Shutting down a startup can be one of the most difficult decisions an entrepreneur has to make. After pouring your heart, soul, time, and money into building something from the ground up, calling it quits can feel like a personal failure. However, knowing when to walk away and how to do it responsibly can save founders from further losses and pave the way for future success.
The Decision to Shut Down
There are many reasons a founder may choose to shut down their business – lack of product-market fit, running out of funding, personal burnout, or realizing the idea is flawed, to name a few. As hard as it is, recognizing when one or more of these factors applies to your company is the first step. Continuing to operate a non-viable business will only dig the hole deeper.
Next, you need to analyze if there are any options to pivot – modifying the product, finding a new target audience, bringing on a new co-founder with fresh ideas, etc. If all reasonable options have been exhausted, however, shutting down may be the best path forward. The decision to close up shop is not one to take lightly, so be sure to consult with mentors, investors, and co-founders before making the final call.
Let Employees and Investors Know
Once the decision is made, you need to break the news to your employees and investors. They deserve to be informed before the general public. Gather the team in person if possible and clearly explain the reasons behind the shutdown. Be transparent about the timeline, next steps, and any severance packages. Listen to their concerns and offer to provide references. Your investors should be notified next.
In both conversations, convey that this was an extremely difficult decision rather than a failure. Frame it as a learning experience that can lead to better things in the future. Share any lessons learned that may be helpful to others in the startup community.
Terminate Contracts and Services
There are many business services and software subscriptions that will need to be canceled. Compile a list of all recurring expenses and terminate them according to their respective policies. Services may include:
- Office or co-working space lease
- Email/communications platforms
- Cloud storage/servers
- Product development tools
- Payroll/HR software
- Benefits packages
- Website Hosting
- Marketing/CRM platforms
Review all contracts thoroughly and determine any early termination fees you may incur. Do not forget about physical assets – call providers to cancel phone, internet, electricity, and other utility services.
Deal with Assets and Inventory
Take stock of any physical assets or inventory your company holds and develop a plan to sell or donate. Assets may include office furniture and supplies, electronics, production equipment, and more. Inventory encompasses any unfinished or unsold products, merch, or materials.
Ideally you want to recoup costs by selling these items if feasible. Products can be liquidated through online marketplaces, auction sites, or wholesalers. For any remaining inventory, consider donating to schools, nonprofits, or charities and getting a tax write-off. The same goes for fixed assets – sell them or donate if possible.
Close Down Accounts and Legal Entities
Several accounts and legal processes need to be shut down or settled. Submit your final tax paperwork to dissolve company accounts with federal and state entities. If you are structured as an LLC, C-Corp, S-Corp or other incorporated entity, begin the dissolution process with your state.
Close company bank accounts and distribute any remaining funds to investors and shareholders according to agreements. Finally, cancel credit cards and pay off any debts through a liquidation process. Keep detailed records of these proceedings.
Preserve and Protect Data
All company data, records, documents and files need to be properly handled. Consult with legal counsel about retention policies and what records must be stored for a certain period of time. For any data that can be destroyed, make sure you have backup copies saved.
If keeping databases or servers running, migrate them to a cloud platform and set a reminder to deactivate after a set period of time. Ensure access controls are updated so former employees no longer have access. Take cybersecurity precautions and encrypt sensitive data. Deleting files permanently should be a last resort done carefully.
Tie Up Loose Ends
Spend time reflecting on your experience and tying up any loose ends:
- Provide references for employees and write recommendations
- Organize and file away any important documents that were saved
- Collect user data, analytics and insights that may offer learnings
- Reflect on challenges, successes, and key takeaways
- Show gratitude and recap the experience in a newsletter or blog post
- Consider writing a “post mortem” report detailing what happened
Closing a startup you poured endless energy into is difficult, to say the least. But approaching the process strategically and compassionately allows you to wrap things up responsibly. This frees you up to take lessons learned into the next venture or career move.
