Napster, the controversial online song swapping service, is close to going under following the resignation of its founder, Shawn Fanning, along with the firm's chief executive and a number of other senior staff.
The exodus follows the failure of negotiations between Napster and Bertelsmann, the German media group which hoped to acquire the business.
The departures appear to spell the end of hopes of Napster relaunching as a legitimate business. The service once threatened the music industry by allowing users to swap songs for free. At the height of its popularity it had 80m users.
The deal with Bertelsmann was wrecked by infighting on the Napster board. The offer, said to be in the region of $15m (£10.3m), was rejected by the private equity firm Hummer Winblad Venture Partners, which has two seats on the board.
An email sent to staff by Napster chief executive Konrad Hilbers said he had reached an agreement with a buyer which would have kept the firm together. But the board had chosen not to pursue the deal. "I am convinced that not pursuing the offer is a mistake and it will lead the company to a place where I don't want to lead it," he said.
Mr Hilbers was installed by Bertelsmann last year to oversee its relaunch as a legitimate service. Bertelsmann has put $85m into Napster.
In a statement Napster said it appreciated the contribution made by Mr Hilbers. But it gave little reassurance about its future. "We deeply regret that we have not yet been able to find a funding solution that would allow Napster to launch a service to benefit artists and consumers alike. We will be looking at additional steps in the coming week to further reduce expenses."
Napster was founded by Mr Fanning, then a teenage college drop-out, from his bedroom.
The service became the focus for the music industry's anxiety about the encroachment of the internet and has been contesting copyright infringements claims by the big five recording companies.
In February 2001, a federal appeals court sided with the record companies and Napster has been offline since last July.
The record companies have since teamed up to launch their own online services, and a number of free outlets such as Kazaa and Morpheus have taken Napster's place.
