Startups and Safe Harbour Protection for Directors
- Concerns over inadvertent breaches of insolvent trading laws are frequently cited as a reason why entrepreneurs are reluctant to launch startups, and seed or specialist early stage investors are also reluctant to support them. Safe Harbour has the potential to alleviate problems for new startup business investors who would previously have been reluctant to take on roles as directors because of the risks associated with unintentional breaches of insolvency law. With Australia moving towards a business rescue culture, there is a now a greater focus improving the success rates of startups.
Protecting Directors, Managing the Interests of Stakeholders
Valley of Death – Risk of Directors Insolvent Trading Personal Liability / Loss of Seed Funding
- The University of Melbourne estimates nearly 97% of startups exit or fail to grow (businesses less than 2 years old). So perilous, this initial phase is frequently referred to as the ‘Valley of Death’.
- Funding challenges contribute at this early phase. Entrepreneurs often suffer demoralisation as the novelty wears off and self-doubt creeps in. This can be an emotionally draining time for all.
- Successful transitioning requires a combination of strategic planning, successful proof of concept, business & leadership coaching, resilience & discipline, systematic use of technology and, importantly, support from professional advisors.
Defining Effective Growth Strategy – Directors Risk Personal Liability / Stakeholders’ Risk
- Melbourne University further states that of the startups that survive beyond two years, 77% of all economic benefits will be created by just 3% of startups that become high growth firms.
- Usually attributed to a range of factors that so often impede business growth. For example, lack of adequate information management systems, failure to effectively market, compliance breaches, inadequate risk management, a failed product launch, director/shareholder disputes, poor organisational culture, transition of a family business, theft of IP or a cyber-attack (etc).
- In refining the business model for expansion, there presents multiple and complex issues. Aligning strategic vision, maximising resources and making use of professional and industry advisors commonly results in learnings that hold the key to ultimate success.
- Turnaround is defined as the ‘sustainable recovery of an underperforming business’ (Michael Fingland 2018, CEO & Executive Director at leading turnaround firm Vantage Performance). An independent business review can be undertaken at any stage throughout the startup cycle. Safe Harbour protects directors from insolvent trading personal liability but also provides ‘breathing space’ to facilitate a strategic restructuring and turnaround (it is not made known to the public).
- Provided directors remain compliant and continue to work towards an outcome that is reasonably likely to provide a better outcome than formal insolvency, there is no time limit on how long a company can stay in Safe Harbour. This allows a range of options to be explored.
- In addition to directors, key stakeholders such as investors, lenders, financiers and suppliers also benefit from Safe Harbour as they take comfort in the statutory compliance requirements bestowed upon directors. A Turnaround Practitioner can provide ongoing progress reports to demonstrate directors remain compliant, focused on the strategic restructuring and, therefore, safely within the Safe Harbour.
TurnAbout charges on a fixed fee basis. Initial consultations are confidential and without obligation.