What happens if a startup fails in California and has VC funding? I read in a previous question that
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.Does such a thing exist in California as well?
State courts in California have not held that employers are liable for wages. New York state courts have - and even have criminal penalties for wage violations.
HOWEVER, you need to know that the there is a federal regulation called the Fair Labor Standards Act ("FLSA") and recently the Ninth Circuit US Court of Appeals held employers liable for wages after the company filed bankruptcy. This is important for two big reasons: 1) California is a state within the Ninth Circuit; and 2) the ruling broadened the scope of liability to any manager with control over the employment relationship. No shareholding was required. If you care to read the case, see Boucher v. Shaw, 572 F.3d 1087 (9th Cir. 2009).
The reason bankruptcy didn't protect the individuals named as defendants was because the former employees weren't making claims against the assets of the companies. The automatic stay you get in bankruptcy would have just put them in line with other creditors. Instead, they named the individuals and used the provisions of FLSA.
How do you protect yourself? Other than making sure that you are covered in your insurance policy, make sure that if you are facing liquity issues, that you prioritize wage issues. Become familiar with state and federal laws or have someone who can give you a primer and that you can turn to when you need to get answers.
It has nothing to do with the state but rather with the terms of agreement that you sign.