HACKER Q&A
📣 heyflyguy

When a VC-backed company folds, who gets paid back first?


Sad situation but I have recently resigned from a startup I helped turnaround and bring to profitability. Unbeknownst to me, there were payables I was unaware of and it was too much to surmount, even with good cash flow. Aside from being wrecked emotionally (I thought "we did it!"), I am now reckoning what will be the outcome. They currently owe me multiple 6 figures of cash, and I thought I was the only one "accruing", but there are/were plenty of others.

In any case, at the time of a liquidation (due to IP, I think there is a good chance of acquisition) who gets paid back first- Vendors or investors?

Edit to add that I am not an employee but a contractor with invoices for my time.

  👤 davismwfl Accepted Answer ✓
It will all depend on your contract and how they raised money. If they raised using debt instruments the investors will have lots of leverage.

In almost all cases (bankruptcy or acquired) your time will be discounted as "insider" (you were helping the turn around) time and you might get some back but it won't be nearly what you have invoiced, unless the company is acquired for a sum greater than the debts. In that case you will be made whole. There are exceptions to what I just said though, and most of that will depend on your contract and how they raised money.

Been on this train myself, it is an interesting situation. Best thing to do is get an attorney early and make sure the appropriate paperwork is in place to secure your spot at the table.

👤 brudgers
In the US, the company would go through bankruptcy court. It's a court and it might be worth talking to an attorney. But if there's no money, then nobody gets paid and even if there is money, the best likely outcome is some people get a little. Who gets paid first and what is determined by bankruptcy law and there's a priority list that probably starts with the taxman and then secured loans (e.g. the IP pledged as collateral). It's also worth keeping in mind that the people who didn't pay you also had time to engage in other financial engineering...like pledging the IP as collateral for a loan from themselves to the failing company.

Good luck.

👤 icedchai
I've had this happen. You'll get a lot of empty promises. Ultimately, you'll get pennies on the dollar, if anything at all.