Color Failed. What Happens To Its $41 Million?

Apple reportedly "acqhired" Color’s team of all-star engineers. They’ll be fine. But what happens to the $41 million Color raised last year?

Before Color became the poster child for Bubble 2.0, some very smart people made what were, in hindsight, very poor decisions to invest a combined $41 million in a team without a product.

If a report from All Things D is correct, Apple recently acqhired a majority of the all-star team of engineers for a figure in the low millions. Their stock remains high. Color, meanwhile, has yet to produce a cent of revenue. So what happens to that $41 million fund?

Payrolling engineers, maneuvering multiple pivots, and buying advertising time on Saturday Night Live is expensive. Color spent a lot of its investment, and that money is gone forever. Unless investors suspect illegal activity and sue the board or executives, they’ll never see it again.

According to reports, however, there’s still about $25 million sitting in Color’s bank account. Color is still an independent company, sans engineers. Nobody has purchased the domain name, the patents, or anything else.

A startup having this much money left in the bank when the ship sinks is rare, say investors. "Companies that fail, more often than not, will consume the vast majority of funds they’ve raised on efforts to not fail," says Brad Svrluga, general partner at High Peaks Venture Partners.

When a startup does have leftover cash, it’s most likely that the board—which by law is responsible for acting in the interest of shareholders—has pulled the cord in order to recuperate what was left of the investment. Though in some circumstances, Foundry Group managing director Brad Feld adds, entrepreneurs realize their product will not work and make the respectable move to call it quits themselves (Though this would be unlike Color's CEO, Bill Nguyen, who told Fast Company last fall, "I will outlast everyone else. There is no one in the world who I won't outlast. There's no way. There's no way. There's no way.").

Color did not immediately respond for a request to comment on whether the company is indeed winding down while its engineers set up shop at Apple. Sequoia Capital, one of its investors, declined to comment.

If Color were to sell its assets or shut down, however, the reported $25 million bank account would be redistributed to investors.

Typically, say investors, leftover funds from a failed startup are paid out in more than one round. First, the company sets aside enough money to pay its bills. This can be complicated when factoring in four-year contracts, taxes, and possible employee lawsuits. Whatever is left over after setting this aside gets paid out first. Then, the rest is distributed to preferred investors first.

Those are people like angels and investors who invest on the condition that they get paid before people without preferred stock. Generally that means they get paid right after the bills and before employees.

"So if color raised $41M and spent half, the other half would be returned to investors who get 50 cents on the dollar," writes Jordan Cooper, a partner at Leher Ventures, in an email to Fast Company. "The company also sells whatever assets it has if it can (chairs computers phones, code, etc.) and the proceeds also go to the cap table with investors having preference. Employees and founders walk away with nothing."

That’s not a good deal for anyone.

But, offers Svrluga, investors are sometimes still a bit relieved after cutting the cord of a struggling startup.

"[Shutting down a company] as compared to the process of going through the motions of trying to save something another year is massively better, probably more for the non-financial reasons than for the financial reasons," he says.

[Image: Flickr user romana klee {is away}]

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4 Comments

  • Callie

    The money followed Bill Nguyen. The money is still chasing the perfect image sharing mobile mega data mine. Think back to the original launch of Color and the original small print for the app?

  • funkotronic

    Jeez, proofread much? I mean, hell, I'm no grammar nazi but the headline is atrocious. Or maybe it's that I'm using IE9 (not by choice, mind you) and it can't even render words properly. Oh, yeah - and the aquistion of Color on such a flimsy premise is a mark of a company that has too much money and no clear direction of what to do with it.

    Edit: Just now paid attention to the intentional misspelling. I'm an idiot. It's my job.

  • JimD

    It's amazing to me that anyone invested in Color to begin with. Even the vague concept presentation would have been enough for me to walk away with a full pocket.