Eschborn 31 May 2022: BRRS partner Dr Stephan Schlegel also advises and supports start-ups prior to insolvency or in insolvency proceedings.
Based on this experience, he describes the special features when a startup is threatened with insolvency or the conditions for insolvency proceedings are met.
Everyone is the same in insolvency – right?
Start-ups are young companies that are founded to realise an innovative business idea with little seed capital and are dependent on obtaining external funding in order to finance themselves. The investors aim for an exit in order to recoup their investment (possibly at a profit). Are start-ups therefore “other companies” and therefore “other insolvencies”? In legal terms, the answer to this question is “no”. There is no special law that would apply to start-ups.
Greatest danger for start-ups in insolvency
However, there are special features of start-up insolvencies that distinguish these proceedings from other insolvencies. For example, start-ups typically have shareholder-brokered or external financing, but not cash flow. They are often managed with great transparency and a high level of intra-communicative effort – but does this prevent or help in a crisis? In our view, the answer must be “not always”. In practice, we see that the managers of a start-up keep a close eye on liquidity, but not on the aspect of over-indebtedness.
Managing directors with conflicting goals
The situation becomes critical for the managing director when liquid funds become scarce, further financing is uncertain and the continuation of the start-up can no longer be regarded as predominantly probable. It is now up to the managing director to decide. If he files for insolvency too early, he can ruin the shareholders’ share values. If he files the application too late, he may be held liable for delay. In this situation, the manager who does not pay attention to how he finances his start-up from the outset may find himself in a conflict of interest with his shareholders or investors.
What to do in the event of over-indebtedness?
To avoid over-indebtedness, financing funds should therefore be removed from the status from the outset. This usually means issuing suitable subordinated declarations or financing via reserves. The provisions to be recognised, for example for the premature termination of a rental agreement, also prove to be problematic. This does not apply equally to the social concerns of employees, as the employees of such companies are usually well qualified and can often take up new employment without any problems. On the contrary, it is often the case that a stumbling start-up has problems retaining its employees and, in particular, its top performers.