By Sophia Kunthara San Francisco Chronicle
WWR Article Summary (tl;dr) As Sophia Kunthara reports, disputes can emerge when a startup closes its doors, especially if it doesn't plan carefully for the shutdown.
More startups fail than succeed: It's the nature of a risky business.
But how they plan for failure varies enormously, and that can dictate the damage they do as they close their doors. Some close abruptly, leaving customers, suppliers and investors in the lurch.
HomeShare, a 3-year-old San Francisco service that matched roommates and placed them in luxury apartments split into smaller units with room dividers, stopped operating in April, citing "financial constraints." It has left behind unhappy renters and at least one lawsuit -- and an object lesson in how not to shut down a startup.
"They took fees and they did just nothing for us," said Allyson Lambert, who said she lost at least $1,500 to the company. She said management at the building where she'd been renting through HomeShare declined to renew her lease, and she now plans to leave San Francisco altogether. The building's operators did not respond to a request for comment.
Another San Francisco HomeShare resident, James Reynolds, sued the company for breach of contract in April. In what may have been a signal of the startup's woes, HomeShare told its renters it would no longer collect rent from groups of roommates and forward them to landlords, and that the tenants should pay rent directly starting April 1.
"You can't just change contract agreements when you want to," Reynolds said. "That's not how it works."
Reynolds is suing for $2,459.63, the total cost of the monthly service fee for his 13-month lease plus a deposit HomeShare charged for the room divider. He said he wasn't given the services he was promised and did not agree to pay a deposit for a room divider.
Lambert's and Reynolds' complaints are emblematic of the disputes that can emerge when a startup closes its doors, especially if it doesn't plan carefully for the shutdown. In a statement, HomeShare CEO Jeff Pang said the company had been "unable to secure additional financing" and was seeking to cut costs when it made some of the changes that upset customers like Reynolds.
In early April, it let go most of its staff, and on April 26, Pang announced HomeShare's shutdown.
The rapid decline of HomeShare's business, from getting out of handling rent payments to laying off staff to shutting its doors, suggests Pang didn't follow the advice many investors offer. Most concur the shutdown process should begin well before such moves become urgent.
"You have to make the decision early enough so that you have enough cash to successfully wind down the business," Beth Scheer, a partner at San Francisco venture capital firm Homebrew, wrote in a guide to shutting down startups.
Whatever financial constraints HomeShare had, it should have put its clients and business partners on notice as early as possible, said Nellie Akalp, CEO of CorpNet, a Westlake Village (Los Angeles County) company that helps entrepreneurs start their businesses.
"The more proactive you are, the better it will sit with clients," Akalp said. She said HomeShare should have refunded residents for services they did not receive.
Pang said in a statement that the company had returned more than $1 million in funds to customers, including prepaid rent. It was not clear how much it owed customers and other creditors. HomeShare had raised $4.7 million from investors, according to CrunchBase. Pang did not respond to further inquiries from The Chronicle.
"I generally advise companies that you really have to start meeting investors and have a next round in mind when you're down to six months of cash left unless you're already profitable," said Mike Ghaffary, a general partner at Canvas Ventures, a Portola Valley firm. "If it then gets down to three months and you don't have an investor who's committed, you're now in a danger zone." When a startup is down to two months of cash, Ghaffary said, the founders should start winding it down.
HomeShare may face legal exposure as well, in particular for its role in handling rent payments and roommate disputes.
HomeShare had been on the San Francisco Tenants Union's radar for a couple years, said Jennifer Fieber, a representative of the nonprofit that advocates for renters. The group heard from tenants who didn't get along with their roommates and then faced eviction by HomeShare. That's illegal, she said, as HomeShare was not the landlord, a role it made clear in its service agreements.
"Anytime there's a middle person collecting fees that aren't really necessary, we don't approve of that," Fieber said. "All of these tenants should be paying directly to their landlord."
State and federal rules also govern the act of money transmission, which embraces taking and holding funds meant for a third party, as HomeShare did when it collected rent payments from roommates and then paid landlords. HomeShare had not registered as a money transmitter in California, a requirement other rent-payment firms like Yapstone of Walnut Creek have met.
For residents who want their service fees back, going to small claims court may be their best bet, renter advocates said. Tommi Avicolli Mecca of the Housing Rights Committee of San Francisco recommended tenants seek help with claims at the Superior Court's Access Center at 400 McAllister St.
For all the disappointment HomeShare has left behind, there's something to its concept, said Zillow economist Jeff Tucker. In San Francisco, the median rent for a two-bedroom is $4,500. City occupancy guidelines allow four people to live in such a unit. "I wouldn't take this as evidence as a lack of demand for ... finding ways to share homes and split the rent and cost," Tucker said. "I'm certain people will find creative ways to do that."