Recession? May be time to pivot.
As the Valley responds to world economic conditions with mass layoffs and a cool down in financings, planning is more important than ever. A company might shift its business strategy or change its business model, also known as a pivot. Startups and smaller companies have an advantage because they can be more nimble in this regard.
It might be time to pivot.
A pivot is when a company discovers that what it was doing isn’t working and decides to do something else. The company shifts its business strategy based on market feedback or changes its business model. A startup named Gigya famously pivoted in 2009. Gigya sold products for MySpace and Friendster; however, Facebook was taking over the market. The CEO realized that radical change was needed. They convinced their existing investors to extend their last round so that they could put R&D dollars into a new product that worked with Facebook instead of competing with it. The strategy was successful. The company survived and was eventually acquired by SAP for $350 million.125 The Valley is full of stories like Gigya’s. They could fill a book in their own right. Often overlooked, however, are the legal strategies necessary to pull off a successful pivot. A pivot is a big deal, so the board of directors should carefully consider the issue and document it. The board is generally protected from the adverse consequences of its decision by the business judgement rule, but the board must still consider its duty of care. A meeting is advisable, with a record that the issue was thoroughly discussed and the issues vetted, with the help of professionals if necessary. Obviously, the investors may not understand a pivot. They invested in a company that makes gadgets and now you are making widgets? Were you always planning on making widgets and, if so, why am I just now hearing about this? As noted above, transparency is key, since once an investor gets it in his head that you have deceived him, it may take a court to convince him otherwise. Many shareholder lawsuits start with a failure to communicate. You should consider how the pivot will affect existing contracts with vendors, suppliers, customers, consultants, and employees. Will it require the company to breach its obligations and, if so, what is the expected cost of that? Some more arcane issues that should be run by counsel are licensure, regulatory and trade. If the company has foreign investors, it may not be allowed to enter the new business. A pivot can be as legally complex as starting a new business in some ways.
For more about pivots and other strategies for dealing with a downturn, see 10,000 Startups Legal Strategies For Startup Success https://www.amazon.com/10-000-Startups-Strategies-Startup-ebook/dp/B09S14JQ9K/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=1645143120&sr=8-4
