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What happens to investor funds when startups shutdown
This question keeps revolving around a lot of startup founders when they hear that a startup, which was funded, has shut down and ceased to exist. The next question comes is what happens to the investor who invested are the promoters or founder need to pay them back and how will they pay back the investor who had invested.
This depends on how the money or the funding was taken: if the funding was on equity then the founders don’t pay back to the investor, as the case is the investor had invested in the shares and when the company shuts down the risk of losing money is only with the investor.
If the money taken was in debt then the trouble for founders starts as they need to repay as per the terms and conditions they had agreed to do so.
So how do investors recover their money? Sometimes it is done with selling the company to the other competitor of the same domain either in all shares deal or just transfer of one company taking over the other and investors still retaining some shares of the new company.
The risk factor is high for investors and the reason being the income factor is also high if a startup goes up then investors sell their shares for better values and valuation before exiting the company.
The founders need to understand that if the money taken on debt problems will be there till the debt is paid back or it’s better to have the equity in the picture as you will not be owing anything to the investor if the startup fails.