Being an entrepreneur has its ups and downs. One of the most challenging parts is facing failure, but what happens to founders after they fail? What should you do after your company fails?
For many people, there are so many questions that need answers when starting a business. There are always risks involved, but this article will give insight on what to do if things don’t work out in your favor.
Most of the time, founders that fail at their startups become serial entrepreneurs. This is not because they are incapable but because these CEOs understand that every company has an endpoint. Since they have experienced this firsthand, they know better than anyone else how to handle a slowing business.
That’s exactly what any savvy startup CEO should do – keep their eyes peeled for slowdowns or downturns in sales projections to re-evaluate the plan.
When the founder sees things aren’t going as planned, it’s best to pivot quickly before things get too bad. Sometimes this means scaling back on operations by reducing staff or outsourcing certain aspects of production, but it could even mean branching out into new markets altogether.
Ten steps founders take after startup failure:
- Figure out what went wrong and learn from it. No project goes according to plan, so after a startup failure, don’t despair that it’ll happen again – instead ask yourself “what could I have done differently? What might I do differently in the future? What can I learn from this? Was there anything I could have done better?” Be honest with yourself about where you made mistakes, and use those lessons going forward – remember where not to make those mistakes again.
- Think about how to fix it – are the constraints insurmountable? Is there a way that you could constrain your project differently or expand it in another way? Remember that entrepreneurs are problem solvers. People tend to think of them as jack-of-all-trades, masters of none, but often they excel at problem solving so much so that their forte is thinking through what might work business-wise.
- Think about the life of a company as a marathon not a sprint, and take some time to reflect on what happened. Not saying that you need to stay depressed about it forever, but don’t jump into something new right away. You need some time to recharge your batteries and think of all the things you learned from it.
- Set new goals – remember there are no failures, just results of different degrees. Reflect on your old goal and decide whether or not you want to pursue it anymore. Then set a new goal both achievable but also challenging enough to hold your interest for more than 3 months.
- Surround yourself with the right people – It doesn’t take much for a business to fail — it could be as simple as one person. Exercise healthy habits of giving back and staying in contact with like-minded individuals – talk to people who understand what you’ve been through (maybe even some former team members!).
- Renewed Motivation – One of the worst feelings is when your motivation to work carries you through the toughest times. It’s easy for this feeling to lag if it feels like there are no prospects coming soon. The first thing you should do before starting any new project is refuel your ambition by recalling how things were before, and remember all of the reasons that got you into it in the first place.
- Finances – You’ll need money to restart a company, which will either have to come from old funds or new loans. Another way would be by selling something else valuable, but this leaves less flexibility for other purposes later. So make sure financing isn’t an issue beforehand.
- Write out a risk breakdown analysis (RBA) and calculate your expected profit and loss (P&L) statements under varying levels of success; this will help you to see where your financial weaknesses lie.
- Calculate the break-even point for how much money you need to make each year at various levels of expenses to cover salaries, rent/neckspace expenses such as office space or equipment leasing – this will help you manage expectations about needing external funding or not.
- Lastly, don’t be afraid to start over! Learn from past mistakes and do better this time around by starting small and building up gradually with every accomplishment that follows.
Even if you don’t make it big, there is still a lot to celebrate. The founders of failed startups are living proof that the idea behind entrepreneurship never dies. They’ve learned valuable lessons and gained invaluable experience through their ventures, which can be applied in future endeavors or used as inspiration for others who want to pursue an entrepreneurial path.
If you’re a founder and your startup fails, don’t be discouraged. With all of this knowledge under your belt, it’ll make starting up again much more accessible than before!
How Much Do Founders Make On Exit?
Unlike other types of investors, founders invest their time and resources into a company. Founders are often not compensated with salary or equity for this work but rather take it upon themselves to make sacrifices like preceding higher-paying jobs to see their ideas come to fruition.
It’s only fair then that if an entrepreneur’s idea succeeds and is sold for profit by someone else, the founder should be able to reap some rewards as well (unless they don’t want any).
On exit, most founders receive 10-20% equity sold back from the company acquired at a discounted price.
That said, if an entrepreneur has already invested substantial amounts into building a company, then they would be unlikely to want to walk away with 2% at the end. Instead, they would prefer 10-20%.
It is a false idea that founders need to be wealthy for an equity stake to make sense. There’s a misconception that founders must get control of the company and get rich before they start (which is usually true) but then give up their shares and lose out on wealth-building opportunities throughout the rest of their career, which we know doesn’t happen.
When planning how Founders take equity, it’s essential to consider personal goals and objectives, financial realities, and potential exit strategies.
Five steps for founders on exit to receive the most acuity:
- Develop your company plan. You should have one for each conceivable exit scenario.
- If you are the founder, decide to sell or not based on whether you are willing to never return any money back to investors if they want it back in spite of your decision. Your co-founder has the same choice.
- Plan for an early exit ahead of time, the more financially secure you are before starting up your business, the better. This way more money will stay in your company and not go into providing for your personal needs.
- Maintain close relationships with key personnel on both sides of any transaction to ascertain that they are performing in compliance with contractual obligations – this is especially true while exiting a business or negotiating terms of employment or sale during an acquisition process.
- Talk to experts in the field. Figure out what are the best ways to maximize your exit value. Set up an appointment with an investment banker or broker.
If you’re an entrepreneur, then it’s time to get serious about your exit strategy. Start focusing on all of your options for potential buyers, and don’t forget that every investment is a saleable asset. As long as you have a business plan or at least solid ideas in place before starting up, there should be no shortage of interested parties willing to buy-in. The key takeaway here is simple – if anyone wants your company, they’ll need to pay for it.
What Happens To Founders After The Acquisition?
The best part is that the acquisition often comes with an attractive offer. For example, Spotify acquired two cashless startups back in December because it looked for engineering talent and solutions for mobile payment processing.
The other upside is access to resources the acquirer has at its disposal (a full range of HR positions, planners, legal services). The downside? Ownership of your company will no longer be yours.
After the acquisition, founders manage the day-to-day events of the acquired company. Some use it as their retirement plan and stay to see things through for a few years. Others transition out sooner once they observe all is well in their absence or do not sense an opportunity for growth or donation of autonomy within their new company.
It depends on the founder’s situation after acquisition when determining if they should stay longer to move up positions in management, start another company, etc.
As a founder, you have undoubtedly been through the highs and lows of building your company. This roller coaster ride is a great incentive to keep pushing forward in pursuit of what you know has significant potential for the future.
However, when the acquisition arrives, it’s essential to take inventory of yourself, your team/family/founders, and your company before moving in any direction.
Five advantages of being an acquired company that you should be aware of include:
- You have the customers from your new parent company’s portfolio, which is a good way to get a foot in the door as a small business.
- If your parent company sells their products on Amazon, they’ll transfer those sales over to you which will dramatically increase your volume and exposure.
- The larger customer base of your parent company will expand your channels of marketing and lead generation.
- A tight budget coupled with decisions made by upper management can limit how much investment you can make into staff or services that could build up service based revenue over time.
- Better employee retention and recruitment because people feel like they’re starting something rather than working on a project that is already over.
The acquisition of a startup is an exciting milestone for the founders and their company. It can be an excellent opportunity to set themselves up for continued success in the future, but it also requires careful planning and consideration by both parties.
Many stories of entrepreneurs have built their dream business, only for it to eventually get acquired by a giant corporation – often with little warning or preparation.
But there’s also plenty of evidence that shows founders can thrive in these situations and even sometimes do better than they would’ve if they had continued running the original business themselves.
Why Do Founders Leave After Acquisition?
Startups are a risky business, and when you buy into that risk, it can be challenging to decide to leave after the company has been acquired.
Founders are the ones who started the company and brought their passion to everything they do. They have a deep understanding of what makes this company tick.
With so much on their plate, founders often leave after the acquisition because it becomes too challenging to balance all these responsibilities while also dealing with new challenges with scaling up.
It’s essential for leaders at both companies to work together to prevent founder turnover following an acquisition.
Three reasons Why Founders Leave After Acquisition:
- They may desire the freedom that comes with being an entirely independent business operation again. The grass is always greener, and new opportunities excite them more than the project they did start with.
- They may find there’s nothing they can do at the new company. When an entrepreneur starts a company, 100% of the growth and success might depend on him/her, but after selling out it becomes clear that perhaps only 30% as much as before as now pressure falls onto others in management positions.
- Founders may not want to spend a lot of time recruiting and motivating a new company, leading to a significant downtime in the coming months before anything really happens under integration.
- Founders often felt that their vision wasn’t fully realized during startup but could be seen through once they recruited more capable employees from other companies. When this doesn’t happen, founders will feel disappointed by the dilution of their vision for the company.
- They come from an entrepreneurial culture where it’s common to start 3-4 ventures throughout one person’s lifetime and if they feel like this idea didn’t work out as well as planned – there are still other options to work on down the line.
Although there are many reasons founders leave after the acquisition, they all stem from different personal convictions and perspectives about growing their company.
Owning your own company may be the dream of many, but it is often better spent working with a larger organization for those who want to grow their business exponentially.
It’s not always easy to leave behind all that you’ve built up over years or even decades, but if you’re looking for growth and opportunity, then selling out might be just what you need.
How Much Do Founders Make In An Acquisition?
It all depends on the size of the acquisition, what they negotiated for their stake in the company beforehand, and it may vary depending on whether or not they are an early or late founder.
Setting aside all the other factors in an acquisition, on average, founders will make between 1% and 2% of the total transaction. Many variables come into play when valuing a company which can affect the percentage owned by founders depending on how they structured equity compensation over time while fundraising at various stages of growth.
Three ways to increase how much Founders Make In An Acquisition?
- Position as a strategic founder and “self-made” CEO. The more founders build themselves up as the visionary behind the growth and success of their business, higher valuation they will likely receive because proven leadership is highly sought after by potential acquirers.
- Establish a benchmark buyout price and negotiate for what you want. If founders come to an acquisition negotiation prepared with a number in mind, this could ensure that they get at least some of what they hoped for. Preparing for negotiations also gives them the opportunity to ask questions about things like board seats or post-acquisition employment guarantee so not all important topics are missed in bargaining.
- Treat other founders fairly during acquisitions by granting them increased compensation to reward them for all their hard work put into the business they began together with you.
A successful business can be sold for a profit. It’s essential to know how much money you are worth as an entrepreneur, and even more importantly, what your company is worth. You should always make sure you have the best exit strategy possible in place before taking on investors or pursuing other opportunities.
How Do Founders Get Paid After Acquisition?
Founders can get paid in lots of different ways. For example, they might get a cash payout at the close of any acquisition or strategic investment, they may be granted stock in the company or gain rights over things like patent royalties.
One of the most successful models for founders to be paid as employees are as follows:
- Founders target a number of years post-acquisition that ensures they’re generating more than their baseline salary.
- At the end of those targeted years, there’s a discussion with management to determine what an appropriate amount would be for them to vest into equity or cash and it all lines up so they walk away and go on and pursue the next adventure happily.
- It’s important to note, however, if equity is paying out over time – say every two years – you also need some sort of multiple or dividend worth x% on top of your “salary” each year.
The importance of founders cashing out on their equity allows them to realize the success they have helped create and move onto new projects. If you’re a founder, we recommend setting up an exit plan before your company starts getting acquired so that when the right offer comes in, you can cash out and focus on what’s next.
Conclusion
It can be challenging to watch a startup fail, but founders often find success in other ways. As we’ve seen from the examples above, it isn’t uncommon for entrepreneurs who have been involved with failed startups to go on and find new successful companies or take senior positions at well-established firms.
Founders may leave after acquisition if they don’t see a future there, feel their role has changed too much, or want to pursue other interests. But you shouldn’t worry about that because even if your company fails as long as you’re persistent enough – entrepreneurship is always worth it! You never know when one of those failures will turn into something big.
Quick Answers To Frequently Asked Questions
What happens to a silicon valley failed startup founder?
If they persevere, most Silicon Valley startup founders end up raising several more rounds of funding. If dealing with the many failures makes them hard-wired for success, then it’s worth it in the end.
Does the angel investor provide seed funding depending on the startup failure rate?
Angel investors provide seed funding because there are many early-stage companies that, despite their potential, may not be suitable investments for traditional venture capitalists. Angel investors are often made up of individuals who have had experience starting a business or have connections to companies in similar industries. They can offer entrepreneurial expertise and knowledge that venture capitalists traditionally lack.
Difference between a fintech startup and a tech startup?
A fintech startup typically focuses on developing new digital products or processes specifically designed to provide financial services. On the other hand, a tech startup is a company that creates an effect for external use in an industry different from the one it operates in.
Does an aspiring entrepreneur make a good business partner?
Yes! A start-up company needs an enthusiastic, knowledgeable business partner to weave them into the fabric of the community. Do you have particular niche expertise in that industry? Are you adept at convincing others to buy into your vision, or are you able to see future trends before they happen? If you’re comfortable with taking risks and are willing to eat noodles when it all goes south, then an aspiring entrepreneur can make a great partner in crime in running your own business.
What is premature scaling on the target audience?
If you’re an entrepreneur looking for feedback on your idea and what products you should offer, starting with small groups of people rather than large polling bodies is the best way to scale up. From there, collect feedback from this initial batch of participants to tailor your questions for the second round.
Is it best to follow a successful startup business model?
It depends. To follow a successful startup business model, one would need to identify how they want to execute their company’s business model and, most importantly, make sure they plan on running the strategies that will contribute directly to the long-term success of their venture.
Does the venture capitalist create funded startup success?
No, the venture capitalist is an investor who provides money to a business in exchange for ownership equity. They also oversee more long-term planning and operation of a startup company.
Is business failure higher with Indian startups?
The number of new business failures in India each year is not that lower than their counterparts in the United States or any other country. The main reason for this (and for poorer economic conditions) is because many Indians are driven to start small entrepreneurial ventures by necessity. There are few jobs, and getting work outside of one’s hometown could be very hard. Those whose livelihood depends on how well they do at their enterprise may go all out to make it succeed, but if it fails (at least initially), they may find themselves worse off than before.
Do startups fail due to Y combinator and early adopters?
Yes, startups and entrepreneurship indeed come with many risks, but there is also opportunity in the places others do not see. Y combinator or not, startup culture still provides an environment where entrepreneurs can constructively work through their ideas and test business theories by re-making them in reality. And while failure is part of the process for any company (large or small), failure does not have to be bad either. It’s a learning experience – one that could prove worthwhile in the long run if utilized well.
What can a failed entrepreneur learn from a successful entrepreneur?
A successful entrepreneur knows their every move. They are like chess players, anticipating problems and making moves to avoid them entirely. They know how to deal with setbacks because they know what will happen if they don’t work through the issue today. A failed entrepreneur is still thinking of solutions tomorrow or next month, or next year instead of dealing with it right now. Successful entrepreneurs also analyze themselves constantly and take responsibility for everything that has happened. Failed entrepreneurs blame everyone but themselves when things go wrong, which will leave you in a loop of negativity that can lead to failure after failure even though you’ve learned your lesson over and over again!
Can an early employee become a team member of a venture capital firm?
It is possible to go from being an early employee to being a team member of a venture capital firm.
Should a failed founder shutdown their mobile app Twitter account?
If they want to contact their followers, it is probably a good idea, but I would recommend that they only post occasional updates on the startup’s progress.
Is it a mistake for a startup leader to request capital without reason?
No, it’s not a mistake to request capital without reason. At an earlier time, entrepreneurs needed large amounts of money for equipment or supplies. But those days are long past and out of date for this age, for which operational expenses can be a one-time payment on a card. So ask for as much funding as you need now and use that until you find additional investors or other sources of capital. The only question is whether your company needs enough money to last through its next phase – do you have any thoughts about what will happen after, say, 12 months? Ask yourself these questions freely, so your story is prepared before the inevitable constant requests from investors who want more information from potential investment opportunities.
