Planning for

FailureStu Garrow

The R

ealit

y 85% of startups will

fail within the first 2 years

Pla

nnin

g f

or

Failu

re You are 6 times more

likely to need a plan

for failure than a plan

for success Most startups plan for

success

Havi

ng a

Pla

n

Having a plan for failure, does not mean

you are planning to fail

Having an fire evacuation plan does

not mean your building is going to burn down It does mean you’ll

know what to do if it

does happen

Eva

cuati

on P

lan

If there was an 85% chance of your building catching on

fire in the next 2 years, how much attention would you pay to the evacuation

plan?

Inve

stors

&

Share

Hold

ers

Want to see you are fully committed to the

busines Will respect smart decisions about how

you plan for your own

future Need to see that if you

personally implode, that the business will

also

Who C

an H

elp

Yo

u Board of directors Independent directors

or advisors Your accountant A business mentor

What

Make

s it

W

ors

e

Most people get way

over their head because they take too

long to react when things start to go wrong They aren’t testing

their position constantly They don’t take action

What

the L

td

means

Ltd means limited liability The creditors of the company can only go after

the assets of the company

and not the directors or

shareholders personal

assets Unless the directors break

the law or their fiduciary

duties

Board

of

Dir

ect

ors

Recruit the best board

you can get with different experience

Understand all your responsibilities as director Take your board

meetings seriously

Board

Meeti

ng

Tim

ing Full board meeting

every month Board call for 30 minutes every week

Board pack published

5 days before each board meeting

Board

Pack

Solvency evaluation Financial report Business KPI’s CEO report & outlook

Future investors will love the investment

Solv

ency Does the business

have more assets than

liabilities Can the business meet

its liabilities as and when they fall due

If Inso

lvency

=

Yes

Immediately call a board meeting (if you

aren’t in one already)

Document every decision made by the

board Assemble a list of all

of your creditors and

what you owe them

Inso

lvency Do not pay creditors

that are chasing you.

All creditors must be

treated equally, or the

funds will have to be

returned

Ord

er

of

paym

ents

Secured creditors Employees Other creditors

Directors and management Shareholders

Cre

dit

ors

Keep them informed

constantly Try to get a creditors

arrangement Payment over time Reduced amount Debt for equity swap

Wit

hout

Preju

dic

e

Placing “without prejudice” on any letter, email or communication means

it cannot be produced

in court Allows you to make an

offer to creditors without admitting anything or having it

used against you

Fiduci

ary

Duty

As a board of directors,

you can justify operating

the business for a few

days whist insolvent if

you can reasonably argue

that it is in the best interest of the shareholders and creditors You cannot incur any new

liabilities whilst insolvent

Poss

ible

Exi

ts

from

Inso

lvency

Sale of business or assets Capital injection

Creditors arrangement

New funding source Voluntary Administration Court appointed administrator

Adm

inis

trato

rs

Administrator fees get

paid first Are paid to recover funds to pay creditors

Will return the business to the Directors when all creditors paid in full

Rece

ivers

hip Liquidation of all

assets immediately No trading out of debt

Company is terminated and wound

up

Dir

ect

ors

Act

ions

Failure to strictly adhere to fiduciary duty to protect shareholders Ends in court and jail

Creditors can sue directors personally for

all personal assets Ban on holding

directorships in the future

People

Change

When the pressure hits, people change

Over communicate Life long friendships

will vaporize Agreeing actions up front help

Cre

dit

or

Change

Eve

n F

ast

er Before you borrow

money or seek investment, consider

the likely outcome that the person will lose their investment

Thin

gs

to A

void Any form of personal

guarantee Fixed and floating charge over the business Secured creditors

Clo

sing D

ow

n

Cost

s M

oney Understand your cost

of closing the business

down Salaries, unpaid leave,

exiting contracts, Company secretary cost

of closure

D&

O Insu

rance

Directors and Officers

insurance Expensive Covers personal claims

on directors and officers, provided they

acted within the law May need to be paid for

5 years or more

Use

Failu

re

Posi

tive

ly Demonstrate that you

took decisive action when it was needed

Experience of going through a failed venture is invaluable

Get

a P

lan

Determine the cost of

shutting down and agree the exit plan with all stakeholders

up front Protect yourself personally Get the best advice

you can

Questions?