Chapter 11 is a court-supervised bankruptcy path where a company reorganizes its debts and operations instead of shutting down right away.

How it works

When a company files for Chapter 11, an automatic stay stops most collection actions. Management usually stays in control as a “debtor in possession,” though the court and creditors can push for changes. The company proposes a reorganization plan: which creditors get paid, in what order, and whether equity holders keep anything. Creditors vote on the plan; the court confirms it if legal requirements are met. During the process, the company may reject leases, renegotiate vendor terms, sell assets under court approval, or raise new capital through a “debtor-in-possession” financing line. Venture-backed startups rarely file Chapter 11 at seed stage, but growth companies with heavy debt, failed acquisitions, or unsustainable burn sometimes do when a straight recap or sale is not available.

Why it matters

• Founders: Equity is often wiped out or deeply subordinated. You may lose board control, face management replacement, and operate under strict court oversight. Personal guarantees on debt can still bite outside the corporate filing.
• Investors: Preferred holders may convert, take a haircut, or receive pennies on the dollar. Follow-on capital inside Chapter 11 is possible but expensive and dilutive. Valuation and liquidation preference math gets rewritten by the plan, not your original term sheet.
• Creditors and lenders: Secured lenders often drive the outcome. DIP financing providers typically get super-priority status and may end up owning the company.

Common mistake

Assuming Chapter 11 is a soft reset that preserves venture economics. In practice, existing common and much of the preferred stack frequently gets restructured away unless new money explicitly protects certain classes.

Related ideas

Chapter 7 liquidation, debtor-in-possession financing, restructuring, distressed M&A, and going-concern sale processes often sit on the same decision tree as a Chapter 11 filing.