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Arista Faces Legal Challenge as It Files for $200M IPO

Ray Le Maistre
3/31/2014
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Switch vendor Arista Networks is set to cash in on the cloud networking boom with an IPO that is set to raise $200 million.

But in filing for its proposed listing, Arista Networks Inc. revealed that it may face a legal fight with one of its founders.

The Santa Clara, Calif.-based company, which competes with the likes of Brocade Communications Systems Inc. (Nasdaq: BRCD), Cisco Systems Inc. (Nasdaq: CSCO), Juniper Networks Inc. (NYSE: JNPR), and Extreme Networks Inc. (Nasdaq: EXTR) for business from data center operators, large enterprises, and telcos, plans to list its shares on the New York Stock Exchange under the symbol ANET. The number of shares being offered and the price have not yet been determined.

The company was formed in 2004 as Arastra with $100 million in funding from two of its founders, chief development officer and chairman Andy Bechtolsheim and chief scientist David Cheriton (more on Cheriton later). The other founder was CTO and senior VP of software engineering Ken Duda.

The company changed its name to Arista Networks in October 2008 and has experienced significant market traction in the past year or so for its switches, which are based on its EOS operating system. It now claims to have more than 2,300 customers. (See Arista Announces Datacenter Switches.)

Its revenues have grown quickly in recent years, with a compound annual growth rate of 71% from 2010 to 2013. In the company's filing, it notes that its 2010 revenues of $71.7 million grew to $193.4 million in 2012, and then took an 87% leap to $361.2 million in 2013. Over the same time period, profits grew from $2.4 million (2010) to $42.5 million.

Microsoft is a major customer, accounting for 22% of revenues in 2013. Other customers include Facebook, Citigroup, Comcast, Equinix, ESPN, and Rackspace.

But there may be trouble ahead. Arista notes in its filing that it received a letter in November 2013 from Optumsoft Inc., a startup founded and still owned by David Cheriton, who quit the Arista board on March 1 of this year.

So what's this all about? Well, the letter claimed ownership of "certain components of our EOS network operating system incorporated in all of our products pursuant to the terms of a 2004 agreement between the companies," and cited "breaches of certain confidentiality and use restrictions in that agreement."

Here's the story. When Arista was founded in 2004, Optumsoft provided Arista with "a non-exclusive, irrevocable, royalty-free license to software delivered by Optumsoft comprising a software tool used to develop certain components of EOS and a runtime library that is incorporated into EOS," according to the Arista filing.

It adds:

    The 2004 agreement places certain restrictions on our use and disclosure of the Optumsoft software and gives Optumsoft ownership of improvements, modifications and corrections to, and derivative works of, the Optumsoft software that we develop. In the November 2013 letter, Optumsoft requested that we cease all conduct constituting the alleged confidentiality and use restriction breaches including the distribution of any of its software in source code form and the unauthorized access of its source code to any third parties. Optumsoft also requested that we assign certain components of our software to it that it believed to be improvements of its software tool.

Oh dear.

Arista will obviously be hoping that the relationship can be saved. "To date, Optumsoft has not filed any legal action against us, although we cannot assure you that it will not do so in the future," notes Arista in its filing. "We intend to vigorously defend against any action brought against us by Optumsoft. However, we cannot be certain that, if litigated, any claims by Optumsoft would be resolved in our favor."

The relationship is complicated further by the fact that the 2010 David R. Cheriton Irrevocable Trust, set up for the benefit of the minor children of David Cheriton, is Arista's largest stockholder.

Cheriton may no longer be on the Arista board, but the success of its IPO may rest in his hands.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
3/31/2014 | 6:32:37 PM
OMG
Legal fight with a co-founder? That never happens with a Silicon Valley IPO.

My crystal ball says this will be settled long before the IPO. As a major investor, the plaintiff has every incentive to not weigh down the price.
DOShea
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DOShea,
User Rank: Blogger
3/31/2014 | 9:52:00 PM
Re: OMG
What I've learned from this story is that I would like to be adopted by David Cheriton...

Arista is trying to cash in on this market at just the right time.
pcharles09
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pcharles09,
User Rank: Light Beer
3/31/2014 | 10:07:41 PM
Re: OMG
It seems like a show of brute force. Make your case in public so you have a good story to tell later, even though you're still getting a fat payout.
sam masud
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sam masud,
User Rank: Light Sabre
4/1/2014 | 9:22:13 AM
Re: OMG
Yup, sounds like a shakedown to me with exquisite timing. And I, like your colleague Dan O'Shea, would like to be adopted by Mr. Cheriton.
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