In any VC portfolio there are going to be companies that need to restructure or pivot. We just had that situation arise for one of our portfolio companies: after raising $9mm+ and a few years of hard work, the team built an incredible technology but couldn’t build a profitable company around that technology. Below are important take-aways from the restructuring:
Make sure you can get to cash flow positive. Our portfolio company had to do a number of layoffs and is only keeping those employees which are truly critical for maintaining the current revenue and advancing the pivot. Make sure your company can cut its way to profitability if need be. As for non-payroll expenses, only pay for things on which have a clear and defined return. For instance if a marketing channel doesn’t have a quantifiable return, you’ve got to cut it off.
Have a pivot. Once you restructure and make cuts, you need to make sure you’ve got a pivot ready for the product. Clearly the old product or method wasn’t working, so innovate into a new product. This will give you a second life and also convince your board members to give you more time or financing. You’ve learned a lot from your mistakes and are now building a new company around the pivot. Don’t be surprised if some of your board members actually get excited.
Ask for money. You’ve made cuts to the team, you’ve cut your salary, and the business is leaner and on a new trajectory. Now is the time to ask investors for money. Don’t be shy about it — you’re on this journey together and if you’ve got to cut, they should contribute to the pivot as well.
Stay lean personally. Most Series A and B startups have founders making $100k+. As a founder even if you have a comfortable salary, make sure you’re still living lean and stashing as much cash as you can because there may come a time when you have to go with no salary for a while. If you’re making cuts to the team, at a minimum your salary should be cut as well. There is nothing worse than a CEO that does a round of layoffs but doesn’t lead by example with their own pay cut.
Only pay those vendors that are important. Your attorney is critical so make sure to keep him currently paid. The landlord that you’re now paying for office space you don’t need because you just cut a bunch of staff is not. If he/she won’t work with through this tough time and provide rent abatement, stop paying. Same goes for vendors which you don’t absolutely need to keep the business going. As dirty as it may seem, survival is priority number one right now.
Ask for equity at the right time. As of today your equity is probably worth zero, but you and the critical employees that are still at the Company will receive fresh equity in NewCo should things go well. Make it understood that this is your expectation and you will ask for equity if certain milestones are achieved. As the pivot becomes successful, you’ll be in a position to negotiate attractive fresh equity from your investors. If the investors don’t want to play ball, you’ve got bad investors and need to walk away.
Hopefully you never have to pivot your business, but make sure you have a plan in place in case you ever need to.
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