Startups are risky ventures. There is no guarantee of success. It is possible that an OCV company is unable to raise a successful Seed round and therefore needs to wind down (or otherwise needs to wind down the business).
In planning a company wind down, keep in mind that corporate officers have a fiduciary duty to the business and investors.
A company wind down refers to the process of closing down a business entity. This process typically involves the selling off of assets and the distribution of proceeds to creditors and shareholders. The reasons for a company wind down can vary and may include bankruptcy, insolvency, or simply a strategic decision to exit a market or industry. In the case of an early stage startup, the inability to demonstrate product-market-fit is likely the primary reason.
The process of winding down a company can be complex, involving legal and financial considerations. It is important to follow the proper procedures to avoid legal issues and ensure that all parties are treated fairly.
One of the first steps in the wind down process is to notify employees of the company's closure. This should be done as soon as practical to allow employees time to find new employment opportunities. Termination agreements and payments may be offered to employees as part of the wind down process (also see below).
It is important for companies to communicate openly and honestly with their customers during a wind down process. Customers should be notified as soon as possible and provided with information on how their existing contracts or agreements will be impacted. It is advisable to work with customers to find alternative solutions or providers if possible. If refunds are owed to customers, they should be processed promptly and fairly. Open communication and transparency can help to minimize any negative impact on customers and maintain positive relationships for the future.
In general, it is advised to follow the termination notice provision of any contracts and, if possible, get confirmation from the counterparty of any amounts owed. If any amount involved were large, consider getting a release signed.
Creditors must also be notified of the company's closure and given the opportunity to file claims for any outstanding debts. The company's assets will be sold off in order to pay off these debts.
In a company wind down, holders of Simple Agreement for Future Equity (Safe) notes are typically treated as creditors. This means that they are entitled to receive any proceeds from the sale of the company's assets after all outstanding debts have been paid. However, because safes are not equity, they do not confer ownership in the company and do not entitle holders to any control or decision-making power. As such, being a holder of a safe alone may not alone confer a say in the decision to wind down the company or the terms of the wind down process. The company’s board which will have a direct input into decision making.
If the company has preferred shares, liquidation preferences for preferred shareholders are also treated as debt. Depending on the specific rights and preferences of the preferred shares, preferred shareholders may be entitled to a pro-rata of the residual proceeds in addition to their liquidation preference.
Once all debts have been paid, any remaining funds will be distributed to shareholders. If there are no remaining funds, the company will be officially dissolved and removed from any relevant registries.
In the context of an OCV startup wind down prior to Seed round, the likelihood of any residual available for common shareholder distribution is low.