Your Startup Failed. Here's How to Financially Reset.
by Malik Amine
Key Takeaways
- About 90% of startups fail, according to CB Insights, yet almost no financial advice addresses the aftermath
- If you exercised stock options or made 83(b) elections on worthless equity, you may be able to claim a capital loss
- Rebuilding starts with cash flow: know your burn rate, cut non-essentials, stabilize before making big moves
- Your 401(k) from a failed company needs to be rolled over within 60 days to avoid taxes and penalties
- The financial setback is real, but it's temporary if you handle the next 6 months correctly
Nobody Prepares You for This Part
There's a ton of content about what to do when your startup succeeds. How to handle your exit. How to optimize your QSBS. How to invest your windfall.
But statistically, most startups don't succeed. CB Insights reports that roughly 90% of startups fail. That's not a scare tactic. It's just the reality of building something from scratch.
And when it doesn't work out, there's almost no guidance on what to do financially. You're just supposed to figure it out. Dust yourself off. Start again.
I've worked with founders who went through this, and the financial side is more nuanced than people realize. There are actual moves you can make that will put you in a better position going forward. And there are mistakes that can make a bad situation worse.
Step One: Understand Where You Actually Stand
Before you do anything, you need an honest picture of your finances. Not the version you had in your head when you were running the company. The real one. You don't need a perfect plan, just any plan.
Start with cash. How much do you have? How many months of living expenses does that cover? If the answer is less than 3 months, that changes the urgency of everything else.
Next, look at debt. Credit cards, personal loans, money you lent to the company. If you personally guaranteed any company debt, you need to understand exactly what you owe and to whom.
Then look at retirement accounts. If your startup had a 401(k), that money is yours regardless of what happened to the company. But you need to roll it over to an IRA or a new employer's plan within 60 days of leaving, or it becomes a taxable distribution. The IRS is not flexible on this timeline.
Finally, check your tax situation. This is where most people miss opportunities.
The Tax Silver Lining Most Founders Miss
If you exercised stock options or filed an 83(b) election on stock that's now worthless, you likely have a capital loss you can claim.
Under Section 1244 of the Internal Revenue Code, if your company qualifies as a small business corporation (total capitalization under $1 million at the time stock was issued), you can deduct up to $50,000 in losses as an ordinary loss ($100,000 if married filing jointly). That's way better than the standard $3,000 annual capital loss limit.
Even if you don't qualify for Section 1244 treatment, you can still claim the capital loss. It offsets any capital gains you have, and you can carry forward unused losses to future years.
A tax advisor who understands startup equity can potentially save you thousands here. According to the National Taxpayer Advocate's 2025 report, equity-related tax provisions are among the most commonly overlooked deductions for former startup employees and founders.
Also, if you paid AMT (Alternative Minimum Tax) because you exercised ISOs while at the startup, you may have an AMT credit carryforward that can reduce your regular tax in future years. This is money the IRS essentially owes you back, and a lot of people forget about it.
Rebuilding Your Cash Flow
Once you've assessed the damage, the next priority is stabilizing your cash flow. This isn't glamorous, but it's the foundation for everything else.
If you're job hunting, optimize for cash compensation in the short term. Equity at a new startup might be tempting, but right now you need liquidity. You can take equity-heavy roles again later when you're stable.
Cut the subscriptions and expenses you accumulated during the startup phase. The coworking membership, the premium tools, the business lunches. These add up to $500 to $1,500 a month that you probably don't need right now.
If you have high-interest debt, prioritize that. Credit card interest at 22% to 28% APR is the most expensive "investment" you can make. Every dollar of credit card debt you pay off is a guaranteed 22%+ return.
What About Health Insurance?
This catches a lot of founders off guard. If your startup provided health insurance, you lose it when the company shuts down.
COBRA lets you continue your company's plan for up to 18 months, but you pay the full premium (employer portion plus your portion), which can be $600 to $1,800 per month.
The better option for most people is an ACA marketplace plan. Depending on your income (which may be low in the year after a startup fails), you could qualify for significant subsidies. The average monthly premium for a Silver plan with subsidies is about $100 to $300, according to KFF.org data from 2025.
Don't go uninsured. One medical emergency can wipe out whatever savings you have left.
The Emotional Side (and Why It Matters Financially)
I want to acknowledge something that financial advice usually ignores. A failed startup is emotionally devastating. You poured years of your life into something, and it didn't work.
That emotional state can lead to bad financial decisions. Panic selling investments. Taking the first job offer regardless of fit. Making impulsive moves to "feel productive." Or the opposite: total paralysis where you can't make any decisions at all.
Give yourself a few weeks to process, but set a deadline for when you'll start executing on the financial plan. A month is reasonable. Two months is pushing it. Beyond that, inertia takes over.
And talk to someone. Not just about the finances, but about how you're doing. Founder burnout and post-failure depression are real and well-documented.
Six Months From Now
If you handle the next six months right, here's where you can be:
Emergency fund rebuilt to at least 3 months of expenses. Debt either eliminated or on a clear payoff plan. Retirement accounts properly rolled over and invested. Tax losses claimed and potentially saving you money. Health insurance in place. Clear-eyed about your next move, whether that's another startup, a job, or something completely different.
The financial setback from a failed startup is real. But it's recoverable. The founders I've worked with who bounced back fastest were the ones who treated the financial reset like a project. Systematic. Step by step. No ego, just execution.
Summary
Startup failure is common, but the financial aftermath doesn't have to be catastrophic. The key moves are assessing your real financial position, claiming available tax losses (especially under Section 1244), stabilizing cash flow, securing health insurance, and rolling over retirement accounts. Give yourself grace, but set a deadline for action. Most founders recover financially within 12 to 18 months when they approach the reset methodically.