Disclaimer: I’m not an investor in OnLive and I know nothing about the specifics of what happened. I’m just speculating, but it’s informed speculation based on my experience.

I read a few articles over the weekend about OnLive potentially going out of business, potentially screwing its employees, and a few other things. The first articles were weirdly hostile with a focus on how OnLive just laid all their employees off in preparation for a sale in order to enrich the founders/investors at the expense of the employees. By the end of the weekend the reporting was more thorough and balanced.

Companies fail – all the time. It’s part of entrepreneurship. It’s painful and sucks when you are part of a company that fails (I know from experience – I’ve been there many times) – whether you are a founder, employee, or investor. But failure is part of it and at the moment of acceptance of failure, a good founder and board look for the most graceful path forward, however messy and yucky that might be.

One of those approaches is something called assignment for the benefit of creditors (ABC). If you were around during the collapse of the Internet bubble, you’ll remember this. It’s a lot easier and quicker than a formal bankruptcy (via a Chapter 11 filing) and allows the assets of a company to quickly be sold to a new owner. In some cases this is just for cash to pay off creditors; in other cases it’s a way to sell the company to a new owner and keep the business operating.

OnLive looks to me like the second case. The news is coming out that it has a new owner, that many of the employees have already been offered jobs post ABC, and that the service will continue to operate and customers won’t be negatively impacted.

The key thing to understand in an ABC is that 100% of the equity is wiped out and deemed worthless. The founders equity, the investors equity, and the employees equity. When a company goes into ABC, it’s almost always because the value of the liabilities far outweighs the perceived value of the assets. No buyer was found that was willing to take on the liabilities while giving the equity holders any economic value. So – an ABC effectively “cleans this up” for the new owner – compartmentalizing the liabilities in the ABC process and using the proceeds from whatever asset sales come out of ABC to pay off some portion of the liabilities.

Occasionally investors will get something in an ABC because they are creditors. If the last round (or rounds) have been in convertible debt, or just straight debt, the investors (whoever holds the debt) will be creditors. They can often be pretty high up in the creditor stack and sometimes recover some or all of their debt. But their equity will almost always be worthless.

In a situation where the company is immediately purchased out of ABC (which is what it looks like happened in OnLive’s case) many of the employees will be rehired by the new owner. While their stock options will be worthless (as is all equity) they are often immediately offered new stock option packages. Usually the vesting clock resets completely; sometimes a new owner will be extra generous and offer a shorter vesting term.

In OnLive’s case, it feels like the company simply ran out of options and couldn’t find a new investor or a buyer who would take on the company outside of ABC. Rather than shut down, they found a buyer / investor (which could be a subset of the existing investors) who would recapitalize the company and keep it going as long as he didn’t inherit the liabilities. Hence, the ABC process.

Rather than screwing the employees to enrich management, this feels to me like a pretty employee friendly approach. Hopefully the stories this week will clear this up, rather than end on “it looks like the investors and the founders screwed the employees.”

Don’t ever forget that failure is part of the process.

In my upcoming book, Startup Communities: Building an Entrepreneurial Ecosystem in Your City, Mark Solon (Highway 12 Ventures) tells the story of a “startup wake” in a section where he gives an outsiders view of the Boulder startup community.

“I’ll never forget one of my early visits to Boulder. After a full day of meeting with startups, I was asked by the entrepreneurs I was with if I’d like to join them and some peers for a “special dinner.” “Sure,” I replied. “What’s special about it?” “It’s a wake” they deadpanned. That dinner showed me that the fabric of this small mountain town was different than anywhere else I’d been. Turns out that earlier that week, a local startup had decided to shut down and the “wake” was the startup community’s way of showing these young, fragile entrepreneurs that it was okay to fail – that the honor was in trying.  They made those founders feel good about themselves in a moment that was critical in their development as entrepreneurs. As an aside, in this case the founders didn’t run out of money. After giving it their best effort, they realized their business wasn’t going to be the great success they had envisioned and they decided to return their remaining cash to their investors. The epilogue of that dinner is that the founders had roles at other local startups within a few weeks.” 

I was thinking about this last night as I was emailing with an entrepreneur who’s company is struggling. Failure is a normal part of the entrepreneurial cycle and it’s talked about regularly. There are endless stories about the entrepreneur who failed and then created a monster success for his next company. But there’s not enough discussion about how startup communities should embrace failure.

I think this is especially important for first time entrepreneurs in a community. It’s easy to prognosticate about failure when you’ve been successful; it’s much harder to go through it. It’s even more painful when it’s your first time and everyone around you seems like they are doing great, even if they aren’t really but are just putting on a good act. So a natural instinct for an entrepreneur on a failing path is to turn inward, shut down, and withdraw.

If your peers in the startup community (the other entrepreneurs) don’t notice, it’s even worse. Failure sucks – it’s often emotional, physically, and financially painful. When your friends suddenly ignore you, avoid you, or don’t have time for you it just reinforces the pain.

Having a wake for a failed company can turn this around. If you are an entrepreneur and observe an entrepreneur in your community failing, do something about it. Organize a group of entrepreneurs to have a wake. Surprise the entrepreneur who is shutting down his company and take him out. It doesn’t have to be a debaucherous, alcohol laden evening (although it can be) – rather do something that you know the entrepreneur in question will enjoy and appreciate. A nice meal. A quiet conversation. A show of support from his peers. Encouragement. Acceptance that failure is part of the entrepreneurial process.

If you are an entrepreneur in a company that is failing, don’t be ashamed. Most startups fail. What matters is how you handle it and what happens next. Let your fellow entrepreneurs throw a wake for you, let the moment happen, and then get on with the next thing. Life is hopefully long. And, for all the entrepreneurs who are leaders of their startup community, make sure you do everything you can to make sure everyone knows failure is ok.

What a great short Nike commercial staring Michael Jordan.

“I’ve failed over and over and over again in my life.  And that is why I succeed.”

As I was going through my morning information routine, I noticed a number of articles that I’d put in the “how to not fail” bucket.  I read a few of these and noticed a consistent tone of “failure is bad – here’s how to avoid it.”

Throughout my life and career I’ve failed at many things, large and small.  I view failure as a fundamental part of every entrepreneurial endeavor, whether it’s a failed project, hire, partnership, relationship, lead, customer, or even the entire business.  One of the great things about entrepreneurship in America is that failure is an accepted part of the cycle.

I used to say something like “one of the great things about America is that failure is acceptable.”  When great people fail, they acknowledge it, learn from it, get up, dust themselves off, and get back at it.  If you accept reality, you can fail gracefully and hopefully learn something from it.  It’s never fun – and it can be really stressful / painful / emotionally hard – but it’s a part of learning, evolving, and growing stronger and better.

While I fail at stuff regularly, I’ll never forget the deepest cycle of failure I’ve been in to date.  As the Internet bubble popped exploded, company after company that I was an investor in failed.  As I grappled with this, I felt like I had been run over by a truck.  After I got up, a steamroller came and flattened me.  As I was peeling myself off the ground, the steamroller backed up and smushed me again.  Then, I realized I was lying on top of a hole and the top fell in and I tumbled down to the bottom.  As I was looking up at the sky, some jerk came into view, poured gasoline onto me, and then dropped a flaming stick on top of me.  By the summer of 2001, I realized that ever day had been worse than the previous day.  I no longer got up in the morning and said “ok – today will be better than yesterday”; instead I resolved myself that every day would be worse, until it eventually got better.  Then 9/11 happened.

I hung in there, kept getting up every day and doing my best, working hard to make informed and intelligent decisions, and helping all of the companies I was an investor in however I could.  A few more failed, but a nice number survived and ultimately thrived.  Things eventually got better.  And I learned a lot.

In my world view, the best leaders understand that failure is an integral part of things.  The cliche “fail fast” is one of my favorites.  When things aren’t working, deal with it.  Another is the famous line from Atlas Shrugged “Nobody stays here by faking reality in any manner whatever.”  Denying that failure is part of our existence is akin to faking reality.

While I accept “the experience of failure” feels “negative / crappy / depressing / hard / sucky”, I don’t believe that “failure is bad.”  Deal with it, learn from it, pick yourself up, and try again.

I’ve made a large number of mistakes in my life.  My goal when I make a mistake is to understand what I did wrong, learn from it, pick myself up, and move forward.  When I’ve made the same mistake for the third time, I usually finally figure out what I’m doing wrong.

While I’ve also had plenty of success, I never get confused about where most of my lessons come from.  In case this is ever ambiguous from my writing, I learn the vast majority of my lessons from my failures.  I also have learned what I don’t know, and have figured out that I shouldn’t venture into areas where I’m clueless unless I am willing to spend a lot of time up front researching them – at least to the point where I’m no longer completely clueless.

Matt McCall points us to a great essay by James Montier from Societe General titled Mind Matters: An admission of ignorance; a humble approach to investing.  I thought it was right on and was nicely reinforced by Matt’s very personal post titled Ignorance and Humility.