I’ve never heard of this before. Anyone know if it’s uncommon?

Familiar with creditors getting divvied in bankruptcies, but not refunds to investors… oh it’s because there’s never any money left when things wind down. (We hear of retail stores where employees discover closures posted on shop doors when reporting to work.)

This is super common with startups and is usually called an orderly shutdown. You don’t want to wait until you are insolvent, but stop when there is enough money left to pay all outstanding liabilities as well as the people that will shut down the business entity, do a final tax return and so on. Then whatever is left eventually gets paid back to investors, who usually have a liquidation preference requiring this as well. The alternative, running truly out of money, no one shutting down anything, a ghost entity that continues to accumulate taxes and penalties, creditors chasing whoever they can get a hold of, is much worse. Just because everyone quits doesn’t mean the entity ceases to exist.

It's pretty common. If a startup winds down before it runs out of money, it typically returns whatever is left to the investors. We didn't have any debt.

It actually happens a lot. Sometimes founders may pivot when the original thesis isn't working out, but a lot of times the prudent thing to do is to just say that it didn't work out and return investors' money.

Honestly, I was close to flagging this story because the title is deliberately manipulative - it makes it sound like the founder did a rug pull. But I was really glad to see the founder come in to these comments and just say we tried, but the market shifted under us. Happens all the time.

It’s not atypical when a startup figures out things aren’t going to work while there’s still money in the bank.

Early stage startups tend not to have a lot debt to pay off, because there aren’t many places willing to offer them much credit.

When I was in university I unsuccessfully attempted to start a company with two other students. We had a small amount of capital from a single investor. We did not pay ourself any salary. We had spent money on incorporating the company and buying a couple of iPads, and not yet spent money on marketing etc.

When after a few months we accepted that it wasn’t going to work, our investor got basically all his money back.

It was pocket change amounts compared to the sums of money that they deal with in Silicon Valley. But the point is the same anyway, the investor got back basically everything.