
Ask HN: Startup shutting down; how should investors be treated? - simonebrunozzi
A startup I advise is going to shut down soon. Their first investor, a friend of mine, is asking me a very good question. Call him Mr.X.<p>Mr.X was the first investor, and his convertible note is due in a couple of months. The startup raised about 1M in a first seed (of which he was first investor), and another 1M in another seed, at a higher valuation.
The startup has approx. 0.5M left.<p>How should the startup treat him?<p>1) They should give each investor approx. 1&#x2F;4 of the money they invested (2M invested, 0.5M left = 1&#x2F;4).<p>2) They should consider the different valuations of the two seeds, and therefore give the investors in the first seed more than what they give to investors in the second seed.<p>3) They should consider how old the convertibles are, and do a weighted average.<p>4) None of the above: they should instead...<p>Any help (from past experiences, or just opinion), is much appreciated.
I don&#x27;t want to reveal what my inclination is to avoid adding bias to your comments.<p>I think this is a very interesting discussion that is not often covered on HN, and therefore useful even besides the specific advice for these guys.
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jeffmould
I am not a lawyer and I am not an accountant. But really the answer is more
difficult than a multiple choice question. The real answer comes down to the
terms of each investment and how that specific investment is laid out. It all
comes down to how liquidation is spelled out in the terms of each specific
investment and the investments as a cumulative.

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simonebrunozzi
Besides the strictly legal aspect, what do you feel would be fair?

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jeffmould
I can't answer that. There are too many variables involved and like I said it
is not as simple as a multiple choice question. You have to consider the
percentage of the company they own for their investment. If Mr. X owns 5% and
Mr. Y owns 25% well Mr. Y is entitled to more money. However, if Mr. X has a
liquidation preference in his investment he may end up getting more than Mr.
Y.

The question has way too many variables and even more unknowns to give a
simple answer to. It is strictly a legal question that should be handled
between attorneys, investors, and the company.

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armandobiondi
I don't think they would be any more happy getting back any less of what they
invested. The average (good) investor cares about getting his money back or
more. Anything else is a sub-optimal result. $500k is plenty of money to give
a core team 1 year of runway to pivot and find something else interesting
enough to purse (or to get at least to revenue and profitability). My $.2

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simonebrunozzi
True, but in this specific case the CEO has decided it is not worth it.

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rajacombinator
With nontrivial amounts invested and remaining, this seems like a good time to
consult an experienced lawyer, rather than asking some dudes on the internet.

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alezante
I would use a fully diluted approach giving back the $ each one had "as
converted" with conversion price being the avg of the caps.

