It seems like there isn't very much information on the web about wind-down processes in a start-up, largely because probably don't want to admit publicly when their company didn't pan out. However, it seems like handling this process well is as much a part of entrepreneurship as anything else. To that extent, I have a few questions:
1 - If a start-up can't cover it's liabilities and needs to wind down what happens to the assets? Specifically stuff like customer lists, IP, etc. that might not be worth very much to other people?
2 - Can the founders buy back the assets of a company if they're legitimately the people who will pay the most for them? If so, does this create an agency problem whereby when a company is running out of money the founders don't do everything they can to save it because they know if it fails they can buy the assets.
3 - Are there any guidelines for knowing when the right time is to shut a company down? Nowadays considering how cheap web startups are to run it seems like many companies could be run indefinitely. Do the founders (assuming they have taken investment) have a fiduciary responsibility to keep running the company forever or are there legitimate reasons to wind down a company before absolutely necessary?
Winding down a company is one of the most unpleasant things one can do. It almost rivals laying people off as the single worst job ever. Being around for a wind down feels awful. With that said, here are the answers to your questions:
In the end, shutting down a company really depends on how the board, executive staff and investors feel about it's future. If the company fails to be an "on going concern", then it's best to shut it down and stop burning money and time.
Hopefully this is just a hypothetical question for you and you're right; wind-down is a part of the entrepreneurial experience. I agree with Jarie that it is a very unpleasant experience, even more so then laying people off because you get to do that and deal with angry creditors too!
I agree with all of Jarie's comments. I'd just like to add to point #3.
I recently had to put a company into Chapter 7 (liquidation) bankruptcy which can be messy, lingering, and to be avoided if possible. The way to do this is to close down BEFORE you are unable to meet your creditor debts. That way you might be able to do an orderly windup and mothball the assets without necessarily having to liquidate.
To do this, the strategy I would advise is the following:
Hope this is advice you won't ever need.
Answer to your comment (add comment feature isn't working for me):
This is a tough one as it becomes a business judgement issue. Again, I'm not a lawyer, but the company's board directors face potential liability if they continue to operate when it is "clear" that the company may no longer be a "going concern". What constitutes "clear" is subject to interpretation. It may be viewed as bad faith or even fraud if the company continues to wrack up debts that it has no ability to pay.
This is definitely a decision that your board needs to make. At very least, you might need to have a sit down with your largest creditors to see if they are willing to play ball with respect to a potential investment or acquisition or not. Note that if two or more creditors get together, they can actually force you into involuntary bankruptcy.
In any event, make sure all your tax obligations are cleared up first!