Startup Therapy Podcast

Episode #189

Ryan Rutan: Welcome back to the episode of the startup therapy podcast. This is Ryan Rotan from startups dot com. Joined as always by Will Schroeder, the founder and CEO of startups dot com. And my dear friend, I also have a bunch of my other dear friends here today. Founders from our community have decided to join us and listen to Will and I babble for half an hour and then argue with us for the balance of the time. So buckle in, this is gonna be an interesting one. As you're all probably aware, there's a lot going on in the macro environment right now. We are mid November of 2022 layoffs are the soup du Jour and they're happening everywhere, big orgs, small orgs and everything in between. And we're all seeing that play out in real time and we all sort of understand what that means. Lots of people getting fired, lots of people looking for jobs, startups are not immune to this either. And there's one thing that we're not really talking about will and that's what I'd like to talk about today is while all of these other folks are being jettisoned from the ship. What's happening to the founders? The founders go down with the ship. Oh, no. Yeah, you don't say yesterday. A good friend of mine, uh he's in one of our founder groups, sent me a text, him and his wife and said, and he said something to the effect of true love is signing joint bankruptcy with your wife, right? And they were both like happy as can be. Now. Now I listen and he wasn't being sarcastic. He's a great guy. I hope he listens to this episode because this is for you, buddy. What he was saying is, you know, start up, obviously run into challenges. He was signed on for everything personally. And he was at the point where creditors were sending people to his house, talking to his friends, his family trying to get money back. That's not pleasant. It's a nightmarish hellscape. It's a, it's a total nightmare. It's the part like we talk about. That's not quite in the brochure of being a founder, right? The part where it's like when you hear about raising lots of money and things, things scaling sounds awesome to be a founder. But today we're gonna talk about the other side. What happens when everything goes south and you can't escape. The reason we're gonna talk about this is to prevent that from happening or at least kind of put that in the back of your mind and go, wait, wait, what I can't just stop doing this. No today. Right. And I are gonna talk about how many things you are tethered to and how hard it is to unwind yourself from your startup is easy as you think. But you, you can't just quit. It's rarely that easy and we're gonna talk about why. So we have a lot to cover and I have a feeling that by the end of this, all the folks that are in our studio audience today are all gonna go running for the hills. So we're just gonna terrify. We generally have that effect on people. So that'll be all that different. Yeah. So let's set it up though, Ryan, let's set it up. We've got our startup. It's at the brink. Things may maybe we lost, you missed a funding round or just run out of money, all the stuff that happens to startups and it's happening a lot right now and we have to call it quits. That's where this, this story, this show is gonna begin. The part where we have to call it quits. Everyone else can bail, not us, not us. And Ryan, I, I think we need to understand how personal this is and I don't just mean emotionally, I mean, financially we're stuck to this thing, you know what I mean? For sure. Yeah. Yeah. And, and it's one of those things where it's death by 1000 cuts, right? And as hard as it is to unwind, boy, it was easy to get wound up in all of it. Right. All of those little agreements we signed. Right. Some of the big ones like the office lease, some of the little ones like the, the broadband contract that it turns out there's no way out of for three years because of that great rate. They gave us to the personal credit cards. We've run up to the business credit cards, we've run up that we didn't realize we were also personally liable for that whole thing about piercing the corporate veil. It does happen a lot. But here's the thing, like, no one thinks about that stuff and I'll give you examples. No. And individually they're inconsequential. I think that's why we don't think about them. It doesn't sound like that big of a deal to be stuck with a $300 a month broadband bill when the company is paying for it when all of a sudden that's coming out of your pocket. And by the way, you don't have any more money that becomes very consequential. When we were running a company in Santa Monica. We had done a, a short term lease of like, three years for like, I think it was like, $7000 a month. Yeah. It's a closet in Santa Monica, isn't it? Yeah. Yeah. There's, it practically was a closet, right. I think it held like five of us to give you a sense for it. But we didn't think much of it because we had just raised a bunch of money. And again, we thought we were being as frugal as can be. But the landlords having been through this once or twice before were like, yes, we'll sign with the company, but we also need a personal guarantor. Now, here is the people that are not in line to be personal guarantors. Everyone except for us, the investors are never gonna be personal guarantors. The staff is never gonna be personal. No one will be personal guarantors except these idiots. I've tried it. I was like, hey, Mark in hr I, I need you to sign this document for me and he's like this is I liable for the entire lease of the company. I'm not signing that Ryan. And you have to understand it's because all of these businesses, you know, whether that's the landlord or whether it's broadband, whether it's a whatever they don't care about the corporate entity. Why? Because the corporate entity will not be the one stuck with the bill when everyone leaves, if everyone could just leave and the corporate entity just disappears and all of a sudden all the the liabilities go with it. They never collect on anything but you attach somebody's personal credit score or personal threat of bankruptcy. And all of a sudden that corporate entity comes up with a lot more money for a lot longer. And so our story begins and so we bought a company called Virtual years ago. Virtual was in this, this overnight shutdown situation. I won't get into all the details, but a couple of the people, the founders had been using their personal cards to front the company. So personal Amex. Right? And that, which is the most common. Everybody gets an American Express card. Everybody loves the idea that, that we're, we're running company expenses through it. We're racking up points, we're going on a sweet vacations. All that free time we've got. Yeah. Yeah, all that free time, right? The part that no one thought about was what happens if the bill is due, but the company is not there to pay it anymore. So they had, I think it was somewhere around like a 90 to $100,000 bill. And if you remember American Express typically only does 30 day cycles. They have a couple, you know, longer term cards now, but it's technically a charge card. So this one guy who was a co-founder didn't have that much stake in the business, but just happened to throw his card down on the day that they were starting, the company personally owed $90,000 that month. So here's what happens. He goes back to us and he said, well, hey, are you guys gonna pay it? And it was like, dude, we didn't actually buy the company. We just bought the assets. You guys owe the money like, like we're not even tied to it. He's like wait, what? He goes back to the investors and he said, hey, you know, we gotta, you know, cover this $90,000 liability that the company has. And the investors say, can't quite hear what you're saying. The line seems to be breaking up. No, we don't. And this poor guy, this poor guy is sitting there going, what the hell just happened? Like I thought I was doing the company a favor by putting my name and my card on the line. And all of a sudden at this point, he has no money, the company has no money and he owes $90,000 tomorrow. There's no return on that favor, buddy. This is the part where all of a sudden people start looking around and going, wait, how did this happen? It happens a lot and it's all those things you never thought about because at the time you did it, it, it never occurred to you that it would come back to you and here we are here, we are. Yeah, I mean, and in some cases, we're, we're clearly entering into these things right where we are signing on as, as, as personal guarantors in, in other, in other cases, there may be issues where it, it's not obvious that we're gonna become liable for this, that we do feel like we're protected by the corporate structure. And I think we can dig into that a little bit later. We've got a lawyer in the audience. So I want to get her perspective on this. I've got my own stories on that one but it was mostly dumb mistakes. Yeah. So what is it that we can do about this? I mean, like when we, when we really start to think about this, like we don't have that many options. Well, let's talk about what happens, right? Everyone's wondering, well, when push comes to shove like, like who bails me out? No one, no one bails you out. No, they don't even hand you, they don't even hand you the bucket to bail with. They're just like, yeah, hey, good luck when we wound down for it. You know, again, the same company that I mentioned that was based in, in Santa Monica. I was the original founder and then Ellie, who's our coo now came on became a co-founder, et cetera, but I had signed everything first, right? All of our liabilities I had personally signed for when the company ran out of money. We had like nine different investors and we had big investors, we had like founders fund, we had Bessemer, we, we had great investors, right? Didn't matter. The investors aren't liable in the way you think they are, right? And it's not even just the fact that we have all these ongoing liabilities that I'm, I'm attached to. The other thing people don't think about is who pays for the entity itself to get wound down because that can be significant. That can be really significant. Yeah, we helped somebody through that last year where I, I think the number I have in mind was 100 and 20 K to wind down to take care of some various things that were owed to the government, for example. And then just to wind down of the entity, they were requiring audited financials. And so that there was 100 and $20,000 from a company that had no money just so that the company could cease to exist. That's my point when virtual had to wind down. If you remember Ryan, they had to bring in somebody to kind of officially wind it down because somebody has to deal with all the creditors that the organization has, et cetera and that cost hundreds of thousands of dollars to wind down that company for a company that had no money again. This is the part that, that, that no one's having that conversation saying, hm, if we run the bank account to zero, how do we actually turn the company off? You might not be able to. That's exactly it. Yeah. People don't know that they assume that when it comes time to wind the thing down, everyone will put in, you know, they, they're, they're salty about it, but everybody will put in their little pro rata to make sure that they can help, help, get that done. Let's all get away clean together like that generally does not happen, everyone disappears, everyone gets amnesia and then whoever the, the last idiot to hold the bag, which is typically the original founder, the only founder that was dumb enough to sign anything. And when I say dumb enough, I've done it, Ryan. You've done it dumb enough. Meaning like you don't feel like you have a choice in the moment. Right? Yeah. And so, so we get in the spot where now we're in real trouble because the company itself is losing money. You know, again, all these bills are stacking up, like real liabilities are starting to happen. And now we're like, we don't have any money, but we actually have to wind this thing down and we don't have any mechanic. There's no accountants or attorneys to get this done, right. We're liable for a bunch of financial stuff and everyone else was liable to walk away. That's, that's what they did. Exactly. And so what do we do now? We start to realize that the only way to get out of this is to file for personal bankruptcy. And we're like, how did that happen? No one else is filing for personal bankruptcy. All of our staffs are thank thankfully, are, are filing for personal bankruptcy. Our investors, maybe with this stock market, they're filing for personal bankruptcy, but generally aren't filing for. How did it only happen to us? And what happens is all of the liabilities, all the liabilities in the company essentially just get funneled back to us and there's another side to it. If you're the creditors, the people that we owe money to, there's only one person you can call, you know, the investors aren't gonna pay the money. You know, you're obviously not gonna call like the director of whatever to go pay the money. You know, the only person that's likely tied to all of this is the founder or founders. And so you're coming after them. Now, all of a sudden, as a founder, you run to the point where you have $0 in the bank, which means long ago as a from personal income, you had $0 in the bank. That's how you got here. So you probably haven't been paid in six months to a year, right? And you've run up the credit cards, you've taken up the home Equity line, you've done all the things to make it work and it still didn't. And now you're at a point where you're at zero or negative dollars and you actually need dollars to stop the bleeding, right? Because otherwise you will continue potentially to incur additional liabilities interest on cards, penalties on unpaid rents, whatever it is, the stuff starts to stack up really, really fast and chances are, like I said, we have zeros of dollars to pay for it. By the way, personal bankruptcy costs money. Too funny story. One of my, I just not a recent history, but I would say, 56 years ago, it was one of my kind and charitable acts. I helped somebody to pay for their bankruptcy. They didn't have enough money to declare bankruptcy. And so they needed cash from somebody. Yeah, like handing somebody thousands of dollars so that they can go and declare bankruptcy somehow. Didn't feel good. Right. Like I was glad to help. But it's like, that's not really what you want to help somebody do now where it becomes, it's particularly difficult is we're sitting here going, I, I thought I did everything. Right. Right. I, I, I, I thought I did everything right. I thought I went out, I was willing to put myself on the line. I brought people in to help build this thing. I brought investors to support this thing. I thought I did everything. Right. Why am I sitting here right now? Signing for personal bankruptcy? The reason that happened is because we just didn't understand how far the rabbit hole on this actually goes. We actually didn't understand that all of these liabilities that get created all map back to us, but it's a limited liability company and, and it is, it's limited, it's not limited as much as you want it to be, particularly if you sign away those rights directly. Yeah, I think, I think founders have this sense that, you know, I, I certainly did with the early ones that, you know, you're, you're playing high stakes poker. Right. And you make your bets, you've got your money and when you, you run out of chips, you walk away from the table and it doesn't feel good, but you walk away on the table. That's not the case, right? We're tied to that chair and we have to keep playing the hands until we actually properly wind it down. And that is just so painful. There's also a piece of this too where the reason all of these things are, are tied to us personally is because long before the corporate entity has any kind of like signing ability, everything maps back to us to this day startups dot com is still working off of my personal credit card that I dropped down 10 years ago. We've been using it for so long that we sort of forgot about it, but like nothing has changed because back in the day, everything was personal, it takes a lot of effort and time in transactional history to be able to build a truly self-sustaining startup that signs all its own documents. And again, the problem is long before that happens, you've already made most these commitments because you kind of had to, you needed office space at the time, you needed credit card at the time, whatever you needed broadband, you needed all those things. Long before your entity was ready to support it on its own. There was no operating agreement and there was no, there was no corporate entity even at that point, there was nothing right. You're just, you're spending out of your own account, signing documents in your own name. And again, even, even after the entities exist in a lot of cases like the landlords, they're not going to accept, the corporation will be fully responsible for this. If you're nationwide insurance, you can sign a lease. They're not asking anybody for a personal guarantee on that. But if you're Ryan or will, they're like, hey, great. I'm glad you guys have been in business for, for 10 years. That's, that's awesome. You will still need your personal signature right here on this line, right? And that's the part I think it's important to understand startups are small long before they're big in, in that small time in that era, which is usually a long time for us. That's the only way we can get stuff done if you were to push back. And you were to say, well, well, Ryan like, ok, cool. How do I not do this? Guess what? You kind of don't? Right? You do have to sign this stuff. You do have to lock yourself up and ideally you wouldn't, right. Ideally somehow, like the corporation could do it on their own. But I gotta say if, if you're thinking about it right now going well, I'm kind of like signed to a lot of stuff now that I think about it. That's 99% of the cases, the 1% the only exception is someone that is able to raise money incredibly quickly and be able to kind of like, take care of things with all the money that they've raised. But usually long before that we're signing for all this stuff personally. Right. And honestly, unfortunately, a lot of times we see people raise money really quickly and what do we see them do? Take on a bunch of additional liabilities and overheads? Right. So it, in some cases, I've seen that exacerbate the problem because then that funding runs out and you've got, you've built up a much larger pile of liabilities that you may or may not be personally liable for, but still unwind. Also, the problem is a lot of this stuff is kind of expensive at the end, you know, to do a corporate wind down assignment by credit or, you know, whatever you're doing. And like I said, you don't have any of that money. So as the, the business is kind of going the wrong direction, a founder with a little bit more experience or maybe one that listened to this podcast would go, you know, before we spend like the last, last, last dollar, we might want to like, cut things off here because we're gonna need some of that money to, to wind things up. If you've never done it before, it wouldn't even occur to, you wouldn't even occur to, you didn't occur to me. Yeah, I had this conversation almost probably a year ago to the day with a founder who was trying to decide whether they needed to wind down the company or not. And that was right where the conversation went. I said, well, let's talk about what are your liabilities? What are your cash balances? What are your current cash flows? And let's figure out like, are we even past the point where you can get away from this clean or if we do this now, will you be ok? And it turned out they basically had 2.5 more months to make the decision based on, you know, their, the current burn rate, the amount of cash they had in the anticipated expenses to wind down the company. And that's ultimately what they ended up doing. They waited about another two months to see if they could turn things around. They did not and they made the decision at the right time. And so they started asking the questions at the correct point in time, which was before we'd hit zero before it was full disaster mode while we still had enough money to be able to pull the rip cord in the parachute and also being cognizant because if you've never been through this before, if this is your, your first rodeo and it doesn't occur to you that, that these liabilities are real, that landlord that you signed with, that the company signed with first. But they also you were the the cosigner. And you're thinking, oh, well, the company will cover the long before they'd ever come after me. Not, this company doesn't exist anymore. You're the only collectible person. All debts go to the most collectable person, not the person most responsible or the, the person most at risk. It's just who can we get money from, with the most ability to pay? Yep. That's it. Yes. Exactly. Exactly. And, and sometimes most often that's us, which sucks. You know, something that's really funny about everything we talk about here is that none of it is new. Everything you're dealing with right now has been done 1000 times before you, which means the answer already exists. You may just not know it, but that's ok. That's kind of what we're here to do. We talk about this stuff on the show, but we actually solve these problems all day long at groups dot startups dot com. So, if any of this sounds familiar, stop guessing about what to do. Let us just give you the answers to the test and be done with it. On that note, I want to talk to the team here now that we've terrified everybody. That's part of this conversation. I want to hear from you guys first off. Is this familiar to anybody? Has anybody actually been through this before? Had to go through this or is this new information like, whoa, hold on. Like this is a little bit terrifying thoughts. Uh So this is all completely new information for me and having started a few businesses myself, the last one uh was actually a photography business. So there wasn't really that much overhead, there wasn't really that much risk. It wasn't really the high stakes poker poker game that you're kind of describing. For me, the most expensive piece of equipment was a $5000 camera which I'm still pretty much paying off for it right now, even 2 to 3 years after fact, not surprised at all. But having said that what it is that you're describing, I've always thought that if the business were to sink, then everything else was gonna sink with it. But the fact that you're saying that creditors can actually go after me even after the business. Wow, that's completely new. Yeah, debts float. That's something that people don't describe. Yeah, you don't know, but they're actually quite buoyant regardless of the ship going down the debts and the liabilities tend to float right there on the surface and you have to deal with them. So Justin the thing is for a lot of folks, when we're signing these liabilities, it doesn't occur to us that we are signing these liabilities. I mean, just about everybody, you know, on this show right now probably has a corporate American Express card. But I guarantee if you look real closely at what you probably signed, it's not that corporate. Yeah, it's pretty personal. It may have your company's name on it, but it's not the company they're gonna come after when the money is due. Yeah. No, absolutely. Is there a way for you to kind of sign some of these liabilities under the company's name instead of your personal name? Great question. There are a couple of things you can do, you can resign agreements once the company itself has its own standing. So for example, if, if I were to take on uh investors, the first thing I would do is create a new American Express card that wasn't based on me. Now, American Express isn't stupid. They've funded more companies than anybody in the history of history and they understand better than anybody that the company paying off when the company goes out of business. Issus Justin paying off is gonna be two very, very different outcomes. And so even then it's very difficult to get one that's not tied to you. Now, some other folks have come out like Breck came out and were trying to do uh cars that were mainly tied to the company, but they were also mainly only trying to work with venture funded companies. So not quite the same thing for the average person not raising a ton of V C, you're probably still gonna be signing for it. But what I wanted to point out is if you do go on to raise money or the company hits a certain threshold, deliberately going back and saying, what am I tied to? And how do I unwind that is a really valuable exercise, really valuable exercise. And it's one that almost always gets overlooked unfortunately. Right, because we know dozens and dozens of founders who found themselves in this problem where they could have easily switched over agreements at some point, maybe not easily, but they could have at least gone back and tried to renegotiate. I remember going to this when we still had our office in Columbus when they still wanted a personal signature on our broadband. And I was like paying you guys for six years, like nobody's signing personally on this. Like we'll keep paying you for broadband. I tell you what if we don't turn it off. Like there's your recourse. I've had five different instances. I can think of throughout my 30 years building startups where I had to go to my landlord and say we can't make the payments anymore. The most recent example, which wasn't like a bankruptcy thing was when COVID hit and Ryan, we had, we had the office in Columbus, Ohio and we went back to our landlord and we were like, dude, we're never gonna come back to an office, right? Like we, we physically can't, I liked that. They assumed that we were, they were like, so we uh we assume you'll want to renew the, the lease at the same terms. And we're like, no, like we haven't been there for three months. Yeah. Yeah. They, they're like, what were we talking about? A month or two? And it was like a little office park situation. I was like, you know, no one's here. Right. You have heard of COVID? Right. And at the time it's just, it's just like, three months into COVID, they're like, ah, it'll blow over. It's, it's just, it's just, it's just a low grade flu, needless to say we don't have an office there anymore, but they were not fun or supportive of it. The landlords to me are always the funniest ones because, like, unlike everyone else, they don't care that money goes directly in their pocket and they're collecting for themselves. They're difficult conversations. All right, let's take it from the top. Uh, Ryan, you wanna, you wanna jump through? I talked to Dina a little bit about some of the items on here. She's our resident lawyer. You want to kick us off Ryan? So, Dina, you asked, you said you'd be interested in hearing my experience with the actual piercing the corporate bill happening, being enforced in real life. And yes, that is separate than doing a personal guarantee. So, in my case, one of the mistakes that I made where, where they decided they would try to, to do that was, there had been some co mingling of funds right where I had, you know, used my checking account here and there to support the company and then made some payments back to myself and didn't necessarily document those as clearly as I should have. I was 19.5. So I've grown a bit since then. But yeah, so it, it was things like that. It was places where I had obviously myself kind of pulled back the corporate veil and stepped right through it and then tried to hide back on the other side. Later in this case, it wasn't a bankruptcy. It did lead to some restructuring of payments to a creditor that we had, which we managed at, at the end. But yeah, it was, they made it very apparent that there was no version of me just winding down and walking away that I would be paying for it. But you know, Dina, maybe we, maybe we get you involved now and you tell us the differences because I prefer not to give legal advice given that I don't have those two fancy letters after my name. I will come on and also say I'm not giving any legal advice because I can't see anyone on this podcast. Uh unless someone wants to contact me and, and enter into engagement. So gonna put that little legal disclaimer out there. But I guess it's an interesting one because it's like, I don't want to just, I think it's important and I think right, that a lot of people don't understand this, don't know what they're signing. So I think it's super important for people to realize that I also on the other side, and part of my question was I don't want to overly scare people and have them think like, oh, entities don't matter at all. And so like that, there's something just about being a founder that would mean that they're definitively liable. What I was getting at was less about the, the piercing of the corporate veil and more so the misunderstanding of where that veil actually exists, you know, like armored cars are great if you're inside them, right? But when we start to do things outside of them, we're as susceptible as anybody else. And I think that was probably, it was poorly phrased, but that was really what I meant was that when we tend to assume we created an LLC, now it can run around and do whatever I want. Willy nilly and I'll be protected because I have this thing called an LLC. And I'll show you here's the state documentation that says it exists. I'm safe now, right? Depending on what you've been doing. No, you're not necessarily. Right. So I think that's where we get things confused is exactly how far does that veil extend and what are all the myriad things that founders merrily find their ways tracing outside of that veil? Yeah. And I, I think that makes total sense and I think it's kind of two issues, right? There's the, you're doing stuff on your own personal, like you're putting stuff on a personal card, you're putting stuff on, you're signing a personal guarantee, those type of things that are outside the business to begin with. And it's like, no, you're liable for that. I know it's a business expense, but if you are doing anything and you've signed for personal liability, you have personal liability. Um, so that's one thing to kind of worry about and, and pay attention to like what's on your personal credit card and not just say like, oh, well, it's a business expense. So obviously it's fine. It's like, no, that's actually your, that's your credit line, that's your personal credit and that it will affect you if, if you can't pay it. Unfortunately. And then there's the second part which I think is what really more po piercing the corporate veil and it sounds like the issue kind of you ran into where there is a veil and it, there is protection. But if you treat your company like it's your own personal finances or you mix them, you start creating a doubt in a court's mind if you ever got in that position as to whether or not this is a legitimate business or is it your own money? And that's where on the outside of signing things, even if you don't have stuff on your own personal credit card, it's all on a business credit card, but you're putting your own personal vacations on there and doing all kinds of other things. That's really for you, not for the business and spending money that way. And mixing them, then you now put yourself into the issue where that veil might not be respected and you're gonna be looked at as it's the same. Unfortunately, I get that. All right. Hey, uh, jumping over to Jess mcaffee, are you able to package a bunch of these small costs into your business and can sweep them in under the bankruptcy? Was, was this a small print in purchasing a business? Something that didn't come up in the due diligence? Uh Justin from your standpoint, what are your thoughts or concerns there? What prompted that? The first thought there, are you able to package a bunch of these small costs? It was more in pertaining to actually having the debt in a failing business, actually getting transferred from the business entity over to personal liability. So you already answered that question. The second one, was this the small print and purchasing a business? It was more in relation to the story that you gave for the anecdote in relation to virtual. I'm talking about the $90,000 bill uh that came due 24 hours later in purchasing. Is it something that just didn't show up in due diligence as you were kind of working through this, this documentation or is it something that was swept under the rug that just was heinous? Well, here's what's really interesting. So virtual sold the business to us. OK. So technically, you're thinking, wait, the founder sold the business like that's good. Right. Not exactly exactly. We did what's called an asset purchase. And for those folks that, you know, aren't aware of the difference. If we do an asset purchase of your company, we buy all the assets, the name, the customer list, software contracts, et cetera, but we don't buy the actual company, the stock, the shares, the incorporated entity, we separate those two. Now, why would someone do that? Why would someone sell the assets and not the whole company? Well, if you're like us and all you want are the assets, but you don't care about the actual corporate entity and all the stockholders and all the debt they may have created and all the liabilities they have. It's a way to buy the good stuff without worrying about the bad stuff. Yeah. And in a lot of cases, it's the only way, it's the only way to buy it, right? Because if you were to absorb the rest of it, if you took the entire corporate entity, it would probably make the deal undoable, right? Because of the liabilities that were on the table because of all the other things that were going on. In that case, in particular, there were other legal implications due to things like payroll tax and hr liabilities, lots of other really, really complicated things that we wanted. No part of not because we didn't care but caring would have cost more than the benefit of buying the business. And so it would have been a charitable contribution to startup world. So not what we're into. Now, imagine all of the liabilities within the company, credit card debts, they owed contracts, they signed, et cetera still exist with the company. All the assets are gone, but all the liabilities are still sitting within the company, which means all of the people that work there, the founders that had signed on it, they have all of these liabilities as if nothing happened. Now, of course, we gave them money for those assets. So they they, they have, you know, money they can use to pay those things off. But now they have a gazillion creditors to deal with which by the way was gonna happen. Either way, the creditors were gonna be the same, either way that would have been worse without selling the assets. So that is just worth mentioning. So this doesn't sound totally Robert be in style. The money was used then because they would have had those liabilities, had they not sold the assets of the company. They would have had, they were at a negative cast position. They would have had no way to wind down the company. They would have had no way to pay that $90,000 bill. They would have had no way to do any of those things. So the asset purchase facilitated the wind down of the corporate entity you be a great way to put it right. Ok. So, uh, moving along here, Justin, you also asked what's the typical time frame for winding down a company six months after you should have? Sadly, the wind down can vary, but from what we've seen from founders, et cetera, giving themselves 3 to 6 months to do the wind down long past when you've shut the doors and everything else and you're probably working at another company while you're doing. It is a good enough time because it's not just the legal process, it's a lot of process and back and forth with all the remaining creditors. And again, there's a lot of people involved typically in a wind down and so you need some cash and you need some time, probably not less than $25,000 of cash and probably not much less than six months. Yeah, it, it, depending on where you are, right. So, corporate structures and, and things vary widely state to state, but also country to country. And so there are things like in the UK va T liabilities that may still be, they still may require reconciliation. There may not be anything due but there'll still be paperwork that has to be filed when at the end of your next fiscal year. So, if you wind down on day five of your fiscal year, you've got a responsibility 360 days from now to file more paperwork, that's completely relevant, but it's required. Right. So, there's, there are all sorts of strange things that you end up having to do. It feels a bit like a whole bunch of homework assignments for a class you stop taking and it's, it's painful. All right. Who do we have up next, Brian? Let's see. I didn't know this was the Spooky Halloween special. Uh, because we're talking about scary stuff. I love that. What was scariest about this because we, we also aren't trying to just scare the shit out of everyone, right? So let's talk about, what about this? Scared you and let's make sure that the thing that you're scared of is the reality of the situation.

Wil Schroter: Um just a personal liability because I recently incorporated my company. So I thought I'm so shit now. But all the things like about having personal liability on your rent and on leases and everything else that the corporate vale can be pierced. I didn't realize that. And um that means I risk getting a poor personal credit rating for the future, which is an additional problem on top of everything else, but I guess that's the name of the game. So I'm already strapped in so I might as well just keep

Ryan Rutan: going and it will depend to Dena's point. It will depend on how did you sign those documents? What is in the fine print? Right? Did it say did you sign personally? And as a company, right, you can sign as an officer of the company doesn't necessarily mean that you're not personally liable, doesn't necessarily mean that you are, it's gonna come down to the specific contract. What's in the terms of that contract? So, yeah, reading those things and, and, and to will's early point, we may not have a choice, right? We may not have a choice. They may say like, look, oh, you don't wanna be personally liable for this? Cool. Then don't move in here and don't start paying us rent. Yeah, then you don't get it. You don't wanna be personally liable for your M X good. You won't have an M X. You don't wanna be personally liable for your lease. Then you won't have a lease. It's not like we had a choice. It's not ok. Cool. Well, hold on. I'd like to sign for this personally. I want to make sure that I'm all in on this thing, right? I want you to know I've got skin in the game MX. That's not how any of this works. You know what we're trying to make folks acutely aware of is that we are very tethered to these things usually for a lot longer than we expect to be right again. We're thinking, God, I just can't wait for this thing to be over with. I just want to shut it down. I want to put it to bed and we realize just because we feel that way, all of our contracts feel very differently. And then let's say we don't have a lot of outstanding contracts. We didn't sign the office lease or we don't have the corporate Amex in our name. Even just winding down an entity. Right? Just making sure legally it is closed and done can cost a couple bucks, right? Some people just abandon it and just like let the chips fall where they may, I wouldn't recommend that, but you wouldn't be the first person to do it. But in order to put everything away, I don't think people realize that like, hey, all the people that may be invested, et cetera don't necessarily have or feel the same liability and likely will just walk away. And we're the last people kind of still holding the bag, right? And who else do we have? Justin again, uh, asked, how do you do that from the start though? How do you know things you don't know at that point? Where do you go again? Some of this is going to be unavoidable. I think that the point will made kind of three quarters of the way through, which is be mindful of what you've signed, be mindful of what falls on the personal side, what's on the company side, what should be safe behind the corporate veil and what's not. And at the first available opportunity, try to change that, right? So things that you may have had to be personally liable for and sometimes it's not just about the, the personal liability. Sometimes it's about things like duration, right? When we, I I'll use hubspot as an example. We started with them. It was annual contracts and payments. And so, you know, you're, you're on the hook for that. Well, nothing better than paying an annual payment for a, a, for a company that gets wound down two months later. So that you've paid for 10 months that you're not gonna use and, or just remaining liable or signing a year contract that you or the company is still still liable for. Even if that safe behind the corporate veil still has to be dealt with. They're still going to want you to pay it. They're still going to come after you. If there are assets in the company to be sold, everybody's gonna start attaching themselves to that. So limit the liabilities as much as you can and, and sometimes it's things like contract renegotiation, price renegotiation, doing everything you can to limit the total exposure that you have as soon as you can make that an active exercise that you engage in as a founder as a company, right? If you've got a finance department, then they should be on top of some of the stuff. Yeah. And it's like anything else like if you have a mortgage, if you have rent, if you got car lease, you got a car loan, student loan, whatever, you know, you're on the hook for those I think the problem that, that we run into as founders is it doesn't really occur to us that these liabilities are the exact same liabilities and we often have a lot of them and like we said before, they tend to be way in excess of whatever we would have taken on personally. And again, just so, so we're not mixing this, you're probably going to sign that anyway, in the first few years, you're probably gonna sign for that lease. You're probably gonna sign for that card. We all do. What we're saying is number one, don't forget as the business might be like taking a header that all of those really are your personal liabilities. Secondly, as fast as you can get off those personal liabilities like that should be so top of mind, like, how do I unwind this like yesterday? And, and I think that's important because again, the problem is the company starts to grow a bit and like, oh, well, we're good, you know, like the company's gonna cover et cetera. If you guys have learned anything in this past year, it's how quickly a company can go from hero to zero. Again, as we're recording this, I was like to time stamp this, this is November of 2022 we just watched a crypto company called F T X go from a $32 billion valued company to a $0 billion valued company in 72 hours Right. It's not amazing to me because I've seen it happen a million times. Right. It's not amazing to me because I've been through it personally. So, if it's your first time out and you're like, oh, well, we're far enough along. We've got a million an A R R like that, you know, that, that $5000 a month liability is not a big deal anymore. It's, everybody thinks that until it's not, when we bought Virtual, they were doing a million a month in revenue, right? So a $90,000 personal statement didn't seem like a, a big deal until the next day. They weren't. And now $90,000 was all the money in the world, especially if you're not getting paid. You gotta be so zoned in on what those liabilities are and treat them as your own because in many ways they are. And again, Trent has asked a question here. It's a catch 22 at the end of the day. Right. Meaning that, yeah, we have to sign for some of this stuff. We don't really have a way around it. If we want to play, we have to pay. But let's use this as one more chance to reiterate the fact that it's a catch 22 but not a perpetual one. Right? You can start to shed some of those liabilities and you can start to stave them off. Right. You can renegotiate, you can do all those things So, yeah, I think that it's, it's about changing that liability to the extent that we can over time in the beginning, likelihood is 99.9% of it rests on you. If you're diligent and you're having, you know, good fortune and some success, you have the opportunity to shift some of that, but it's not a guarantee.

Wil Schroter: Ok. And that's after getting funded, correct, at the end of the day, once you can pass off the guarantees and the personals and whatnot,

Ryan Rutan: right? Could be funding could just be cash flow. Success could be, could be payment history, right? Like if you've been paying a vendor or a landlord for a period of time and they feel comfortable with you now, they may be willing to renegotiate. So a lot of these things depend on the timing, right? So if it's now you've, you finished your first five year lease with somebody, they want you to resign. You've got a little leverage now too, right? You're like, ok, we'll resign another five year lease, but I'm not putting my name on it this time, right? They may tell you to go pound sand, but you at least you have, you have some leverage the first time you go to sign that they're like big deposit, personal guarantees and no flexibility and you'll smile while signing it. Yep, I agreed. Let's jump over to Angela. Angela. You said my motto after COVID for anything long term is I have to live long enough. No long term agreements. I just love that. What prompted that. Well, I mean, in our, in my industry is cash pay, primarily plastic surgeons and cosmetic surgeons. So everyone thought when COVID happened, including me, you know, I'm always, I think a lot like you guys, I listened to you guys for a long time. I didn't join for years until like just now I just joined. So even though I listen to all the time, we're not mad at you. Hey, I'm just being real. But I will tell you the thing that I always loved is that I think we think a lot of like, I always think the shoe is going to fall off and it's going to drop. And I'm always, I never count the customers as my customers. What I say is there's no such thing as my customer, my husband, my daughter and my son, none of they don't belong to you. So I always feel the same way. So I'm always thinking so anything can happen. So when we thought, oh my gosh, you know, who are we going to sell to? So I thought, hey, I'll of veterinarians. I don't care. It doesn't matter, you know, but it didn't happen. Everything. We actually had a 25% increase in our industry during COVID, which is just amazing. I guess. I don't know if it's a fact that people hadn't. I know. I do know they'd have to spend the money on that extra money couldn't go anywhere and they figured, hey, I'll get my boobs done. What we were all, we were all spending all our day on Zoom. Like I, when I, all my other conversations, I didn't have to see my own face, but now I'm on Zoom all day long. I see my face all day. Like damn. Right. I'm going to go get some plastic surgery. I need some water. He's crazy. We were so busy. So even though my whole company is virtual, I've always had an office because I need to break a space. So the landlord at first because I live in California, I thought, oh, great. I'm not going to have to pay my rent for six months. So I went and said, oh, so what's, what do I get because of COVID? She's like, uh we'll let you out of your lease. I'm like not the answer I wanted. So then she said, well, how about if we give you, you go ahead, you can go ahead and sign for two years. I'm like, nope, I have to live long enough which you, you're getting, what's my minimum. So I signed for one year. Same for Z soho the same for, oh my, I didn't, everything I have, I still do either month to month or their minimum amount. Even though I know in the long run I pay more, but you gotta live long enough. There is no long run. If you don't live long enough, you gotta live long enough. So that's gotta stay around. Love it. I agree. I agree. Thanks, sharing that. And also thanks for listening. You know, I think when we think about long term commitments at a startup, it, it cracks me up the idea of a five or seven year commitment at the early ages of a startup. The only people even ask for those commitments are people that don't normally know what startups are about. Right? They're like, that's like asking a college student to sign a mortgage. Like, you know, I'm only gonna be on campus for like a few years, right? Like this, this has been like a long term commitment and, and there aren't that many that we can get uh looped into, but she mentioned soho she mentioned like, uh contracts and stuff like that. We sign little of if any of those contracts, we will always do like the shorter term, likely more expensive contract every single time because, and we're a pretty good sized company doesn't matter, things change on a dime and we're just used to it. So we try to keep our all of our liabilities as short term as possible. Yeah, just a funny note about things like annual discounts. Everybody who provides a discount for an annual product knows that you are less likely to stay around for a year. You're gonna end up paying more for that. If they, if they're giving you two months off, it means that their current LTV is eight months. So they know they're getting two bonus months out of you. Right. It's never a discount. It's an extension of their LTV. So be wary, be wary. On that note, we're gonna write here guys. We love having you on the show. We love the questions. We can actually, uh, keep this going on the founder group Slack if you guys uh have some more questions. But again, thanks for listening, Ryan. I always appreciate the time. Some of you've been listening for a long time like Angela said, she has after and you said, you know, hey, I've been listening for a long time. I know a lot of you guys have. It's awesome. Again, we appreciate it more than anything and we would love to see you guys on the next show. Sound good. Take care guys, hope we terrified you enough for one day by everybody. So in addition to all the stuff related to founder groups, you've also got full access to everything on startups dot com that includes all of our education tracks, which will be funding customer acquisition, even how to manage your monthly finance. There's so much stuff in there. All of our software including biz plan for putting together detailed business plans and financials, launch rock for attracting early customers and of course fund for attracting investment capital. When you log into the startups dot com site. You'll find all of these resources available.

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