's how

Wil Schroter: emotional it got. Like,

Ryan Rutan: literally, yeah, it was super intense and when you have these like deep fundamental feelings, right? Like, you know, I was coming from the fact that I don't want to I don't want to take people down a path where we could end up wrecking their lives and he's saying, I don't want to break this thing that we've spent time building and ruin their lives without a really good reason. I'm saying, man, I think we're already there and so it was that are we at that point, Oh man, And and it was one that repeated itself every every day a couple of times a day for about two weeks and it didn't end well right. It ended up with us still disagreeing about whether or not to do it. But at some point, like I went ahead and started having the conversation and it didn't feel good because my partner didn't agree with me.

Wil Schroter: Yeah, I could absolutely see that

Ryan Rutan: and it was awful. But like it was what I felt I had to do at the time and I didn't have a choice. I couldn't convince him and I couldn't not say something and you know, things landed in my favor because he couldn't stop me from opening my mouth, sort of having a fistfight and knocking me out right, right. I was able to do what I felt I had to do at the time and it was super uncomfortable and it created some dissension. There was already dissension between me and my partner, but it created some dissension amongst the staff as well because then now they're getting mixed messages from the leadership and I think that, you know, above all, that was probably the most painful part for them. They're going like you guys can't even agree as to whether this is really happening or not, what the hell should we be thinking? And so we just ended up firing the half that listen to

Wil Schroter: him. Yeah. I ran into a similar experience, but in a very different way about 10 years ago, I got elected to the board of directors for first this symphony of all things for a major city I won't name because I don't think that's fair, but there aren't that many symphonies left. So, uh, but here's the funny thing. I get invited to join this board. Um, there's about 30 40 people on the board and I show up at the first board meeting and they're handing around the financials for the symphony And the Symphony ran on about a $10 million dollar operating budget and I get the financials and as you know, I'm our CFO, so I'm pretty clever as far as how numbers work, I hope. But I look at the numbers and again, that's the first time ever to win them. Yeah, the numbers. And I'm like, Hey, I must be missing something and how you guys put together income statements, but I'm showing a $8 million $10 million dollars of expenses and we're a nonprofit company. So I assume we're not sitting on any cash unless we have an endowment. I don't know about it. Sounds like we're going to go out of business. Here's, here's what was so crazy about this story. Every single person in the room knew it and I was the first person that ever really brought it up publicly. In other words, 30 people were willing to admit we're going to go out of business, right? And I feel like such an asshole because I'm like, like I just got here five minutes ago, right, how am I the only person bringing this up and sure enough, within a year we're out of business, you know, because no one wanted to act, no one wanted to stand up, you know, in front of what was essentially a pretty prominent board and organization and say we're going out of business, we need to tell everyone they're like, no symphonies don't go out of business, We're not gonna let this city's symphony go out of business. I'm like, listen man, this is basically economics, we're going out of business

Ryan Rutan: and maybe they just wanted to end their board memberships but didn't know how to do that gracefully and thought that bankrupt would be the most socially acceptable method for bowing

Wil Schroter: out. Yeah, I don't know man, they got me off the board as well as the entire symphony while they're at it, which is horrible to watch. But to your point, I mean, you couldn't be more spot on, man. Like it's everything here assumes that the other folks that you're working with are on the same page. You are and they're going to have all different conditions and perceptions, et cetera and likely they won't. However, what I would say is that the methodology we're talking about and the things that you sort of need to do whether or not your team wants to do them this kind of is the way to do it

Ryan Rutan: and that was that's why I decided finally to do that and you know I was so mad about the situation for for so many reasons, so disappointed, so upset. Had I been more emotionally mature, I was in my mid twenties and this happened had I been more emotionally mature, I would have understood that he just wasn't at that same point, he hadn't gotten there and so I don't think that even my communication with him was fair, that my expectations that he should feel exactly the same way because it took me time to get there too and it took me less time. It took me less time but I don't know when he started thinking about it either, I may have started thinking about it months in advance just like kind of seeing what happened. It also wasn't my first startup and it was his and so I think that there was there were some signs that I saw that he probably didn't pick up on but I wasn't giving him the benefit of that doubt at that time. I'm just like dude we need to do this, I know the answer to this, we gotta do this fully discounting the fact that it's such a huge decision and he wasn't there emotionally and I just like dude logically that's what we need to do, I know it inside, you just need to hear my words and follow my lead and that's just not fair, right, I don't really have a better advice or like, you know, I think of myself as being more emotionally intelligent now, but I'm still not sure how I would deal with that situation at this point, were it to arise again and to have that same level of dissonance,

Wil Schroter: know that it's a, it's a great point

Ryan Rutan: partners now

Wil Schroter: and you're going to have to have conversations with lots of people, right? And in every case it is about building consensus. You know, we talked about having to be able to confront your investors, try to get five different investors, you know, name however many are in your gaggle of investors and try to get them to agree that they should all be at the point where it's okay to lose money. Good luck with that, right? Yeah. I mean, uh, there's, there's never been a group of people that have, you know, a stronger impetus for not seeing this thing go away because they get zero from right. Right. However, I gotta say for most investors and, and, and, and I'm not trying to say one size fits all for most professional investors who make probably more than five or 10 investments, this isn't their only investment. It's not your grandmother's life savings heaven forbid. Um, for most investors, by the time you need to sit down with them and tell them that it's game over, they already know, right? Yeah. And here's what, here's what startups and founders need to understand about how investors look at their, their startups, they know going in that most of them will fail. It sucks every time. It doesn't matter how many startups you work with. Every time you watch one of those bets you make fail, it sucks. But guess what? You as the investor, you made multiple bets, you'll be okay, right? You won't get that extra vacation home you're hoping for. But chances are, you'll be okay again. Some investors invest more money. Some investors have more consequence. I'm not saying the investors have no consequence at all. I'm saying chances are the investor will be okay. You on the other hand, not so much right now like this. This is our life savings. This is all of our, our net worth. This is everything that we own in. Everything that we are wrapped into one package.

Ryan Rutan: This is well beyond the financial for us, right? It's literally, it's not life savings, it's life, it's, it's our life.

Wil Schroter: But here's what I've learned. Um, years ago, I was doing a company that's gone now, of course called afford it dot com And we had about nine investors for VCS and five prominent angel investors into the deal and we were running out of money. I knew it. Everyone else knew it. I spent way too long trying to get that next round of funding that never came right. I made all the mistakes that we're going to talk about today, which is why I understand this stuff so well. But the one thing that's stuck with me the most Ryan was that I was so convinced that I couldn't sit across from these investors and tell them that I had lost their money. Same thing I sat across from them and gave them the grand vision, right? Like this, this whole big story about how we're gonna make so much money together and they should believe in me and they should support me and they did. And now I'm going to tell them that I failed them. I wanted anything but to ever have that conversation

Ryan Rutan: isn't that crazy? So that was what was driving it. So at that point in time, if you can go back in history and you can put yourself in that moment Was the motivation because that's what you were trying to raise more funds, right? You just like I'm going to keep this thing alive. You 100% didn't want to sit across from them and have that conversation. And was that all of the motivation or was there was there some part of you that still believed you could make it work?

Wil Schroter: Oh yeah. I mean,

Ryan Rutan: was it really just like, I just don't want to sound like I'm just to avoid this. I'll do anything right? We talked about that at the top of the top of the show at all costs, right? I'll avoid this at all costs. So was this an additional cost that didn't really have a clear outcome? I'm gonna raise the money and hopefully by myself, time to figure it out Or did you at that point have, like how, how deep was the depravity at this point? I guess what I'm asking like, were you sure that you could do something with it or was it like, God, I'm gonna get the money so I don't have to have this conversation and I hope I can do something with it.

Wil Schroter: Well, incidentally, that it was a pretty good business idea. And, and had we been able to raise the money, we actually probably would have made it work, But that was sort of here nor there. By the time I was about to have this conversation with the investors, I was probably 12 months too late to this conversation. In other words, I was the only person that still thought this company had a future, right? Because remember investors don't take the same ride you do from a day to day emotional standpoint. You know, Ryan, you and I started the business, we build it. We're investing every single second of our attention into just this business. The investor isn't, they were super pumped four years ago when they, when they gave a seed capital or some venture, but they've done 100 other things since then, right? And they're far more excited about the other investments that are going to go somewhere, then they are worked up about the investment that they made in us. Again, they're not psyched that the investments gone. But unlike us, they have other places that they can still win. This was our only game, right? So here's what I learned. I finally worked up the courage to talk to these investors thinking it's, this could be the worst conversation of my life and the investors looked at me like I had two heads. They were like, dude, you've been dead for a year. Like, like why are you just telling me this now, right? Like, almost like, you know, you know what I was, I was Bruce Willis and what was the movie where he's dead for like a long time. six cents. That was Bruce Willis in 6th sense, I was the only person that didn't know I was dead. I was running around and everyone was like, I'm not even there. Um, and I'll remember sitting across to the investors and then saying, dude, like, I don't understand why you took so long to bring this up. The one thing I did do. Well, clearly whiffed on timing. What I did do Well is I, I didn't, I didn't point to market forces even though there were, we were raising money for a financial services company in the height of the financial meltdown. And in retrospect, the timing was God awful, but I didn't bring that up. I didn't say that, hey, we're raising at the wrong time. I didn't blame anyone but myself. I said, look, here are the challenges that we ran into. But I took 100% ownership of it. And I think when I read an article about this, I basically said that the conversation is this simple. Here's what I was working toward here are the mistakes I made. This outcome is on me were 100 done

Ryan Rutan: right. You know, And the interesting thing about that is like owning your mistakes regardless. So for everybody listening, like it doesn't matter whether you're having a conversation about, about, you know, the entire company winding down or any failure when you don't come out defensive, when you don't give people something to attack back against. The conversations tend to go a lot easier. If you owned 100% of the responsibility, most people don't want to kick you while you're down and pile on. At that point, there, there are people out there that will do that. But for the most part and the investors that you dealt with were in this category. They're going to say, look, he's taken his lessons and he took a beating. It sucks for me. They should know that. It sucks more for you.

Wil Schroter: They do and they

Ryan Rutan: move on and they move on

Wil Schroter: and not to suggest every breakup will be stellar. The investors could just as soon air their grievances, let them, that's their opportunity. They spent good money for that grievance. Let them have it, right? And if you really want to earn extra credit, bonus points in this conversation, ask the question, what can you tell me? You know, any lessons I can take away from this because, you know, even though the business wasn't a win, I still want to go on to build great things. Any advice you might have for me, right? That's just the mature zen like thing to do and by the way, might result in some of the best advice you ever get at the time. You need it the most

Ryan Rutan: they could also just scream at you to get out of their

Wil Schroter: office. Yeah. You know, in which case the end of that conversation, Right. Um, but I think for a lot of founders myself included, we dread having that conversation because we think it's very different. We think that they're going to strong arm us or force us to continue to work like an indentured servant. And, and the truth is, they're just, in most cases are just going to say, yeah, I get it. We're done right, Because they already knew

Ryan Rutan: right? Yeah. If only if only that was the conversation. We saw in our head any of the 2000 times we were having it in our head before we had it. In reality, things would go a lot smoother

Wil Schroter: agreed agreed. And so your list of calls continues right from there. You basically have to figure out then how to kind of tell the world about this, the world being like all of media and social now and man do people screw this one up, yep, here's where they screwed up, they don't say anything, they just want to witness

Ryan Rutan: protection. Exactly

Wil Schroter: man, they just want to put their head in the sand. We all do, who wouldn't and forget about it. I remember reading something that Hillary Clinton wrote when she uh, when she lost the election to trump, she said, look, I didn't want to give any speeches. All I want to do is just go home and cry. I mean, you know what, that's Hillary clinton, right? I mean of course that's how you feel, right. However, that's not the best solution, right? The best solution because the narrative is going to get created in your social circles in the media and wherever else you're going to get talked about. The only defense here is to come up with your own narrative, right?

Ryan Rutan: Drive it yourself,

Wil Schroter: drive yourself right. And, and Ryan you and I've seen a lot of cases where the founder has, you know, reached out publicly. Usually it's the typical medium post and said, hey, we funked up right, here's what we're trying to do here are the mistakes that we made by the way, once again, a good opportunity to say these were my mistakes, even if even if not all of them were, you know, as the captain of the ship, it's your job to own them and in here's what other people could learn from the mistakes we made by the way, like just great piece of karma and as importantly here's what I've learned and what I'd like to change the next time that I do this. You know what I mean?

Ryan Rutan: It's such an important, I mean it's, it's cathartic for the founder, um, it's a great growth moment for the founder. It's such a good to your point. It's such a great share to the community. Um, you know, as as much as I hate to see them come up, I don't think I've ever missed reading a post mortem written by the founder because there's always filled with reflections of our own, you know, fears and doubts and, and concerns and losses and filled with lessons about things that we can do to avoid them or even just commiserations that they've happened other people. It's such a powerful thing to do. And let's be honest, as, as mortals, it might be the only opportunity we get to write both our eulogy and our epitaph

Wil Schroter: agreed agreed and, and, and you know what it humanizes the process because if all you are is the faceless organization slash ceo slash founding team that just fired a bunch of people or exited a bunch of companies are burned through a bunch of cash, then that narrative doesn't work in your favor, no one's going to come to your rescue and say, oh, but they were really sweet people, right. All you can do is say, look, yes, I funked up this, you know, let's we're here because I funked up if things were going really well, we wouldn't be sitting here. Um but here's what I was trying to do, here's where it didn't work. Here's where I made some mistakes. Look, this whole process of starting as a series of judgment calls, where we all try to make the best calls and and we often don't right, But if we can admit to that, if we can say, look here, the calls that I made, here's why I made them, you know, I thought this was going to be a billion dollar company, I was getting big offices and paying big salaries because I was trying to build for something bigger. The fact that we never made $1,000 in revenue in the entire time wasn't what I had in mind, I wasn't just spending money, you know, for the sake of spending money, here are my reasons, albeit in retrospect the wrong ones.

Ryan Rutan: All right, So let's talk a little bit about this narrative for a minute and there's a lot more to talk about this is this is an incredibly deep topic. I think we're this maybe end up being one of our longest episodes, but when you when we talk about controlling this narrative, how can a founder put themselves in the right head space to think about what the objective of this narrative should be. We talked about some of these things, but when you're going through this, what what is it that we can do as founders, when we're on this downward spiraling path that we can be thoughtful and mindful enough to to have a purpose behind this, because we've both seen plenty of these things spin out of control and and sometimes that's under the control of the Founder themselves, right? They just spin the wrong or a negative narrative to your point about talking to investors, they start to blame everybody around, they start doing these things. So is there is that do you think that there's kind of a standard operating procedure here around like, here's the narrative that we should tell. I feel like there's, you know, there's there's gonna be a lot of diversity in in how these stories get told. But I do think it is important to have some objective in mind as you create the narrative, right? And it's not just it's not to cover your ass for sure, right? And it's it's not to spin it into the most positive light. I think that, you know, making sure that it humanizes the thing, because I think we also forget that as founders, we might bear the bulk of the brunt, but some of this responsibility is shared amongst all the people that went down with us, all the employees, they all share some of this, you know, angst or shame or remorse or whatever it is that they end up feeling and I think that they often without humanizing this by keeping it company name and by keeping it founder focused, even that we're doing them a disservice in the same way we'd be doing them a disservice not to tell them in advance. I think it's really sad when they get left out of the post mortem.

Wil Schroter: Well I agree. And I think what you're talking about is kinda like giving your equivalent of the shout outs right? In a way that by the way, not a lot of people expect, for example, in the company taking a header and you're shutting it down, chances are you had very hard conversations with your investors and they chose not to continue to invest in you, right? Not a cool conversation. No version where you have that conversation and you're both smiling when you leave the room. You know, you're piste you you feel like like you've been let down, they're pissed. They feel like you've let them down. But if you could show enough contrition to step back and say, look, Miss investor, I know that we reached a point where you know, it didn't make sense for you guys to continue to invest in the company, but I don't want to forget what it took for you guys to have the courage to invest in me to begin with, right? That's just a powerful thing to say, right? Um, it's, it's, it's the same with your employees, right? Look, I know this wasn't the outcome that you wanted, but I'll never forget the nights that you spent tirelessly working for this. I'll never forget how how important our mission was to you. I'll never forget all these things that you did. The last thing that an employee wants. Somebody has been working there asA off for you is to think that all the time and effort was forgotten about even if it wasn't rewarded. You know what I mean?

Ryan Rutan: And you know what's, you know what's amazing is, and we both have personal stories that speak to this. Some of those people will follow you to the next venture and that has everything to do with how you treat them when this one winds down, right? I think we tend to think of these things and you know, and my mistake, but I use the words eulogy and epitaph and then the reality is we don't die with these things, right. Right. And, and it doesn't have to be seen that way. And I really, I feel bad that I use that language now. It's not the end. It is, it's a chapter summer, right? And things things move on, right. There's even this, this notion within a lot of investors that they won't invest in somebody who hasn't already failed at least once, right? Because they know what that's like, they know what it's like to go through. So, so, so it isn't death. And it shouldn't, it shouldn't be aligned with

Wil Schroter: death agreed well, But but along those lines, I think what we're talking about is showing a genuine appreciation for everybody that was involved and reminding people why you went through what you went through. It's typically aligned toward a goal that meant a lot to you. And it's important to reflect, Yeah, we didn't get a chance to do it, but our intentions were good and yes, we failed. But we didn't fail on bad intentions, right? And and well, it doesn't change the outcome. It definitely changes how you remembered, right. Which to your point of going on to the next one is all that you're going to have left to contribute to your next adventure.

Ryan Rutan: That's it. That's exactly it. Because it's not going to be forgotten. So how how, how you how you bottle the good momentum that you had and how you except, you know, the losses and and take responsibility for those has everything to do with what the next step looks like

Wil Schroter: agreed. So along those lines, as you're thinking about people to kind of reward and appreciate one of those people, those folks that typically left out of conversation are your customers, right? Like you just assume that you're not gonna you're not gonna have customers anymore, man that represents a lot of people, right? And I think not finding a way to give them a gift and, and, and I think it's important for us to spend some time. But what we mean by a gift is a huge mess because you're talking about all these people who did believe in you, They voted with their dollars and their commitments. You have to speak to them right? And you have to come with him directly. And, and Ryan man, we certainly learned this lesson when we bought a company called virtual.

Ryan Rutan: We did indeed.

Wil Schroter: And so what do you want to get the quick backstory of What's virtual was at the time. This was around 2015, the company we acquired.

Ryan Rutan: Sure. So on one hand, you know sexual was a rocket ship and it was growing fast and things were going really well, something's happened, Things stopped eating, stopped going as well. It, it kind of had famously had to shut down overnight due to some of those labor laws we talked about earlier, you know, some, some small financial mistakes cascaded into into a massive, a massive disaster. And we were presented with the opportunity to kind of take things over the day after. Right, literally literally yeah, overnight. We was literally overnight. We were called and woke up in the middle of the night and started, you know, kicking the tires and doing everything we could to figure out like simultaneously do we want to buy this thing, can we buy this thing, how can we keep it going? And if we could do, we actually want to do that. Right. So it was this way weird amalgam of taking over operations and doing diligence and all this stuff at the same time. And we truly didn't know what the outcome would be. We don't know how viable the business was. We didn't know you know whether we would be the right operators for it. We thought we would um in hindsight has proven us correct in that sense. But yeah, we it was it was a it was a situation of extreme uncertainty. And while all startup companies or situations of uncertainty, this one was at the top of my

Wil Schroter: List. It was also interesting. A lot of people don't think about. We shepherded the shutdown of somebody else's company first. So when we bought searchable, they had 450 employees and they had thousands and thousands of clients. And if you're not familiar with virtual, it's a, it's a business that allows you to hire a virtual assistant for usually just a few $100 a month. And the balance of those employees are virtual assistants of course. And but the folks that employ them, the customers in this case of the business are executives who really need that person. So virtual shutting down overnight. And damn near without warning was not only a problem to the employees, which is where you know, some press at the time was centered. It was a problem for thousands of companies that were employing those folks. Now again, to be fair, we took over the company the next day. So it didn't really ever truly go out of business per se. However, didn't make our lives any easier either because we had a lot on our plate at

Ryan Rutan: all. So we had a lot of explaining to do,

Wil Schroter: we had a lot of explaining to do and so so what we had to do literally the next day, this is monday morning is we had to make a call as to what we're going to do with thousands of customers, right? Many of all of whom we didn't know but many of whom we had no idea what they were going to do etcetera and represented millions upon millions of dollars in revenue, a lot of revenue. And we made the call at that moment and it was a tough call to basically just say, look here's what we're going to do clients, here's your virtual assistance information, right to employment, everything, hire them directly. Ergo cut us out of the process, right? Our thought process was this, we believe that if our customers were taken care of even if they weren't going to be our customers, it was just the right thing to do because not only will the customer get taken care of they're going to save money by being able to hire. There's ea directly these ea will then have a job which was an important thing for us to address and within a man with within a week, you know, we lost millions and millions and millions of dollars of potential revenue, but I gotta say it was one of the best things we've ever done because we saved a ton of jobs that would have been completely gone and we did right by a lot of clients and by way of that, a lot of clients did stay with us and we, you know, took that and transformed that back into a really healthy, really incredible business. But our focus was, hey, if things don't turn around right, you know, fortunately I had a happy ending, but, but if things don't turn around, we want to make sure we did right by all those customers and we did

Ryan Rutan: and, and it's, you know, we talk about goodwill in, in a business and you know, when you're, if you're buying a business, goodwill is often a line item and it's one that I think a lot of people scoff at and it shouldn't be right because goodwill is a real thing and it is tangible and we used to great effect, not with the intent of using it as a piece of leverage. We did it because it was the right thing and because it was the right thing for the right reason, people saw that and they did decide to stick around, right. We had a zero trust relationship with any of those clients. Zero trust. They had no idea who we were and the company that they did know just completely screwed them, right? Sorry. You're and and that was the way it went out. It went out as an email on monday morning. Your assistant can't report today. You no longer have an assistant, right? That was the messaging that had to go out legally from prior searchable. Right? And so zero trust, right? Like antitrust, right? There was there was the negative trust and so by doing the right thing. In that moment, we we ensured the two things you talked about continuity of process for the for the clients, continuity of employment for the employees so that they could continue as they were unobstructed, unimpeded. And that bought us some trust. Not all the trust. As you said, we lost millions of dollars in future revenue brought us the trust with the people that did stick around and we were able to leverage that and use that to build the healthy business that we have today. While also feeling good about ourselves.

Wil Schroter: Absolutely. And look in most cases, you won't have that luxury. You're out of money. The idea of giving gifts is the last thing I can find, right. But gifts come in many forms, right, gifts come is something as simple as sending a personal email to your customers to say, look, you guys trusted in what we're doing. You trusted in in kind of my leadership if things didn't work out, however, if I can ever repay that trust in the form of favor or anything that I can do in the future, please let me know because it means that much to me. Right, yep. That kind of gesture, assuming it's not a hollow gesture and you genuinely, you know, will stand behind, it will pay massive dividends in the future. Right? Again, it's based on being the right thing to do. But beyond that you're saying, look, I'm still here, I still have value. I'd still like to help you in the future, even if I can't help you in quite the same way I helped you in the past and I can't think of anybody that wouldn't respect that at some level.

Ryan Rutan: I wouldn't want to know them if they didn't.

Wil Schroter: Fair enough, fair enough.

Ryan Rutan: Yeah, I've been on the other side of this, I've been on the client side. So this goes back to like circa 2006 or seven. And this was at a time where videoconferencing was in its very, very nascent stages, you know, Was running technology for a very large market research firm, about 500 employees and another couple 1000 field staff. And We need ways to communicate at scale across 15 different country level, market operations, different languages to share cultures. Video is really important to making this global brand work based on all of the individual market operations. And there was a tool at the time. It's, it's the worst name ever was called dim dim d I m D I am right. It just, yeah, whatever. It was a great tool, it worked really well. It allowed you to have multiple, multiple participants, you could hand off the video chat to multiple people which you couldn't do before. It was like you could do one on one Skype video chatting and stuff like that. The group mechanism didn't work And we slowly over a period of about 18 months became entrenched in this tool. We were using it for everything. Internal communications for focus group conduction. Like all the stuff we had revenue booked against the ability to use this tool for for a year and more

Wil Schroter: out

Ryan Rutan: and we got two weeks of notice that said, hey guys, great News Salesforce is buying us and you're not going to use this anymore unless you buy like their complete package which for my 2000 people would have cost me a mint and it with the R. O. I wasn't there, I I didn't need the entire system. It was and like I was, I was in total just absolute pull my hair out house on fire mode and we end up losing revenue because of that because we had booked revenue that we could no longer keep up with at scale, we had to build some tools, we had to patch things together, it was a disaster and to this day, you know, that I still feel I still feel a little angry when I think about that, because they didn't have to do that to

Wil Schroter: me. That's how you remembered. Right? Well, I'll tell you what, we talked a lot about all the different stakeholders that you need to protect or consider, etcetera. How about we wind this up with the one stakeholder we haven't talked much about, which is you right? That's kind of what to do to protect yourself as you're shutting this thing down. Let's assume you've done a good job of taking care of and and being considerate to all of the other stakeholders. Let's get you out clean to the extent that we can and and and I think the first place that we talked about is the legal and financial shutdown, like,

Ryan Rutan: Yeah, we were talking about the founder and the entity, right? The legal entity, that is this thing, right? And the owner's attachment to that. So, yeah, the last stakeholder, I guess, is the business itself, right?

Wil Schroter: Yeah. And I got to tell you a lot of founders don't think about this. A lot of founders, you know, they go through the process, and uh they think about, you know, all the different pieces of the business that that they need to wind down, you know, they forget their names still on a bank account. You know, the I. R. S. Is still going to call you next year and say, where's your tax returns. So

Ryan Rutan: funny you should say that I loaned money to a friend once who had run a business into the ground despite all his best efforts. He did a great job with the company for a long time went out of business. He hadn't thought about that. He had to provide financials. He had a huge you know you have you have you know $30,000 accounting bill just for for tax prep every year and I had to lend this guy money so that he could file his taxes. Imagine how excited he was about that. Right. Right. Exactly. Almost a year after he had wound the thing down

Wil Schroter: and think about it and you got a checklist this think about every agreement you're tied to whether it's your cable modem bill at the office, whether it's your your Amex bill everything has to be shut down. Is it a massive pain in the ass hell yes it is.

Ryan Rutan: Do you

Wil Schroter: have to do it? Yes you have to shut everything down as much as you can. No loose ends, no reminders whatsoever to the extent that you can now some stuff just it can't or won't be there is a service level of agreement that you just can't get out of or anything else like that. But the more you can shut stuff down. Not only does it does it take away some legal and financial liability but I gotta tell you it just gets some of the overhead out of your mind right, nothing is more painful than getting an I. R. S. Notice of late taxes on a business that bankrupted you personally.

Ryan Rutan: The gift that keeps on

Wil Schroter: exactly. I I got to say you know we're laughing about it but it ain't funny right? And um all of these final final steps to shut it down, dissolving the entity filing your final tax is making sure that all of your different state or local or federal entities aren't still trying to to collect employment taxes for employees you don't have. Right? Dude, I've gotten employment tax bills for companies that I shut down seven years ago, right because their respective state that they may have started in they keep assuming you have employees until you tell them that you don't I still get tax collectors calling on basically fake invoices from 2011 from some

Ryan Rutan: random company.

Wil Schroter: I mean it's it's ridiculous. And again I just didn't I didn't know better at the time how thorough you have to be that just because you stopped paying your bills or you say the business is over, no one else thinks it is and they want to keep collecting.

Ryan Rutan: Yeah. Yeah the death certificate has to be signed by someone official.

Wil Schroter: Yeah and and and once it is you know once you've gotten all those things checked off a lot of this is just getting you mentally checked out for all the right reasons because you know what I would say is the real focus. Once you've kind of done your rounds with all your stakeholders, close it out and move the hell on get dude, get this out of your head however you can because most of us yeah, I I can't even think of some person that that didn't had this fate, we wallow, right? You know, and this is it's a different

Ryan Rutan: show, different penance, right? We have. Yeah, we we we feel like, yeah, now now I will, I will flagellating myself with the memory for the next six months uh and and continue to to feel bad about it because I feel like I should and the reality is that's a horrible waste of energy and emotion and and a disservice to all the people that believed in, you honestly

Wil Schroter: agreed agreed. And and at that point the best thing you can do if you really want to talk about how to, how to shut down gracefully is transform all of your time and energy judo style into doing something else, no matter what that might be, it could be your next job, you spending time with your family. Could be hopefully building another startup if you're crazy enough to do it. But to take all that negative energy and put it into something that you feel really strongly about, right? Just to transform it, right? So that when you see somebody on the street and say, hey, how'd that start up workout? The whole rest of the awkward conversation isn't just about how it shut down. Its oh yeah, we shut that down. But I'm now doing X, Y, Z, put all your energy and X, Y, Z.

Ryan Rutan: And it's, and it's of course easier said than done, right? Because you know, you do have to sort of explain around that, right? And if you just immediately move on, then people are like, but didn't you just run something else into the ground? Like, and now you're just really okay, why don't you go get a job? Why don't you take the time? Why don't you, why don't you do something? Why don't you do something meaningful with yourself? Right? Like we've all had these conversations and it's, it's painful. But you know what let that run off like, like everything else and just move on. Well, yeah, whatever it takes to move forward, you got to do it, it will happen at some point. The sooner the better.

Wil Schroter: Right? I found the best way to, to shake it off is to go do something else, literally anything else, But just have the conversation of your life be something other than the thing you stopped working with, right? When I talked to founders who recently shut something down and some of that we worked with in different capacities. My first thing is just find something else to put all of your time and energy and excitement around because all of a sudden all that anxiety will finally have a positive channel and it's amazing what you can build some of my, my best moments in life. My most productive moments have been based on the ascend of some crazy, anxious, you know, roller coaster that I just came off. Yeah, for sure.

Ryan Rutan: We've given you some steps today. That might make the process a little easier. Maybe not easier, but a little clear, right? It's always going to be brutal, right? But I think that what we want to walk away with is knowing that we did this in the best way that we could. And I think that a framework like we've talked about today gives you some certainty of the process, right? It certainly will suck. But it also certainly will end. And I think that it's important to walk away knowing that you did it as best you could so that you can leverage that feeling into going on and doing whatever you do next. If you treat the people, whether it's your employees, your investors, your customers, your partners with as much dignity, respect and advanced warning as you can. There's a stronger likelihood that they'll be ready to support you when you're ready to do this again. And we certainly hope that you will be ready to do it again. That's a wrap for this episode of the startup therapy podcast. This is Ryan Rutan on behalf of my partner Wil Schroder and all the startups dot com family thanking you for joining us and we hope you'll continue to join us. Be sure to subscribe rate and comment on itunes or wherever you love to listen to startup therapy. You can find all of our episodes at startups dot com slash podcast. If you're looking for more amazing resources to launch or grow your startup, be sure to head to startups dot com and check out startups unlimited. It's everything we have to offer from our online university to our amazing community of experts and founders and even all the tools we've built like biz plan, fungible and launch rock. It's everything a founder needs visit startups dot com slash begin that startups dot com slash b E G I N. You'll thank me later.

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