SANgate CEO Removal Puts Company At Risk

It?s been said that the data storage sector is saturated, but no one really expected it to be thinned out like this.

Yesterday, a Massachusetts Superior Court justice legally enjoined SANgate Systems Inc. CEO Doron Kempel from having any employment or policy-making relationship with the company over the next nine months. The injunction was imposed in response to a complaint by EMC Corp., which alleged that former employee Kempel had violated a 12-month non-compete clause when he resigned his EMC post to join SANgate this past June.

On the surface, the ruling would not seem fatal to SANgate, as the Southborough, Mass.-based company survived admirably through the forced resignation of its first CEO. Indeed, a company spokeswoman expressed disappointment, but said Kempel?s departure would not cause any disruptions to SANgate?s day-to-day business. She added that the company had no plans to appeal the decision.

But while everything may be spinning out fine on the surface, a look inside the court record reveals a far bleaker picture for SANgate.

Tom Crotty, a general partner with Battery Ventures and SANgate board member, wrote in an affidavit for the defense that a decision to remove Kempel would cause irreparable financial harm to SANgate by delaying an anticipated third round of venture capital financing. The deal was originally expected to close within six months, but Crotty argued it would take six months just to find a new CEO, without which the fund-raising process could not legitimately commence.

?In sum, enjoining Mr. Kempel from working for SANgate at this time will almost certainly force SANgate out of business,? Crotty wrote.

The company still has some cash in the bank as part of its $10 million Series B round this past spring, but it is not yet generating any revenue. Its network storage platform is not expected to be commercialized until sometime early next year, and Crotty?s affidavit suggests that SANgate may not be able to bridge the revenue gap without Kempel on board.

The only other possibility, of course, is that Battery and fellow SANgate backer Jerusalem Venture Partners (JVP) could prop up the company until a new CEO is found. Neither Crotty nor Erel Margalit, who represents JVP on the SANgate board, have been available for comment as of Wednesday afternoon. The spokeswoman said they were behind closed doors with the rest of the SANgate board, trying to devise a course of action.

At the time of its Series B financing, the company was valued at $60 million.

Dan Primack can be contacted at: Daniel.Primack@tfn.com

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