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Until this April’s market crash, law firms were putting great stock in their own technology practices. Even firms with no particular history of representing start-ups began to develop and promote their intellectual property, e-commerce and emerging technology departments. But now that formerly red-hot dot-coms have plummeted in value, the same firms that built up their e-commerce departments must cope with the fallout. While many attorneys optimistically predict their clients will survive, they also acknowledge that the nature of representing a start-up has changed. With the public markets all but closed, venture capitalists getting pickier and dot-coms burning through their cash, some high-tech lawyers have had to retool their practices to accommodate the changing landscape. “The dot-com companies still require a very substantial amount of corporate work,” said Greg Markel, Brobeck, Phleger & Harrison’s managing partner in New York. However, he added, “it’s different in mix than it was before.” For instance, instead of taking a company public, the lawyers are advising clients on alternative ways of raising money. Now included in discussion between the start-ups and their lawyers are topics such as refinancing debt, slowing down the burn rate, exploring merger options and bartering for services. Many companies who had planned to make an initial public offerings this spring are especially in need of cash. After their exit strategy was abruptly short-circuited by the Nasdaq crash, they had to quickly finagle enough money to stay afloat. SITTING ON THE SHELF For instance, New York-based Stroock & Stroock & Lavan had papers for nine clients’ initial public offerings drafted and awaiting filing when the crash came. Now the statements are “sitting on the shelf,” said partner Anne Pinedo, as the companies are raising money by returning to the original investors. However, said Pinedo, the investors are not nearly as free with the funds as in the past. “The venture capitalists are now being harder on valuation,” she said. “A few months ago, you wouldn’t have heard a venture capitalist ask what a company’s burn rate is.” Pinedo adds that investors have started to protect themselves by asking for collateral in addition to equity; some are hedging their bets against a company’s bankruptcy by demanding a security interest in intellectual property as a condition of a bridge loan. Whether there will be a rash of dot-com bankruptcy filings is still anybody’s guess. A few firms are anticipating an increase in bankruptcies, but others say it makes more sense for the smaller dot-coms to either let themselves be acquired or dissolve without court order than to file for bankruptcy. “If the assets are worth only a couple of million dollars, it’s not clear to me that it’s worth the expense of a bankruptcy proceeding,” said Lawrence Gottesman, head of the bankruptcy practice at Brown Raysman Millstein Felder & Steiner in New York. Additionally, since most venture capitalists took equity in the dot-coms in exchange for their money, as opposed to making loans, the investors are not likely to get their money back in a bankruptcy. “In a normal Chapter 11, recovery by equity hovers in the zero range,” said Gottesman. Although sometimes, “a bone will be thrown to equity,” he said, it is more typical for the investors to get next to nothing. For this reason, Gottesman thinks many dot-coms that cannot come up with more financing will either be bought privately or “will simply disappear.” Even if investors can theoretically force a company into bankruptcy or into restructuring, some lawyers say that the venture capitalists are not likely to do so. “That’s not the way our world works,” scoffed Carmelo Gordian, a partner in Brobeck’s Austin, Texas, office referring to the new economy. When a start-up fails, investors “don’t sit there and fight over the carcass,” said Gordian, who called such maneuvers an “old economy” way of doing business. “They view it as time is money, and if a business is not succeeding, the best thing to do is move to the next business.” But other lawyers are heeding the more traditional wisdom that bankruptcies increase with market downturns. Lawrence Larose, a partner in the financial restructuring department at Cadwalader, Wickersham & Taft, said that most of his colleagues believe that, “what’s gone on in the dot-com world will result in bankruptcies and restructuring.” Larose’s clients are the financiers, almost all of whom are invested to some extent in the dot-coms. For now, he said, the firm is making known that it is ready to do the legal work that could lead a dot-com to restructure. “We’re out in the space, talking to people, letting people know we’re around.” BETTING ON BANKRUPTCIES Morrison & Foerster is also betting on bankruptcies. The firm started a bankruptcy practice in New York in 1999 by hiring Larren Nashelsky from Weil Gotshal & Manges. Since that time, MoFo has already been involved in one Internet-related bankruptcy this April, when the firm represented Telia Internet in its acquisition of the out-of-cash Internet service provider Apex Global Information Services. Nashelsky predicts that more companies will follow Apex into bankruptcy, and he noted that MoFo has been increasing the size of the department for the last six months. As with the initial Web-related legal work, there is little precedent in bankruptcy law addressing the issues most relevant to a struggling dot-com. In the case of Telia, Apex wanted to offer the 30 remaining technical employees jobs, but had to lend the company money until the bankruptcy closed in order to pay them. Although it is rare for bankruptcy courts to approve loans to companies that are going out of business, Nashelsky said that in this case the judge was persuaded to allow the loans because of the particular skills of the employees. “Part of what has made the start-up work so successful was the ability to be flexible and shift,” said Nashelsky. “There is no formulaic dot-com bankruptcy. Everyone’s going to be different because the companies are so unique.”

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