In the fast-paced world of technology startups, financial challenges can sometimes force companies into a firesale. This urgent process involves selling off assets quickly, often at a discounted price, to meet financial obligations. For founders, a firesale is a stressful and complex situation, especially when considering the pecking order of payments and the potential outcomes for themselves and their employees. This article explores the firesale process, the distribution of proceeds, and how founders can ensure positive outcomes for all stakeholders involved.
A firesale is a rapid liquidation of a company’s assets due to financial distress, such as impending insolvency, loss of funding, or the need to pivot quickly. The goal is to raise cash as quickly as possible, often by selling assets like intellectual property, software, or customer contracts at lower-than-market prices. The urgency and discounted nature of firesales make them challenging, but understanding the process and prioritizing stakeholder interests can lead to better outcomes.
In a firesale, the distribution of proceeds follows a specific pecking order, which prioritizes creditors and other stakeholders based on legal and contractual obligations. Here’s a breakdown of the typical pecking order:
Secured creditors are the first in line to receive proceeds from the firesale. These are lenders or investors who hold collateral—such as company assets—against the loans they provided. The assets are sold, and the proceeds are used to repay these debts. If the value of the assets exceeds the debt, the remaining amount moves to the next in line.
Unsecured creditors come next. These might include suppliers, contractors, or service providers who are owed money but do not have specific collateral backing their claims. They typically receive payment only after secured creditors have been fully satisfied, and the amount they receive can vary depending on the remaining proceeds.
Employee claims, particularly unpaid wages and benefits, often take priority over other unsecured debts. In many jurisdictions, there are laws in place that protect employees by ensuring they receive a portion of any proceeds before other unsecured creditors. This is crucial for maintaining employee morale and trust during the firesale process.
Founders and other equity holders are usually last in line to receive any proceeds. In most cases, they only receive a payout if all creditors (secured and unsecured) and employees have been fully compensated. This reality underscores the importance of founders managing expectations and preparing for the potential financial outcome of a firesale.
While the pecking order may seem daunting, there are strategies founders can employ to make the firesale process as positive as possible for both themselves and their employees.
Open and honest communication with employees is critical. Employees should be informed about the firesale process, the reasons behind it, and what it means for them. Transparency helps build trust and can ease the transition, especially if some employees may continue working under new ownership.
Given that employees are often one of the most valuable assets of a company, ensuring they are treated fairly during a firesale is essential. This includes prioritizing unpaid wages, benefits, and severance packages. By doing so, founders can maintain their reputation and potentially retain goodwill within the industry.
If possible, negotiate with buyers to retain key employees post-sale. This not only helps employees secure their jobs but also increases the likelihood of a smoother transition for the new owners. It can also enhance the overall value of the sale, as buyers are often interested in retaining talent.
Founders should prepare for the likelihood that they may not receive significant proceeds from a firesale, especially if debts are high. However, there may be opportunities to negotiate non-monetary benefits, such as consulting roles, stock options in the acquiring company, or other future opportunities that could provide long-term value.
Engaging legal and financial experts who specialize in distressed sales can help founders navigate the complexities of a firesale. These professionals can ensure that the pecking order is respected and that all legal obligations are met, potentially uncovering ways to protect both the founder’s and employees’ interests.
A firesale is a challenging process that requires careful planning and strategic decision-making, particularly when it comes to understanding the pecking order of payments. For founders, the reality is that they are often last in line to receive proceeds, but by focusing on transparency, prioritizing employee compensation, and negotiating strategically, they can still achieve a positive outcome for themselves and their team.
At Exitboat, we specialize in helping founders navigate the firesale process with our AI-assisted services that streamline buyer outreach, generate professional sales materials, and ensure a thorough review of assets. Our goal is to support you in achieving the best possible outcome, even in the most time-sensitive situations, ensuring that both you and your employees are treated fairly and respectfully throughout the process.
