How To Legally Pause, Pivot Or Wind Down A Startup

Building a startup rarely follows a straight line.

Sometimes, the business needs more time or funding before it can move forward. Sometimes, the original idea is not working and the founders need to change direction. In other cases, the best decision may be to bring the business to an end.

Planning the legal side early can help founders preserve what still has value, reduce unnecessary costs and avoid leaving unresolved problems behind.

What Does It Mean To Pause, Pivot Or Wind Down A Startup?

Before taking action, it helps to be clear about what is actually happening to the business.

Pausing usually means temporarily reducing or stopping operations without closing the company. The founders may intend to restart after securing funding, resolving a product issue or waiting for market conditions to improve.

Pivoting means changing an important part of the business. This could involve targeting a different type of customer, changing the product or service, adopting a new revenue model or moving into another market. The startup continues operating, but not necessarily in the same form.

Winding down means taking the practical steps needed to bring the startup’s activities to an end. This is not necessarily the same as formally winding up a company through liquidation.

Likewise, pausing is not a special legal status. Unless the company is formally deregistered or wound up, it continues to exist and its officeholders retain their ongoing obligations.

How Do You Decide Which Path To Take?

The decision is not always as simple as asking whether the founders still believe in the idea.

A startup may have enough money to pause for several months but still be tied to an expensive lease. A pivot may look commercially promising but require investor approval or fall outside what existing customers agreed to purchase. A wind-down may appear straightforward until the founders discover that the company owns valuable intellectual property or owes money to employees and suppliers.

Start by looking honestly at the company’s financial position. Can it pay its debts when they fall due? Which expenses will continue if trading slows down? Does it have enough money to meet wages, employee entitlements, supplier invoices, refunds and other commitments?

A company is insolvent if it cannot pay its debts when they become due. Directors must be careful not to allow the company to incur further debts while it is insolvent. If insolvency may be an issue, they should seek advice from a registered liquidator or suitably qualified insolvency adviser, together with legal advice where appropriate.

Founders should also check who has authority to make the decision. The company’s Company Constitution, Shareholders Agreement, investment documents, loan arrangements or grant terms may require approval before the startup changes its main business, sells important assets or stops operating.

Even where everyone agrees informally, important decisions should be properly recorded through the required board or shareholder resolutions.

What Happens To Existing Contracts?

A startup’s contracts do not automatically pause because its operations do.

Customer contracts, supplier arrangements, leases, software subscriptions, licences, loans and commercial partnerships may continue until they expire or are properly terminated. Some will contain notice periods, early termination fees, minimum commitments or terms requiring consent before the business changes what it does.

A startup that is pausing may need to negotiate temporary changes rather than simply stop paying. This could involve reducing commitments under a Supplier Agreement, ending unnecessary subscriptions or reaching a different arrangement with a landlord.

If the startup is pivoting, founders should check whether its current agreements still match the new business model. Terms written for a one-off product purchase may not work for a subscription service, while a licence limited to a particular industry or territory may not cover the startup’s new direction.

A wind-down will usually require the company to identify each current agreement, check how it can be ended and work out what must still be performed or paid. Obligations relating to confidentiality, intellectual property and customer information may continue after the agreement ends.

Ignoring a contract because the startup no longer needs it does not bring it to an end. Reviewing these commitments early may give the business more room to negotiate before avoidable liabilities build up.

What Happens To Founders, Employees And Contractors?

A pause, pivot or closure can also change the roles of the people behind the startup.

One founder may want to continue while another wants to leave. Someone may stop working in the business but remain a director or shareholder. There may also be questions about founder loans, expenses, equity vesting, access to company systems and ownership of work created for the startup.

The company’s Shareholders Agreement, vesting arrangements and founder employment or contractor documents should be reviewed before someone steps away. Stopping work does not automatically remove a founder as a director or cancel their shares.

Employees must also be dealt with properly. A pause may lead the company to consider reduced hours, changed duties or unpaid leave, but these changes cannot necessarily be imposed without agreement. The relevant Employment Contracts, modern awards, enterprise agreements and the Fair Work Act 2009 may affect what the employer can do.

If a position is no longer required, the startup may need to follow a genuine redundancy process. This can involve meeting consultation requirements and considering whether reasonable redeployment is available. Notice and outstanding employee entitlements may also remain payable.

Redundancy pay will depend on factors including the employee’s length of service, the applicable award or enterprise agreement and whether the startup is a small-business employer. Businesses with fewer than 15 employees are generally exempt from National Employment Standards redundancy pay, although exceptions can apply.

A pivot will not automatically create a genuine redundancy. If substantially the same job still needs to be performed under a different title, ending the employee’s role on redundancy grounds may create legal risk.

Contractors should be managed according to their Contractor Agreements. The startup may need to give notice, pay final invoices, recover equipment and confirm that intellectual property and confidential information have been dealt with properly.

What Does The Startup Owe Its Customers?

When a startup is under pressure, it can be easy to focus on investors and creditors while overlooking customers who have already paid.

The business should identify outstanding orders, prepaid services, deposits, subscriptions, credits, warranties and continuing support commitments. It should then determine what can still be fulfilled and which customers need to be contacted.

A paused startup may need to explain service interruptions or delays. A pivoting startup should consider whether the new product or service is what existing customers originally agreed to buy. A wind-down may require orders to be completed, subscriptions to be cancelled or refunds and other remedies to be considered.

The Australian Consumer Law continues to apply. Where products or services do not meet the consumer guarantees, customers may be entitled to a remedy depending on the nature and seriousness of the problem.

Founders should be especially careful about continuing to accept payments when they know the company may not be able to provide what it is selling. A final sales push may improve cash flow temporarily, but it can make the company’s position worse if those orders cannot be fulfilled.

Customer communications should be clear and honest. The business does not need to reveal every internal difficulty, but it should not mislead customers about whether it is operating, when an order will be delivered or whether ongoing support will remain available.

What Happens To The Startup’s Assets And Information?

Even where the original business model has failed, the startup may still own valuable assets.

These could include equipment, stock, cash, software, domain names, websites, social media accounts, customer relationships, registered trade marks and other intellectual property.

Before selling, transferring or abandoning anything, founders should confirm who owns it.

Software may have been developed by a contractor without an effective IP Assignment Deed. A trade mark may be registered in a founder’s personal name rather than the company’s. A domain name or social media account may be controlled through someone’s personal login.

Any transfer should be properly documented. For example, the assignment of a registered trade mark should be recorded in writing and the ownership details updated with IP Australia.

Founders should be particularly cautious about transferring valuable assets away from a company that owes money. Moving intellectual property, customers or equipment into another entity for little or no value can raise serious issues where the original company is insolvent.

Customer information also requires separate consideration. A customer database is not simply an asset that can always be handed to a new company or buyer.

The business should consider what customers were told when their information was collected, whether the proposed disclosure is permitted and what privacy protections need to apply during due diligence and any eventual transfer.

Where personal information is itself sold or transferred as an asset, the transaction may bring an otherwise exempt small business within the Privacy Act. De-identified or aggregated information should generally be used during due diligence wherever possible.

Corporate, financial, employee and contractual records should not be deleted simply because operations have stopped. The company may still need them to complete its obligations or respond to a later claim.

What Does Pausing The Startup Require?

A company can stop or reduce trading without being formally closed. However, it continues to exist as a separate legal entity and its officeholders must keep meeting their legal obligations, including keeping company records and details current and paying the annual review fee.

The startup may also need to maintain insurance, bank accounts, domain names, important intellectual property and any registrations needed to preserve the business. Contracts that have not been ended will continue according to their terms.

A pause should have a plan behind it. Founders should decide how long it is expected to last, which expenses will continue, what needs to be preserved and what must happen before the startup restarts.

Without a plan, the company may remain in limbo while annual fees, subscriptions and other liabilities continue to accumulate.

What Needs To Change During A Pivot?

A pivot may allow the startup to continue, but its existing legal documents may no longer reflect the business customers are dealing with.

A new product, pricing structure, target market or delivery model may require changes to the startup’s Terms and Conditions, supplier arrangements, contractor scopes and employment roles.

A different use of customer information may also require updates to its Privacy Policy or collection notices. Moving into a regulated industry or new location may introduce licences or other compliance requirements that did not previously apply.

The business should also review its intellectual property protection. An existing trade mark may not cover the new products or services, while a major rebrand may require new searches and trade mark registration.

A pivot is a useful point to check whether the startup’s contracts, policies and ownership arrangements still match the business it has become.

How Do You Formally Close The Company?

Stopping trading is not the same as formally closing a company.

Voluntary deregistration may be available if all members agree, the company is no longer conducting business, its assets are worth less than $1,000, it has no outstanding liabilities, it is not involved in legal proceedings and all ASIC fees and penalties have been paid.

A company should not be deregistered while it still owns valuable intellectual property, expects to receive money, owes debts or has unresolved claims. Property left in the company when it is deregistered will generally vest in ASIC or the Commonwealth, meaning former founders or shareholders cannot simply continue dealing with it.

If the company is solvent but cannot use voluntary deregistration, a members’ voluntary winding up may be considered. If it is insolvent, options may include liquidation, voluntary administration or small-business restructuring. Specialist insolvency advice should be obtained rather than attempting to deregister an insolvent company.

The business may also need to cancel or update its business name, ABN, licences and other registrations, close accounts and complete outstanding reporting obligations. Tax and financial consequences should be discussed with an accountant or tax adviser.

Could The Startup Be Sold Instead?

Bringing the original venture to an end does not necessarily mean abandoning everything it has built.

Another business may be interested in acquiring the startup’s technology, brand, domain name, contracts or other assets. The founders may also decide to sell one part of the business while continuing with another.

Before agreeing to a sale, the company should confirm that it owns the relevant assets, identify which liabilities will remain and check whether contracts and customer information can be transferred.

The structure of the sale will also matter. A Share Sale Agreement is generally used where ownership of the company itself is changing. An Asset Sale Agreement or Business Sale Agreement may be needed where the buyer is acquiring selected assets or the business operations instead.

If employees will move to the buyer, the parties should also consider whether the transfer-of-business rules apply and how prior service and accrued entitlements will be treated.

When Should Founders Get Legal Help?

Founders should consider getting advice before announcing a closure, dismissing employees, transferring intellectual property or telling customers that the startup will no longer provide what was promised.

Early advice is particularly important where the company may be insolvent, the founders disagree, investors or lenders have approval rights, employees may be made redundant or valuable assets and customer information will be transferred.

A pause is about preserving the startup properly while activity slows down. A pivot is about making sure its legal foundations still match its new direction. A wind-down is about bringing the business to an end without leaving avoidable liabilities behind.

The earlier founders identify which path they are taking, the more control they are likely to have over what happens next.

If you would like a consultation on legally pausing, pivoting or winding down your startup, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.