So, it sucks, but it happens, and it won't matter nearly as much in June 2014 as it seems to right now.

Your co-founder will, hopefully, not find out about this through guessing "Is this my company?" on Twitter, but rather in hearing it from you. You may be heartbroken about it, you may cry a bit (totally OK). Then, you will put on your Responsible Adult pants, call your employee into the office, and tell them the situation. You will emphasize that it is in no way their fault. You will tell them the status of your future payments to them (you can make them -- good), and instruct them that they have no job now other than lining up their next gig, and that you are totally at their disposal for making that happen. First among all things you take care of your employees -- they have the worst risk situation of anyone involved.

You will then tell your investors that you're failing and will be proceeding to wind up the business in an orderly fashion. They probably already know this. None of the ones who you care about will hold it against you -- "this is the nature of the business we have chosen." Some of them may likely attempt to invest in your endeavors in the future, if you decide to go down that route.

You will then draw up and execute on a plan to wind down the business in an orderly fashion. Give your customers a window on their apps going dark, if appropriate. Turn off new signups now. Turn off ability to take money now, unless it is absolutely required to continue paying your employees. There likely a small mountain of very boring administrative work here -- your lawyer and accountant can help you through it.

After this is over, you'll probably be very stressed. That is fine and natural. You're in the hottest market ever in terms of hiring right now. If you want a job immediately, you will have many offers for it. "Built a company with real revenues from nothing. Got into an accelerator. Took funding. It didn't work." is enough of a resume to get you an interview at any number of places. If you need introductions, you are probably well-networked enough to get them, but if for some reason you want more drop me an email. Your designer co-founder will have, similarly, no shortage of offers.

Like tptacek says below, this will not meaningfully hurt your chances of creating a business later. You've likely learned plenty through the experience.

It sucks. It will be better, very soon. You don't have to be scared: this is routine and, while it doesn't feel like it, you're actually in very good position, both absolutely and relative to many other people.

Senator Wyden has been remarkable in how far he has been willing to legally stick his neck out while so many other politicians either quietly cower in fear or hop on the mass surveillance bus. He'll be getting both my public support and campaign contributions for as long as he's in office.

Your startup is going to die, you're going to get a new job (which you'll have no trouble doing), and sometime in the future you'll start another company. Maybe you'll do the next one smarter, since you'll have more experience.

Signed,

Been there.