ABC vs. Chapter 7 vs. dissolution: which exit fits your venture-backed startup?

When a venture-backed startup reaches the end, founders usually reach for the word "bankruptcy" — and usually that's the wrong word. Most VC-backed companies that fail never file bankruptcy at all. There are three main exits, and the right one comes down to three facts: how much you owe, how angry your creditors are, and whether there's anything left worth selling.

Door 1: Dissolution

A dissolution is the clean, voluntary wind-down. It's for companies that are solvent enough to pay what they owe — or close to it — and simply need to stop. The board authorizes it, you make final filings, settle ordinary payables, distribute anything left to stockholders, and file a certificate of dissolution.

It's the fastest and cheapest path, it stays private, and the board keeps control the whole way through. The catch: it only works if your liabilities are genuinely covered. If you owe far more than you have, a dissolution doesn't make those creditors disappear — and pretending otherwise can create personal exposure for the directors.

Door 2: Assignment for the Benefit of Creditors (ABC)

An ABC is the venture world's quiet workhorse, and it's what most people actually mean when they say "structured wind-down." It's a state-law alternative to bankruptcy: the company assigns its assets to an independent third party — the assignee — who acts as a fiduciary, sells the assets, and distributes the proceeds to creditors.

Compared with bankruptcy it's usually faster, cheaper, and far more private, and you get to choose an experienced assignee rather than draw whoever a court appoints. It shines when there's real value to sell — IP, a working product, a team an acquirer wants — because a respected assignee can run a fast sale and maximize what creditors recover. Two things to know going in:

• There's no automatic stay, so a determined creditor can still sue during the process.
• Once the assignment happens, the board steps aside — the assignee's duty runs to creditors, not to you.

Door 3: Chapter 7 (or 11) bankruptcy

Federal bankruptcy is the right tool when you need the one thing only a court can give: the automatic stay, which freezes creditor lawsuits the moment you file. Chapter 7 liquidates the company under a court-appointed trustee. Chapter 11 can preserve a going concern or run a "363 sale" that delivers assets to a buyer free and clear of liens — valuable when there's a real business to sell but messy liens to cut through.

The price of that protection is that bankruptcy is slower, more expensive, and public, and the court — not you — runs the process. For most small startups it's overkill. For ones facing active litigation or genuinely contested claims, it's sometimes the only thing that works.

A quick way to tell which door you're at

Three questions get you most of the way:

• Can you cover what you owe? If yes → dissolution. If no → keep going.
• Are creditors cooperative, or litigating? If they're reasonable and you want speed and privacy → ABC. If they're suing, or you need a court to halt them → bankruptcy.
• Is there anything an acquirer would want? If there's real value to sell, an ABC (or a 363 sale in bankruptcy) exists to capture it. If there's almost nothing left, the cheapest compliant exit wins.

The honest part

These aren't always clean categories. A restructuring can reduce liabilities enough to turn an ABC candidate back into a straightforward dissolution, and one hostile creditor can push an ABC toward bankruptcy. The decision is genuinely fact-specific — which is why the right first step is rarely "pick a door" and almost always "map the situation, then pick the door."