The Dot-Com Kevorkians

When a Web outfit dies, bad debts and lawsuits are likely to mark its passing. Now a new breed of consultant is preparing ailing outfits for the final log-off

It's a given that most dot-com companies are headed for the graveyard. But does death have to be such a painful and uncivilized experience? Richard N. Tilton thinks not.

A bankruptcy lawyer by training, Tilton is chief executive of Recognition Group, a New York City-based consulting firm that helps financially distressed companies get back on their feet -- or go out of business gracefully. Recognition has 12 clients, up from four in March, and most are failing dot-coms. "A lot of people are leaving a mess behind and hoping no one catches up with them," says Tilton.

Indeed, most dot-coms have simply disappeared into the night, often leaving unpaid employees and disgruntled creditors in their wake. While the laid-back dot-com culture was a hoot on the way up, the way down has revealed its nasty side. Human-resources policies were as common in the online world as typewriters. When Net upstarts ran out of cash, many didn't bother with federal rules about layoff warnings or even make sure that employees were paid. So it's no surprise that some onetime highfliers are now mired in lawsuits, including defunct online entertainment site Digital Entertainment Network and Web-based educational startup wwwrrr Inc.

That said, a small and growing number of dot-com investors, executives, and workers is trying to wind down their failed businesses in a less chaotic manner. It's a wise legal move. Unpaid creditors can hold officers and directors personally liable for breaches of fiduciary duty if assets are sold for less than their reasonable value. And employees can sue board members who made promises they couldn't keep.


  Engineering a more thoughtful endgame also makes business sense. In many cases, firms can help to rescue the healthy parts of a company, scale down an enterprise, or maximize the value of assets that need to be sold. Lisa Donohue, a principal at Southfield (Mich.)-based Jay Alix & Associates, which advises troubled companies, says the earlier a company explores its restructuring opportunities, the better chance it has of selling its assets. Plus, extending the life of a company by cutting costs may provide "enough of a window where you can facilitate a deal."

Sometimes workers are the ones who take proactive steps. Jennifer Eno, the former director of community and content at, an online portal for young women, saw the writing on the wall a few months ago. ChickClick's parent company was under pressure to cut costs and reach profitability quickly. Eno and her staff realized that was in danger of being put out to pasture. So she and her fellow producers drew up a plan to keep the site alive with a skeleton staff of four producers. Management bought it. Even though Snowball laid off 33% of its staff on Apr. 17, is still publishing content. Eno's initiative probably saved the site and a few jobs, she says, adding: "They could have put it on ice altogether."

In most cases, though, it's management that leads the effort to unwind the business. Michael Epstein, a principal at Boston-based Recovery Group, was hired by the board of e-business consulting firm Xpedior to scale back its operations. Xpedior filed for bankruptcy on Apr. 20, after bringing in Epstein last fall to start planning its demise. Working with a bankruptcy-law firm, Epstein helped Xpedior buy time from creditors, close several offices and sell off the leases, and form a layoff plan with severance packages and retention bonuses for employees it wanted to stick around.


  As a result, Xpedior had enough money and staff to complete its existing consulting contracts for customers who still owed millions of dollars. Not only did this help Xpedior's clients, it also brought in money that is being used to pay off its $25 million in debts. "These guys could have said: 'Screw it, we're going home,' but they didn't," says Epstein.

Other Net companies hire consultants to help salvage parts of the business. Jeffrey E. Finkle, a managing partner at New York venture-capital firm Odeon Capital Partners, hired Recognition Group to help restructure a troubled Web software company in Odeon's portfolio. The company had two product lines, one that was promising and another that wasn't. Tilton & Co. are helping Finkle eliminate the weak part of the business -- scrapping office leases and negotiating discounted employee contracts -- in the hope that the remaining part of the company can prosper one day. "Our energy is better spent building businesses," says Finkle. Most dot-coms couldn't figure out how to manage during the boom, but at least some are learning how to manage the bust.

By Spencer E. Ante in New York

Edited by Alex Salkever

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