As Jason and others indicated in their answers, it is not illegal for the business to fail and unless there was some kind of fraud involved, you should not be worrying about your investors suing you or any implications of jail time, etc.
For the business itself, there are actually a few possible paths forward and exactly what happens depends on how the business is dissolved and what the creditor situation looks like and what kinds of assets remain in the business. For the sake of discussion here, because there are VC's involved, I'm assuming the business is incorporated and therefore all equity holders (owners) are insulated from the liabilities of the business (see footnote) unless somebody personally signed for something.
For the most part, the VC's, assuming they have controlling interest in the situation will want to do one or some combination of the following things with the business:
- Licensing or direct sale of the developed technologies to another business prior to or part of bankruptcy.
- Merging of the business with another business in the VC portfolio to pickup people and or technologies. The merged company generally assumes the liabilities of the failing company here, but this can be part of the bankruptcy process.
- Chapter 7 Bankruptcy (US Code Term) - Court managed dissolution of the business where all assests are liqudated to pay liabilities of the company to maximum extent possible
- Chapter 11 Bankruptcy (US Code Term) - Renegotiation of liabilities to allow the company to continue to operate and perhaps reemerge with new funding. Usually this case only makes sense when the company is generating revenue.
The exception to the above and the common cases that come to mind relative to personal signatures might have been involved include:
- Office space leases. It is very
common for landlords to ask for a
personal guarantee on a lease for
start-ups. Of course, I would not
recommend this, but if the founder(s)
did this, the landlord might trying
suing for the balance of the lease
when the business goes down the
- Bank Line of Credit. Operational
lines of credit with a bank are
really hard to get without personal
signature of some kind in a start-up.
If the founder personally signed for
such a line, this is likely to be a
discussion point with the bank and
highly recommend some way of paying
this off with company funds prior to
Footnote: There are some exceptions to the corporation liability shield in some locales. For example, companies incorporated in New York State, employee payroll liabilities of the business extend personally onto shareholders that own more than a certain percentage of the company's stock. This is a really good reason to incorporate in a state like Delaware and not New York.