Is it ever worth suing a startup that has no money left and is clearly about to go under?

QUESTION:

I’m an amateur angel. I put money into a tech startup, and the CEO spent the money on “personal” travel and other questionable things. I don’t think what he did was ethical or good for the business. But is it ever worth suing a startup that has no money left and is clearly about to go under?

ANSWER:

Naomi Kokubo

by Naomi Kokubo, Cofounder of Founders Space

In short, I’d say “No.” You bet on this CEO, and it didn’t pan out the way you expected. I suggest you cut your losses and move on. I wouldn’t waste more time on this company. Also, if the company is almost out of money, you won’t recover anything even if you did win in court. It’s just throwing good money after bad.

1 Comment

Ethan Stone

January 14, 2011 at 6:21 am

Naomi is right, generally speaking. The only exception is if the person in question has a lot of his own assets, his conduct was very egregious (i.e. there’s really no argument that he embezzled or otherwise spent company money on personal things), and there’s a significant amount of money involved. If you have all of those factors, you could bring a “derivative” suit (a suit by a shareholder in the name of the corporation) to try to claw money back from him personally and you might be able to get a decent plaintiffs’ lawyer to take the case on a contingency basis. Bear in mind, however, that it is very tough to succeed with a derivative suit unless you can show pretty clear personal wrongdoing. Stupid and thoughtless mismanagement is not enough. You really need to show actual corruption or, at very least, a glaring conflicts of interest.

If you think you might have those facts, there’s no reason not to talk it over with a few plaintiffs’ lawyers with good reputations (i.e. who are smart and realistic enough to give you a good evaluation and follow through if they take the case).

Ethan Stone
January 14, 2011 at 6:21 am

Naomi is right, generally speaking. The only exception is if the person in question has a lot of his own assets, his conduct was very egregious (i.e. there’s really no argument that he embezzled or otherwise spent company money on personal things), and there’s a significant amount of money involved. If you have all of those factors, you could bring a “derivative” suit (a suit by a shareholder in the name of the corporation) to try to claw money back from him personally and you might be able to get a decent plaintiffs’ lawyer to take the case on a contingency basis. Bear in mind, however, that it is very tough to succeed with a derivative suit unless you can show pretty clear personal wrongdoing. Stupid and thoughtless mismanagement is not enough. You really need to show actual corruption or, at very least, a glaring conflicts of interest.

If you think you might have those facts, there’s no reason not to talk it over with a few plaintiffs’ lawyers with good reputations (i.e. who are smart and realistic enough to give you a good evaluation and follow through if they take the case).