Looking at the end: Exploring the Assignment for Benefit of Creditors (ABC)

There’s a ton content out there about startup culture, the hustle, fundraising, and dreams of being the next Google. We all want a successful endgame, but the reality is 9 out of 10 startups won’t make it. So, what happens to those 9? How do they wind down the business? Having the end in mind at the start may feel uncomfortable at first, but in the future, you will appreciate it should something unexpected pop up. For today let us chat about an “ABC”: an Assignment for Benefit of Creditors and compare it to other options like dissolution and bankruptcy.

Planning for Closure

Founders tend to view their startups as their babies – nurtured, protected, and constantly evolving. However, responsible founders also acknowledge unforeseen circumstances, often out of the founder’s control: venture capital is not available, laws & regulations change, loss of a founder or key person on the team, an acquisition falls through, or you know – a freaking pandemic. Now faced with winding down, you are scrambling to understand legalities, creditor obligations, and financial implications. This is where a pre-established “shutdown plan” becomes invaluable.

Think of it as a safety net. By familiarizing yourself with options like the ABC beforehand, you can navigate a challenging situation with more clarity and control. Shutting down a business involves financial aspects – legal fees, potential severance packages, and asset liquidation. Having a plan ensures you are not caught entirely off guard by the unexpected.

The ABC: A Controlled Approach to Closure

An ABC is a structured and legal alternative to bankruptcy for winding down businesses. There are some key steps:

• Transfer of Assets: You, the business owner, voluntarily transfer most or all your company’s assets to a neutral third party called an assignee. This assignee is typically an experienced insolvency or turnaround professional. There are legal groups that specialize in this & startups now that simplify this process.
• Liquidation: The assignee takes control and oversees the liquidation of assets. This might involve selling the entire business, selling off assets individually through auctions, or other methods to generate as much cash as possible. Assets include equipment, intellectual property, developed software, real estate, and inventory.
• Distribution to Creditors: Proceeds from the asset sale are then used to pay off creditors in a predetermined order. Secured creditors with collateral (like a loan on equipment) plus investors (preferred shares) get paid first, followed by unsecured creditors (like suppliers) and employees (common shares).

When Does an ABC Make Sense?

• Avoiding Bankruptcy: Bankruptcy is complex, lengthy, and carries a negative stigma. An ABC offers a more streamlined and private alternative.
• Valuable Assets: If your startup has valuable intellectual property, customer lists, or equipment, an ABC allows the assignee to potentially maximize returns for creditors through a controlled liquidation process.
• More Control: Compared to bankruptcy, an ABC offers more control over the liquidation process. You get to choose the assignee and have some input on asset sales.

– M

Helpful Resources

• SVB – Shutting down a startup: How to protect yourself and your investors from liability
• Crunchbase – How to Unwind an Unsuccessful Startup
• American Bar Association – What is an ABC?
• Saylor Academy – Alternatives to Bankruptcy

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