Silicon Valley is known around the world as the place that technology startups can thrive. But as you would find with any type of business startup, there are going to be hundreds and hundreds of companies that don’t survive. For every smashing success like Apple or Facebook, there are more great ideas than you can count that just don’t pan out.
Whether you are dealing with one of the most successful startups in the history of Silicon Valley or just another company that is struggling to get off the ground, you need to have a plan in place for how you intend to protect yourself if things go sideways. And since that can happen incredibly fast in the IT sector, it helps to know as much as possible about debt collection.
Fortunately, collecting outstanding debts from IT companies is actually quite similar to collecting debts from any other business. Here are some basic guidelines that you will always want to follow.
Know Your History
Silicon Valley is a small area located near the San Francisco Bay Area, and it has a reputation for launching innovative technology businesses that is unparalleled. That reputation started all the way back in 1939 when William Hewlett and Dave Packard started Hewlett-Packard in Palo Alto.
Since that time, the area has witnessed the birth of companies like Atari, Apple, and Oracle in the 1970s. Then it became the epicenter of the dot com boom in the 1990s with companies like eBay, Yahoo, PayPal, and Google launching during that time. And since then, other colossal success stories like Facebook, Twitter, Uber, and Tesla all call Silicon Valley home.
Of course, there are also plenty of companies that didn’t make it in Silicon Valley over the years. And there are also companies like Theranos that were deliberately deceitful, as profiled in John Carreyrou’s fascinating book “Bad Blood.”
Be Careful About Drinking the Kool-Aid
With this much history inspiring just about everyone in Silicon Valley to shoot for the stars, it can be easy to get caught up in the hype surrounding a company and lose sight of the potential pitfalls. And that is exactly what we want to prevent when working with any type of startup.
In order to run a successful startup, the people at the top need to be constantly hyping up the future earnings and profit potential of a company. In many cases, they will have their arguments for why the future looks so bright down to a seamless pitch that sounds airtight to the average investor.
As an outside vendor that is doing business with a startup, it is important to maintain a more reserved view of the company’s prospects for success. Staying away from getting caught up in the hype will help you avoid accepting terms that aren’t in your best interest.
Have Someone Review Stock Options
One of the most common forms of compensation out in Silicon Valley is the trading of ownership shares in exchange for services. Because most startups aren’t generating cash flow early in their existence, they often trade ownership in their company for necessary tasks.
However, it is important to be aware that not all ownership shares are created equal. With different rounds of fundraising and different classifications of stock, you might not be getting exactly what you think you are, so it is always important to have a qualified third party review any stock options deals.
It is also important to keep in mind that stock options are only worth something if the company continues to grow, and most startups will eventually fail. So, while you might be talking about trading services for ownership in “the next Facebook,” it is actually more likely that you will never see any tangible return for those services.
Agree in Writing Before the Deal
Because things move so fast in the technology sector, it is always important to make sure that you get all of the details of your deal in writing. Extending credit terms of any kind to a technology startup is extremely risky, and having rock-solid documentation in place ahead of time is the best way to protect yourself from trouble down the road.
If the deal is big enough, you might want to consider paying a lawyer to draw up specific papers to document the arrangement you are putting together. No one ever wants to spend the money on lawyers heading into a deal, but their due diligence up front can often help to avoid paying far more for lawyers down the road.
Document All Communication
Speaking of documentation, it is absolutely critical that you document any and all communication with anyone you are working within Silicon Valley. Because any deal with a technology startup is naturally going to carry a significant amount of risk, you are going to want to make sure that you cover your bases as much as possible.
Fortunately, email is the preferred method of communication for many IT companies, and it is also one of the best ways to document your communication throughout a business relationship. While someone might be able to deny what they said in person or over the phone, they will never be able to dispute what they said in an email.
It can also be helpful to take the time to write your own notes about each interaction with a technology startup. This is actually a good practice anytime you are extending credit terms to a company, but it is even more powerful when you are working out in Silicon Valley.
Be Firm, Consistent, and Positive
Business leaders in Silicon Valley are quite used to everyone they work with agreeing to their terms to get in on the ground floor of one of the world’s next great companies. They have also been known to use this leverage in order to restructure deals on the fly when money gets tight.
Should you find yourself in a situation where things aren’t going exactly according to plan, you are going to have to renegotiate, and people who do the negotiating out in Silicon Valley are used to getting exactly what they want.
The key for heading into any type of restructuring conversation is to maintain a positive attitude while holding firm that you expect to be fairly compensated in a consistent manner. Things happen in startup situations, but that doesn’t make it acceptable for your company to suffer.
Don’t Allow Yourself to Fall in Too Deep
When a Silicon Valley startup is heading towards failure, they won’t hesitate to take on piles of debt and trade away huge chunks of ownership in a last ditch effort to save their operation. In these situations, it can be common for a vendor working with a startup to be owed so much that they feel “pot committed” to helping the startup survive.
Obviously, the goal is to avoid finding yourself in a position where you either have so much owed to you or so much in stock options that your fate is tied to an IT startup. This is a very slippery slope, and the best way to avoid it is to keep your accounts receivable in a manageable place from the start.
Have an Exit Strategy in Place
If you do find yourself in a situation with a failing startup, there will come a point where the best thing that you can do is cut your losses and move on.
When that happens, it can be extremely helpful to have an exit strategy in place. And if that exit strategy is built into the initial documentation you worked out with the company, you will be in much better shape that you would be without it.
Having an existing partnership with a commercial debt collection agency can be a fantastic help in any exit strategy situation. If you are thinking about getting out of a relationship with a startup, that relationship is probably already damaged to the point where you should have an experienced agency working on your behalf.
Working with IT companies in Silicon Valley can be very exciting and extremely profitable, but there are also plenty of pitfalls that you definitely want to avoid. But if you follow the advice in this article, you will already be on your way to guarding against the worst case scenario while potentially working with the next big company.