When Ian Milnes in 2001 started his fourth company, Zultys Technologies, on the heels of the 9/11 World Trade Center attacks, he never would have foreseen the firestorm that engulfed the VoIP equipment maker during this past week.

Capitalized in part by the $400 million that Milnes secured when he sold his previous venture, Zarak Systems, to Spirent at the height of the dot-com boom, Zultys rode the initial wave of enthusiasm for voice over IP (VoIP). Within two years, the company had achieved the status that most start-ups dreamed of: It had branch offices opened in London and Sydney - and Network World magazine named Zultys to its 2003 list of Top 10 companies to watch.

Over the next two years, the company continued to prosper and was lauded with praise from its customers, channel partners and the trade press. By 2005, the company, armed with its lines of IP PBXs, phones and peripheral products, grew to 235 employees and had branch offices in 10 different countries.

But at the beginning of this year, Zultys’ founder began to realize that funding was going to run dry, TMCnet has learned. At their Vaqueros Avenue headquarters in Sunnyvale, Calif., Milnes met with his EVP of Operations Al Reis and his VP of Product Marketing Patrick Ferriter – both of whom were board members – to discuss their options. In the end, the company decided to engage Citigroup as its financial advisor and began rounds of meetings with venture capitalists and private equity groups.

“We’ve been out looking for funding for six months,” Milnes told TMCnet. Through its financial advisor, Zultys eventually came to terms with a venture capitalist and began to finalize the negotiations – that is, until disaster struck.

“At the last minute, the VC decided not to invest. It was rather a shock to the system for all of us,” Milnes explained during a telephone interview.

Based on the advice of legal counsel, Milnes shuttered the Sunnyvale operations on the morning of Wednesday, July 26. Some employees were notified via telephone while others arrived only to find they were locked out of their offices. General termination notices hung on the front door with only Milnes, Ferriter and Reis inside the building working without pay. Payroll accounts and benefits were frozen. All employees had lost their jobs except for the ones in the branch office in Australia – the only profitable region.

“I know the way we handled the termination of the employees wasn’t a very friendly thing. We’re a friendly company. It’s not the way I wanted to handle it,” Milnes admitted. But the damage was already done.

“There’s so many of us who put our heart and soul into this company,” one former employee said speaking on the condition of anonymity.

In the days that followed, Milnes immersed himself in crisis management and damage control to salvage the company’s reputation with customers, partners and the channel community. Word of the layoffs broke on Greg Galitzine’s VoIP Authority Blog and spread like wildfire.

“My immediate goal is to try and restore confidence in the channel,” he said.

According to Milnes, Zultys earlier this week has been able to secure partial financing from a “private” source. Although he declines to specify names or amounts, Milnes said the funding will enable the company to operate “probably until the end of the year.” That has allowed Milnes to re-hire approximately 100 employees, most of whom are part of the sales organization.

“We obviously need to increase the staff to get back to where we used to be. That will require additional funding but we can stay at this level for some time,” he said.

Milnes said he intends to repay former employees any monies that they are owed. At least one former employee has told TMCnet that he/she would be willing to return back to work despite of all of the events that have transpired.

In the meantime, Milnes and the Zultys board continue to build the business.

“We’re still looking for additional funding,” he said.

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Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.