Sidebar: The Offering

Existing common stockholders, who owned 24.3 percent of the company, will be left with 0.6 percent of the company. Existing holders of preferred stock, who owned 75.7 percent of the company, will be left with 2.8 percent of the company. Cisco, company executives, and venture capitalists will own 96.6 percent of the company.

According to the plan filed today with the SEC but not yet approved by shareholders, Cisco raises its stake from 4.97 percent to 20.21 percent (Cisco will also receive a cash payment). The venture capitalists are divided into four groups of affiliated companies. The Jerusalem Venture Partners group will raise its stake from 20.68 percent to 23.73 percent and has a seat on Cogent's board occupied by its managing general partner, Erel Margalit. The Worldview Technology Partners group will raise its stake from 16.19 percent to 17.77 percent and has a set on Cogent's board occupied by general partner James Wei. The Oak Investment Partners group will raise its stake from 14.19 percent to 18.01 percent and has a seat on Cogent's board occupied by founding general partner Edward Glassmeyer. The Broadview Capital Partners group will raise its stake from 6.14 percent to 9.81 percent and will not be represented on Cogent's board.

Although CEO Dave Schaeffer will get some of the preferred stock, his stake will drop from 12.58 percent to 1.71 percent. Other executives will see their stake drop further as they will not immediately receive preferred stock. If our calculations are correct, H. Helen Lee, Cogent's CFO, will see her 108,275 shares of common stock drop from 0.74 percent of the company to about 0.03 percent of it. In an age where CEO stock grants are carefully scrutinized, Schaeffer's seems tame. The only unusual disclosure in the 134 page document filed today is this: "The Company's headquarters is located in an office building owned by an entity controlled by the Company's Chief Executive Officer. The Company paid $333,000 in 2000, $453,000 in 2001 and $410,000 in 2002 in rent to this entity."

Five members of the board of directors (which consists of eleven people), Schaeffer, Margalit, Wei, Glassmeyer, and Hunt, will control about 61.213 percent of the company.

The preferred stock gives holders the right to convert to common stock. Based on a preliminary reading of the plan, it seems that holders of preferred stock will convert to common only if 1) it is clear that the company will never liquidate, so their preferred treatment in the event of liquidation is no longer valuable and 2) the company never issues a dividend. It was unclear to us whether conversion ratios from preferred stock to common listed in the plan are guidelines that could change depending on the price of common stock. If so, the plan could dilute the common stock even more.

The plan, as filed, also allows Cogent to award "equity compensation" to its executives. The new stock option plan is not ready, so details are not available at the present.

It appears that some of the shareholders of companies previously acquired by Cogent will also see their stake diluted significantly by the current plan.

As we read the plan and the financial statements, we wonder that the company is still public. It seems that the company could gain a lot by going private. Owned by executives, VCs, and Cisco, it would not need to disclose its financial structure or make regular reports.

The full 134 page filing can be viewed here.

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