Raising Equity as a Startup before Ch7 is discharged.

[startingup]

My lawyer has recently filed my Chapter 7 bankruptcy. The actual creditors meeting will take place in 2-3 months. So the actual discharge will probably happen in 6 months or so, I think.
I want to create a startup now and I can't (or don't want to) wait that long.
I say startup, because I guess my goal is to get Venture Capital firms to invest in it. So it'd almost certainly be equity funding NOT debt funding.

OK so now, here's the question- at what stage CAN I actually raise the money? (Let's say $1 Million)
What if I had a cofounder (we both own 50%)?
To be clear - in Venture Capital, there's 2 kinds of fund raises: pre-money & post-money.
> Pre-Money Investment - the VC gives you the $1M WITHOUT a valuation attached to it.
> Post-Money Investment - the VC gives you the $1M WITH a valuation attached to it. So, assuming they ask for a 20% for $1M, that would imply a $5M.

.... Please let the answer not be after discharge 😭

I already emailed this question to my lawyer several days ago. He hasn't responded. Regardless, his answers are often too short.
If any of you wizards have thoughts, I'd truly appreciate.

[justbroke]

In a Chapter 7, the 341 Meeting is usually 1 month after filing, and discharge is 60 days (2-months) after the first scheduled 341 Meeting.

Any smart venture capital (investor) should run a credit report (and background investigation) against any of the principals in a company. It's just smart business. If they see the Chapter 7 and the recency of such a personal bankruptcy, then a smart investor should take that as an indication that the principal does not know how to manage money.

I think you have issues whether it's pre-money or not. At least as far as I would be concerned, as an angel investor.

[startingup]

I understand where you're coming from. And I'm not here to talk personal, misfortunes, list credibilities/track records, and such. Frankly, I wouldn't even mind being honest about circumstance to the VC/angel. Do you have any thoughts per my question directly?

[despritfreya]

Your attorney should be the one advising you on this. Having said that, a Chapter 7 trustee has no interest in an entity you form AFTER the date you filed bk. If you are going to start a new business (with or without post bk financing/venture capital) you would have to form a new LLC or Inc. You DO NOT want to use one that was formed (or in any way belonged to you) before you filed bk.

Des.

[justbroke]

I defer to Des and structuring any new entity should be discussed with a qualified attorney. As Des mentions, make sure that any new entity does not have anything to do with the old entity. I can't advise you on this, but I would personally not even pass assets between them.

[startingup]

That’s great advice guys, thank you so much.

if anybody else have thoughts, I’d love to hear

[bornfree2]

if you find a penny on the street after you file, that penny is yours and not included in the bankruptcy.
Anything before you filed, is the estate. Yes, the very shirt on your back is not yours the moment you file -- it needs to be exempted.

But in your 'new life', any assets and contracts going forward are none of anyone business but your own. So you start a corp, assign shares, that is all your involvement in your new life. Outside of the estate.

However, as implied above, any assets from your past life that 'bleeds' over into the startup life could be an issue. For example, you have some crypto stashed and you sell off some of it after filing date to fund your startup life.

Well that crypto was before the filing date, so those funds are technically the estate until they are exempted. So trustsee could reclaim that during the bk. So if it were me it be careful that not one penny or asset was used in the start up life -- which means exactly what the startup is and your new life 'startup up again'. You want to not let anything from your past financial life contaminate the new start up.

So probably Id get a job to finance my personal expenses during the bankruptcy and make sure no money from the past savings is personally invested in the startup until its got the all clear. Your partners would upfront the necessary expenses for the startup -- perhaps even paying you a salary which would be outside the bankruptcy.

Thats my wild opinion on this and its not advise, im not a lawyer but like to speculate on how the law applies if it were my scenario.

Be sure to get a good lawyer for this one.

[startingup]

if you find a penny on the street after you file, that penny is yours and not included in the bankruptcy.
Anything before you filed, is the estate. Yes, the very shirt on your back is not yours the moment you file -- it needs to be exempted.

But in your 'new life', any assets and contracts going forward are none of anyone business but your own. So you start a corp, assign shares, that is all your involvement in your new life. Outside of the estate.

However, as implied above, any assets from your past life that 'bleeds' over into the startup life could be an issue. For example, you have some crypto stashed and you sell off some of it after filing date to fund your startup life.

Well that crypto was before the filing date, so those funds are technically the estate until they are exempted. So trustsee could reclaim that during the bk. So if it were me it be careful that not one penny or asset was used in the start up life -- which means exactly what the startup is and your new life 'startup up again'. You want to not let anything from your past financial life contaminate the new start up.

So probably Id get a job to finance my personal expenses during the bankruptcy and make sure no money from the past savings is personally invested in the startup until its got the all clear. Your partners would upfront the necessary expenses for the startup -- perhaps even paying you a salary which would be outside the bankruptcy.

Thats my wild opinion on this and its not advise, im not a lawyer but like to speculate on how the law applies if it were my scenario.

Be sure to get a good lawyer for this one.

Extraordinarily helpful- this is the kind of clarity that I can forward to my lawyer, and make me have no follow-up questions (depending on his response, of course).
Thank you so much

[bornfree2]

Extraordinarily helpful- this is the kind of clarity that I can forward to my lawyer, and make me have no follow-up questions (depending on his response, of course).
Thank you so much

If it were me id have thousands of follow up questions for my lawyer.. which id attempt to first answer on my own by doing due diligence in learning bankruptcy law and rules. I have a thread in ProSe forum about books/links. The last post is a very helpful link to what chapter 7 is all about...a kind of nuts and bults article that a pro bono lawyer would use. If it were me id read that from top to bottom many times and id get clarity in many other areas

Knowledge is power.

[startingup]

If it were me id have thousands of follow up questions for my lawyer.. which id attempt to first answer on my own by doing due diligence in learning bankruptcy law and rules. I have a thread in ProSe forum about books/links. The last post is a very helpful link to what chapter 7 is all about...a kind of nuts and bults article that a pro bono lawyer would use. If it were me id read that from top to bottom many times and id get clarity in many other areas

Knowledge is power.

As far as I read it, your answer (+their suggestions) cover all the bases.
Example: My partner and I create a new LLC, and everything is through his/her pocket. (It's simply a few months- I wouldn't complicate w factors eg salaries).
If my lawyer says, "they're exactly right", it'd seem I have a trouble-free path (again, assuming I don't complicate it).

The books never provide certainties, which is why I said your answer was helpful - it equips me to narrow the scope of my question to ask my lawyer.
The fact that you're saying you'd have a 1000 questions suggests I should just look for a job in the interim. :/

[bornfree2]

In my experience books provide a more thorough analysis of an issue than any one particular lawyer could because they are not specialized in that particular issue. This is the domain of legal research which requires intellectual effort. But no lawyer will give any certainty or guarantee that's probably why their replies are short and sweet or non existent!

If this is a technology startup perhaps Intellectual Property also comes into play. Any copyrights, domain names, that I personally hold before filing also become part of the trustee estate.

If a VC asks 'this is a great idea, tell us the genesis story' and I say 'well i saw a need to scratch an itch and coded this website/app over the weekend. then i put it out there and it gained traction. So now i want to take it to the next level and i need $1 million."

Well if the VC is being asked to invest in already existing code/product to gain a first mover advantage, that VC, on finding out of your BK, would/should know they are investing in IP that belongs to the estate.

If it were me in that case, id consider startubg completely over. new name, new brand, new ip approach. A 2.0 version which would be better, faster, cheaper etc. And of course, id remember about the start up history of compaq and how they reverse engineered the IBM bios code by having a black box outside engineer assigned to recreate it from scratch. (see the TV show Halt and Fire for a docudrama about that) That way my personal involvement in the new IP code not be called into question.

But its much easier to do the infamous 'pivoting' and take the same idea, give it a new twist, reimplement it, and its a new creation

Of course this is just all wild speculation on my part and not legal advice.

[bornfree2]

startingup i came across this video by a BK lawyer/professor that addresses this topic. The relevant part is here regarding a corporation formed during/after BK

https://youtu.be/7FfWCElTdaY?t=1650

The whole video and entire channel is very useful

https://www.youtube.com/channel/UCflVKytsm-S_2po8NFM6qRw/videos

[startingup]

Really appreciate this (again).
I feel your post "In my experience books..." is not applicable to my situation. I just have a friend who also wants to do the startup.
He actually brought up the idea via email, if there needs to be proof. (with that in mind, is everything I write via gmail secretly being tracked and can come against me?) The fact that you used that as an example makes me feel people can do startups after filing (before discharge), generally, I think.

Per your bk video (https://youtu.be/7FfWCElTdaY?t=1650), this isn't in the context of post-filing pre-discharge, so it's not applicable (I think?). What he said (loss of equity) is totally understandable, because it's pre-filing.

To be clear, right now, I'm almost certain I'm just going to go the job route, but apply for a small startup (first 10 members). Which means I'd still get a lot of equity, but all things considered, feels less flamboyant, etc.... But who knows, the mind can be fickle, especially if you're a dreamer like me.

[bornfree2]

startingup yes everything done post filing is your new financial life so starting a new business would be ok since its outside the estate that was created when you signed the 101 form. I was just playing devils advocate to suggest that if you had any IP that the new startup would use, you may run into problems. And the other piece of wisdom given here was to not allow your finances from your old life (prefiling) bleed into the new one... a new job into a seperate account would assure that.

Also im probably the most overthinking bk filer on this forum so most of how i see things is hypothetical worst case thinking. I figure Ive lost practically everything may as well go to extreme measures to preserve what I have. meh

I love startups! Ive been in 5. And look at me now.. bankrupt! lol