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Question: What do you think are some best practices when it becomes clear that a company is starting to fail? What moves do VCs want founders/CEOs to take to create as soft a landing as possible? On the other hand, what should the founder/CEO "not do" in this situation?

Even the best operators and investors have to deal with the fact that some companies are not going to survive. Entrepreneurs that handle this process the “right way” will earn a lot of respect from those around them. If handled the wrong way, the bridges burnt may make it much more difficult to be successful in the future. A few tips:

Be intellectually honest about your business and its likelihood of success, and adjust accordingly.

Have early warning systems in place (Key Performance Indicators – KPIs) to determine if the business is on track or not. If the company is not on track, and shutting down is a likely alternative, start conserving capital. The sooner capital conservation begins, the more time available to find a buyer or go through an orderly shutdown. As detailed in the following link, there are a number of items to handle when closing a business - http://www.nolo.com/legal-encyclopedia/checklist-closing-business-20-things-29027.html - and having to go back to investors to ask for more money to shut down a business is the last thing anyone wants.

Think about the big picture.

The CEO isn’t the only one affected when a business closes. The company’s employees, customers, partners and investors will all be affected. Treat all stakeholders with respect and help them to the extent possible. That may mean trying to line up alternative solutions for your key customers. That may mean giving employees reasonable notice and assisting in a job search. That may mean returning money to investors if it’s clear the business is not going to work. Imagine the difference in how we perceive an entrepreneur that says “this isn’t going to work out, and while it’s not the outcome any of us wanted, I’m thinking about shutting the business down and returning some of your capital” vs. an email announcing the company is shutting down, or even worse, a call saying “We’ve hit a brick wall and need a little more money to officially dissolve the business to keep us from getting sued.” 

Communicate with key stakeholders.

While this is the end of one business, it’s not the end of relationships with stakeholders, and it’s probably not the end of a career. Be thoughtful and honest when communicating with these folks. CEOs may not want to air all of their dirty laundry, and the message and timing of the communication to each stakeholder may be different (e.g. the conversation with investors may come the first time shutting down seems to be a likely option while the conversation with customers may come weeks later), but try to communicate with everyone and treat them with respect.

Even though taking these steps may not materially affect the outcome for employees, customers, partners or investors, handling the shutdown process the “right way” may make a big difference for you in the future.