How to Shut Down Your Startup Gracefully to Get Funding Next Time

Startup failure is common (one in five startups fail in the first year).

This guide will walk you through how to shut down your startup to get funding the next time around:

1. Sharing bad news with investors
2. Legally dissolving your startup
3. Moving forward

How to share the shutdown with investors 

Telling investors is hard for first-time founders. Many first-time founders believe that they’ll never get funded again if they choose to fold.

Startup failure is part of the business model. VCs and angels are holding out for that unicorn that pays back all the other investments that went upside down.

So, reframe your failure as an expensive lesson. You've gone to grad school. Now you know the basics that will help you move faster and spot common pitfalls next time.
When breaking the news, don’t beat around the bush.

In your shutdown email, lead with the bad news. This shouldn’t be surprising if you’ve been sending investor updates.

Then, concisely answer these three questions

1. Why did you fail?
2. How much funding will be returned?
3. What's next?

Why did you fail?

Investors gauge whether or not to fund your next startup not based on the fact that you quit but on how you quit.

If you gave it everything you had, then investigated and analyzed why you failed, you’re more likely to be given another shot.

If you point fingers at others, blame the market, or complain that you didn’t have enough cash to get the job done, you probably won’t.

Pull out your original thesis - the one your investor took a shot on - and walk through what you got wrong:

• Did you misjudge the total addressable market (TAM)?
• Did you fail to catch an important threat in your competitor analysis?
• Was the idea too early for the market?
• Did you launch the product too early or too late?
• Was your G2M strategy off (like getting your positioning and messaging wrong)?

Walk through the reason behind your failure (there may be more than one), including:

• What you learned
• How you’ll take those lessons forward
• How you would have done it differently if you had a second shot
• How these learnings might apply to your VC’s future investments 

How much funding will be returned?

The answer to this question depends on the kind of funding you raised.

If you raised an equity round, you’ll need to consult with your legal team on liquidation preferences. Some investors may have the first right to cash. 

Outline your plan for this in the email to your investor.

If you raised cash on SAFEs instead, pro-rate the return using this formula:

$ remaining / $ raised = % to return. Multiply % by investment.

Share the calculations and final amounts to be returned in your email.

What's next?

Prioritize landing your team into new opportunities.

Ask for your investor's help to connect great people with new companies who are hiring. This is a win-win situation and shows that you’re not a burn, cut, and run style entrepreneur.

Legally dissolving your startup 

The steps covered below are an example of the logistics of shutting down an early-stage C Corp entity based in Delaware.

Step 1: Delaware Franchise Taxes

Contact the Delaware Division of Corporations to find out how much your company owes in franchise taxes.

If the amount owed is less than $400, follow the instructions provided. If it's more, ask for the other method of calculating what you owe (the one for early-stage startups). Here is a guide on Delaware Franchise Taxes for startups to lower your bill. 

Step 2: Sign consent forms for dissolution

Ask your lawyer for these two templates:

1. Board consent authorizing the dissolution
2. Stockholder consent authorizing the dissolution

Fill them in and get them signed by the relevant parties. If you raised on SAFEs, then only you and any cofounders need to sign them.

Step 3: File Certificate of Dissolution

File your dissolution docs with Delaware’s Ecorp online filing system.  

You’ll receive a date-stamped Certificate of Dissolution. Send this on to your investors, and keep a copy for your own records.

Step 4: Liquidate Distributions

Sell off any non-cash assets your company has, such as:

• Office equipment 
• Physical tech, such as laptops and phones
• Brandable domain names

After paying down your liabilities, take your remaining cash and wire funds to your investors as outlined in your initial shutdown email.

Step 5: Taxes

Most companies have two tax forms to file at this point:

1. IRS Form 966 (to be filed within 30 days of dissolution).
2. Form 1120 (U.S. Corporation Income Tax Return). File this by the 15th day of the third month after dissolution, and check the "final return" box.

The usual disclaimers apply: 

• This is not legal or financial advice
• Your mileage may vary depending on your company stage, corporation type, and state of incorporation (for example, California-registered entities need to file with the state.)
• We recommend contacting local experts to help guide you through the process, especially if your company structure is complex.

Consult your lawyer and CPA on the details here.

Preparing mentally and moving forward 

This is the hardest part. 

Once you’re through all of the technical aspects of shutting down your startup comes the grief. Everyone processes this differently.

Some will jump straight into a role at another company. Others will travel and take some time to reflect. 

Have a plan for moving forward, and know that you don’t need to jump straight into the first opportunity that comes along. 

The stubborn start thinking of their next idea right away. 

While there’s nothing wrong with wanting to try again, you should allow yourself space to learn from your failure first (and maybe read Malcolm Gladwell’s Outliers to deepen your understanding of the role luck has to play in success).

Conclusion 

Shutting down your startup might feel daunting, but you’re far from the first to do it.

VCs and angels invest in multiple opportunities knowing that less than 10% of them will succeed.

Take comfort in the fact that you followed through on an idea—most don’t. Remember, while this one wasn’t the success you’d hoped for, you still come away with a tonne of first-hand experience.

Good investors also know that repeat founders are more likely to succeed and even that older founders (age being a reasonable proxy for experience) have a better chance of making a win happen. As a 3x founder, I’ve learned this truth first-hand.