When you have shares in a startup, what happens if the startup runs out of money, has debt and bankrupts?
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You have a pretty certificate that shows the number of shares you have that you can show your friends :-). In other words, you lost your investment in the startup whether it was money or work. Game over, time to find something else. In more details though, it's like any bankruptcy. The debtors of the corporations get to divide amongst them any assets the corporation has, including IP. If after the debtors are paid, there's anything left, it's divided amongst the shareholder based on their stock ownership. In the case you described, there's probably not going to be anything left over. |
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This is not legal advice and I am not a legal professional. The answer would also vary depending on where the business is located. It sounds like you are in a company structure since you have shares. My understanding is that directors and shareholders in a company only lose the startup/investment capital you have put in. Generally shareholders are paid any remaining money after all other debts have been paid, (depending on the type of shareholding.) Directors are paid last. (This is relevant for Australia, but I think it is similar elsewhere.) If you are a sole trader, or not in a legal structure, you would be liable for all the debts. Since you probably won't be able to sell your IP, you need to make a decision about what happens with that. If you are worried about debts and liability, the best thing you can do is to go and talk to your lawyer and accountant as soon as you can. |
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I am not as lawyer but I think the answer is it really depends. It depends if the shareholder personally guaranteed everything. It depends if the corporate records were maintained properly so that the collectors can not pierce the corporate shield. It also depends upon your state laws. |
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Best case scenario is that you just walk away. Other worse scenarios (for the shareholders/executives) may be that they are liable for things like payroll and other expenses. I think much depends on where you are incorporated and as someone else pointed out, how you operated the venture. |
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