Additional Issues Concerning Bankruptcy of Startup Companies

The reorganization model of the U.S. Bankruptcy Code (Chapter 11) is not particularly suited to young knowledge-based startup companies. The material difference between startups and other companies is that the former lack many tangible assets which may be easily liquidated as part of the rehabilitation process. On the other hand, startups usually have intellectual property which may be sold if no restrictions are imposed on its transfer.

Investors in startups usually enjoy priority in dissolution over other shareholders, by virtue of their preference in liquidation rights (see the section on the rights attached to the securities allotted to investors). For example, investors may have a right of first refusal in the sale of the company's intellectual property.

The sale of some of the company's assets, such as customer lists or information on customers, may be challenged by the courts due to various laws protecting consumer privacy. When the toy company, for instance, wanted to sell its customer list, the court objected to the sale. The Federal Trade Commission (FTC) and the Attorney Generals of more than 40 states in the United States objected to the sale of information on customers as the company promised its customers, before its bankruptcy, that it would not sell their information to third parties. The argument was that the sale of the information violated the laws of fair trade (since a representation was made to customers that the information would not be sold). In the case of Toysmart, a compromise was reached whereby the information could be sold to a company in the same field, provided that it was sold with the entire company and provided that the acquirer assumed the same privacy-protection undertakings made by Toysmart.

In another case, that of the furniture retail company, it was determined that customer lists could be sold, provided that customers were given the opportunity to request to be removed from the list ("opt out"). As an immediate reaction to these decisions, many companies are now modifying their privacy policy so as to explicitly state that the policy does not apply in the case of a sale of the company or of its assets.

From Concept to Wall Street(c) A Complete Guide to Entrepreneurship and Venture Capital
From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital
ISBN: 0130348031
EAN: 2147483647
Year: 2005
Pages: 131

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