At this point, you should explain to your VC (hopefully he is your only one) that you intend to: (1) wind down the business, layoff all staff, pay off all debtors and cease all company operations. And (2), without soliciting any employees or infringing on any IP, you intend to reconstitute a new company in the X space where X is your current business.
Explain how it was a pleasure to work with him, and you're sorry you were unable to return his equity in this endeavor. You can ask if he is interested in finding a buyer for his remaining equity, despite it's precipitous loss in value pending the imminent loss of all employees, and if so, you may be able to arrange a buyer.
You are on the east coast so be sure you do not have any sort of non-compete agreement with your company that is enforceable. You most certainly have a non-solicit agreement in place, so be cautious, and email none of these communications or plans around. This is a decent time to be paranoid.