How do you avoid a cram-down or a wash-out in a distressed liquidation round?

1 Know your rights

As a shareholder, you should be familiar with the terms of your stock agreement, especially the liquidation preference, anti-dilution protection, and voting rights. These clauses determine how much you will get paid in the event of a sale or liquidation, how your ownership will be adjusted if new shares are issued at a lower price, and how much influence you have over the company's decisions. You should also review the company's charter and bylaws, which may contain provisions that affect your rights, such as drag-along or pay-to-play clauses.

2 Negotiate with new investors

If you are approached by new investors who offer to inject capital into your company, but at a steep discount and with unfavorable terms, you should not accept their offer without negotiating. You should try to convince them that your company has more potential and value than they think, and that you have other options or alternatives. You should also try to leverage your existing relationships and networks to find other investors who may be interested in your company, or who may be willing to join the round on better terms. You should also seek legal advice and representation before signing any agreements or documents.

3 Communicate with existing shareholders

If you are facing a distressed liquidation round, you should not keep your existing shareholders in the dark. You should inform them of the situation and the options available, and seek their feedback and support. You should also try to align their interests and incentives with yours, and avoid creating conflicts or resentment. You should also respect their rights and preferences, and follow the proper procedures and formalities to obtain their consent and approval for any major changes or transactions.

4 Consider alternative solutions

A distressed liquidation round is not the only way to save your company from bankruptcy or failure. You may be able to explore other solutions, such as restructuring your debt, cutting your costs, pivoting your business model, or finding a strategic partner or acquirer. You may also be able to use other sources of funding, such as grants, loans, crowdfunding, or revenue-based financing. You should weigh the pros and cons of each option, and assess their feasibility and viability for your company.

5 Plan for the worst

Even if you follow the above tips, you may not be able to avoid a cram-down or a wash-out in a distressed liquidation round. Therefore, you should be prepared for the worst-case scenario, and have a contingency plan in place. You should know what your exit strategy is, and what your rights and obligations are in the event of a sale or liquidation. You should also protect your personal assets and reputation, and avoid any legal or ethical issues that may arise from the process.

6 Learn from the experience

A distressed liquidation round can be a painful and stressful experience for any startup founder or investor. However, it can also be a valuable learning opportunity, and a chance to improve your skills and knowledge. You should try to analyze what went wrong, and what you could have done differently or better. You should also seek feedback and advice from others who have gone through similar situations, and who can offer you insights and guidance. You should also use the experience to grow as an entrepreneur or investor, and to prepare for your next venture or opportunity.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?