How do angel investors/VCs deal with “zombie companies”?

Question

If it's clear that a portfolio company won't be able to reach venture scale, but founders refuse to sell/shutdown the company (maybe because it has already become a lifestyle/cashflow business), how do angel/VCs deal with this situation?From the Internet, I've found a few data points:1) "I don't care. No need to return money to me/us. Keep the money. Do whatever you want. Good luck."- Seems Y Combinator and some good investors go this way [4]2) "I'll sell our shares back to you for $1."- KPCB sold their shares back to Gumroad for $1 [1]3) "Return my/our original investment back. 1x return. No need to worry about inflation over the past 5 years. Just return the original dollar amount. Let's both move on."4) "I'll sell our shares back to you for 120% ~ 500% returns. Pay me/us back within X months using your cashflow or just borrow money to pay me/us back."- Buffer used cash to buy back investor shares [2]- Wistia raised debt to buy back investor shares [3]If you are an angel/VC, what did you do?[1] https://sahillavingia.com/reflecting[2] https://buffer.com/resources/buying-out-investors/[3] https://wistia.com/learn/culture/taking-on-debt-to-grow-our-own-way[4] https://share.transistor.fm/s/43dad61e

contingencies · Accepted Answer

Objectively, early stage private equity is the wild west. The law in most cases is that the investor took a risk knowingly, ceded control of the capital, and does not have the control of the company to do anything about it. If they have a near-majority of board control they may attempt to acquire one. If they don't, they're effectively powerless.
However, the reality is that you may have gentleman's agreements or reputational concerns to uphold. "Intentionally bad-acting" vs "failed" founders will be blacklisted from one or a cluster of funds. Sometimes there are other concerns. For example I have, due to informal agreement, personally returned capital to small scale investors in past ventures.
In an extreme case, I have even seen investors screw over inexperienced founders demanding they work to pay back debt and that they "owe" them the capital invested, even after a venture collapses. This is absolutely unfair and not the sort of thing founders should put up with.
I would encourage anyone asking this question to educate themselves as to the standard mechanics by taking TechStars' course Venture Deals https://venturedeals.techstars.com/pages/coming_soon

revolutukr · Answer

If you are not a rockstar, keep a list of zombie companies. These are the ones most likely to hire you, especially when you are over 40 years old.

badpun · Answer

Feeling obliged to return the capital in case of failure is sort of messed up. It basically turns their bet into risk-free investment, with potentially massive upside. When I worked in a startup that eventually failed, and heard that the young (and broke) founder felt obliged to fully return seed money to the billionaire angel investor that funded us (even though he explicitly refered to us as "a bet"), it felt really weird.