Coup at Cratos

It appears the investors behind Cratos Networks have engineered a bloody coup, resulting in the removal of its CEO and a reconfiguration of the company’s board.

Late last month, Cratos CEO and founder Sanjeev Newarikar was escorted out of the Chelmsford, Mass., headquarters by bodyguards, according to sources. Jack Skydel, vice president of business development and founding member of Comstellar Technologies Inc., the venture capital firm that bankrolled the company, has taken over as the interim CEO.

“Sanjeev is not the first founder, nor will he be the last, who has left a company,” says Skydel. “He made a tremendous contribution, but not all founders can go along for the ride.”

Here’s another twist: Raj Singh, the former president and founder at Comstellar, who orginally led the Cratos investment, has given up his Cratos board seat and is now taking a backseat role at Comstellar.

Singh, now pursuing a career as a film producer, was not available for comment. He is on vacation from Comstellar until July and is said to be busy shooting his first film.

Newarikar and Singh were the marquee names behind Cratos. Both had worked together at Fiberlane Communications, a pioneering metro networking company that was broken up and later evolved into Cerent, Siara, and Cyras, all successful startups that were sold for billions of dollars (see Fiberlane Founder Finds Another Startup). Newarikar was the technical visionary who had also worked at Ascend Communications and Lucent Technologies Inc. (NYSE: LU). Singh had a string of hits with his Fiberlane offspring, but he's struggled to get his latest startups off the ground (see Raj Singh's Sour Note).

So what happened at Cratos? Apparently the problems developed during the second round of funding.

The story goes like this, says one source close to the situation:

On April 19th, 2001, Newarikar received a term sheet for Cratos's second round of funding, to be led jointly by Charter Ventures and First Hand Capital Management Inc. The next day, Cratos’s attorney sent some term sheet changes to the investors.

On April 21, Raj Singh reportedly called Newarikar to tell him that Comstellar was organizing a meeting to decide the fate of the company. He also informed Newarikar that he would be resigning from his Cratos board seat.

Two days later, Cratos still had not heard back from the investors, a situation that was “very unusual,” according to the source. Finally, on the evening of April 23, Charter Ventures called to inform Newarikar that it would be passing on the deal.

The next day, Newarikar was escorted out of the building by “hired bodyguards." Comstellar had apparently converted its preferred shares of the company to common shares, so that it would hold a majority in the company. Then it allegedly canned the entire board of directors and replaced them with Comstellar executives.

Comstellar told employees the next day that Charter was not satisfied with changes in the term sheet prepared by Cratos. The source says that when Newarikar was asked about this issue, he said he wasn’t aware of it.

Skydel says that he cannot comment on the specifics of what happened with Newarikar. But a spokesperson for the company denies allegations that Newarikar’s departure had something to do with potential investors.

“We’re happy with the technology development,” says Skydel. “Now we are adding some more management to take the company to the next level. In that context, when these changes happen not everyone goes along for the ride.”

Singh left the Cratos board about the same time that Newarikar was asked to leave (see Raj Singh's Sour Note). But Skydel says that Singh’s resignation has nothing to do with Newarikar’s leaving.

“He has been wanting to scale back his workload for sometime, and he has resigned from a number of his positions within Comstellar,” says Skydel. “He’s using this time to pursue other interests.”

In a recent interview with Light Reading, Newarikar described the Cratos product as a cross between a Cisco Systems Inc. (Nasdaq: CSCO) 15454, a Redback Networks Inc. (Nasdaq: RBAK) SmartEdge, and a Ciena Corp. (Nasdaq: CIEN) CoreDirector (see Cratos Networks Tips Its Hand). Skydel says none of the team left with Newarikar, but they are in the process of filling some key business-level positions.

Unlike Newarikar, Skydel does not have a technical background. Before helping found Comstellar, he had been a vice president of Lehman Brothers.

“My expertise is clearly on the financial side,” says Skydel. “I’ve never built a company from scratch, and it probably won’t ever happen in my lifetime. I’m just the interim CEO until we can get someone else in here.”

-- Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com