Startup Boards, 2nd Edition

Chapter 28Going Out of Business

Unfortunately, many companies aren't successful, entering bankruptcy or a wind-down process. This situation is one of the most difficult ones for a board to navigate. While cash is certainly tight at this point, investing some of the remaining cash in strong outside counsel and following their guidance is a wise long-term move. If you don't, in addition to the company generating additional liabilities, directors may end up being personally liable for mistakes you and the board make.

Earlier in this book, we discussed the fiduciary duties a board and the board members have to the company and the shareholders. We've also discussed how some board members will have additional duties to others, such as a VC having duties to the limited partners of their fund. When a company begins to fail, the board's fiduciary duties can change. State law defines these duties and differs from state to state. We'll try to give you a general idea of how this works. But, as with everything else in this section, please don't rely on this book for legal advice. Make sure you have a great lawyer.

The Zone of Insolvency

A solvent company has the cash to pay its liabilities and financial obligations. If you got your MBA from an esteemed university or were a finance major, you'll start thinking about cash flow versus balance sheet solvency, but for this book, let's keep it simple and say, “If you can pay all your bills, you are solvent.”

When a company begins running low ...