This document discusses various options for companies facing financial difficulties, including asset sales, wind downs, recapitalizations, and dissolution. It notes the pros and cons of asset sales versus multiple asset deals. For recapitalizations, it outlines the mechanics and key considerations around fairness issues. Wind downs require preparing financial projections both with and without going concern assumptions. Directors and officers could face personal liability for unpaid wages, taxes, and other obligations. The document provides a sample checklist for winding down a company and emphasizes the importance of clear communication with all stakeholders throughout the process.

1. Light at the end of tunnel . . .

3. Series A Crunch??

4. The Result??

5. So What Are We Talking About?
• Asset Sales
• Wind Downs (Shut downs)
• Recaps
• Dissolving

6. Asset Deals
• Could be multiple asset sales – Patent Portfolio, platform,
acqui-hires and more
• Pros
– Purchaser only assumes specified liabilities
– No Purchaser shareholder vote required
• Cons
– Liabilities not specifically assumed by Purchaser remain with
Seller
• There are exceptions to even an asset purchaser’s ability to exclude
certain types of liabilities, including certain taxes, product liabilities,
environmental liabilities, ERISA liabilities and Cobra liabilities
– Third party consents will likely be required (“assignment of
contracts”)
– Very difficult to meet tax-free requirements – but tax
considerations likely not important
– Post closing distributions and wind down matters

7. Multiple Asset Deals
• Difficulty separating IP assets
• May need to negotiate license back for
sale of remaining assets
–Can be complicated with sale of
patent portfolio

8. Recaps

9. Recaps Mechanics
• Conversion – Convert existing preferred stock to
common stock – may need some syndicate of non
investing preferred investors to approve
• Reduce preference overhang – investors will need to
consider target preference post closing
• Preserve (or restore) value of prior preference based
upon participation – this is the exchange or “pull
through”
– Common Stock (from old preferred stock) exchanged
for new preferred stock at exchange ratio tied to
preference pull through
• Effect reverse stock split of common stock –
reduces old common and old preferred ownership

10. Recaps Mechanics
• Consult with company and investor counsel on
fiduciary obligations (if board member) and ways to
mitigate litigation exposure
• Some key considerations:
– Disinterested lead investor in new financing (if possible)
– Clear record of thorough search for disinterested lead
investor
– Rights offering to all affected stockholders
– Disinterested approval of special committee of board of
directors
– Disinterested stockholder approval
– Price-based antidilution likely triggered – don’t forget to
consider impact
– Process and paperwork pricey

11. Alternatives to Recaps
Convertible Notes with Multiple on Sale
• Simpler and cheaper paperwork
• Still must consider “fairness” issues
• Does not address preference overhang
– Consider success bonus or carveout plans to
address overhang – set aside portion of exit
proceeds for employees who stick around
• May be able to secure debt with Company
assets
– Consider existing lender rights

12. Wind Downs
• PREPARE PREPARE PREPARE
• GET YOUR NUMBERS DOWN
• And then do the numbers over
again
• And remember to run them
without a “going concern”
assumption

13. Personal Liability

14. Risks
• YEP, IF YOU’RE ON THE BOARD OR AN OFFICER,
YOUR PERSONAL ASSETS CAN BE AT RISK
• Some key areas to ensure company counsel (or your
counsel) locks down:
– Unpaid wages (including vacation, benefits and other
compensation)
– Continued employment when the company doesn’t have the
cash to pay
– Use of taxes withheld from employees’ pay for other
purposes
– Nonpayment of unemployment, workers’ compensation,
disability and other payroll-related taxes
– Nonpayment of municipal, state sales and use taxes
– WARN act issues

15. Wind Downs
How to manage:
–Self-managed?
–Assignment for benefit of
creditors?
–Bankruptcy filing?
–Friendly foreclosure?

16. Sample Checklist
• Identify all bank accounts and money market accounts. Revisit
signature authority
• Identify all lease agreements. Identify associated security
deposits, and consider negotiating to apply deposits to rent as
it comes due. In hot market, consider terminating early
• Identify and review material contracts, particularly contracts
critical to the company’s continued operations. Identify
contracts where the company is in default and evaluate
penalties
• Identify and review all secured loans
• Identify continuing obligations (those that may survive sales,
mergers or shutdowns)
• Identify all prepaid expenses and try to recoup them
• Collect and cancel all corporate credit cards

17. Recap on the Wind Down
• Communicate Communicate
Communicate
• I typically refer to interested parties as
“Stakeholders”
– Employees
– Stockholders
– Creditors
– Bridge Note holders
– Secured Creditors

18. Recap on Wind Downs
• Four Star Word Time – “Fiduciary obligations”
– I’m an investor, so who do I look out for? Yourself
– I’m also a board member, so what now? Oh yeah.
Obligations owed to Company and stockholders
– And creditors?
Lawyers often advise D&Os on shifting obligations to
creditors in “zone of insolvency”
• BUT Delaware cases over the last few years have reduced (or
eliminated) director duties to creditors
• Nuanced advice: Maximize enterprise value without considering the
effect on creditors
• Not so nuanced advice: Be sure to understand stakeholders’
contractual rights
• When can secured creditor trigger repayment?
• When about remaining severance obligations?

19. Who Should Lead the Charge on the
Process?
• Short Answer: Company management should
manage process with guidance from Board
• Longer harder answer: Oftentimes, management has
no incentive to stick around. Conflicting stakeholder
interests may make “by the book” process difficult
• IMPORTANT TIP: VCs should not usurp functions of
the Company board. But there’s nothing wrong with
creditors negotiating
• SUPER IMPORTANT REMINDER: COMMUNICATE
COMMUNICATE COMMUNICATE

20. A Note on “Dissolution”
• Filing a “Certificate of Dissolution” only
BEGINS the wind down process
• Company continues to survive with limited
authority to process wind down activities
• Not unusual to forego filing Certificate of
Dissolution – DE generally doesn’t pursue
for franchise taxes
• BUT be sure to withdraw registration in other
states. CA will come looking for $$

21. Contact
Josh Cook, Gunderson Dettmer
650-463-5267
jcook@gunder.com
@joshcook
Gunderson Dettmer
140 Second Street, Second Floor
San Francisco CA
p: 650-321-2400
Twitter: @gundersonlaw
www.gunder.com

22. Gunderson Dettmer Stats
• More than 2,000 company
clients
• More than 950 venture
financings each year
• More than 60 venture fund
formations annually

23. 500 Startups
And, of course,
>500 deals
for