The legal fracas between the majority Macquarie-owned software success story Nuix and its co-founder Eddie Sheehy has potentially profound implications for the nascent Australian tech sector.
At a time when the nation is seeking to attract entrepreneurs and innovators to join Australia’s maturing but fragmented innovation ecosystem, the circumstances that prompted Federal Court action sends an unfortunate and alarming message to the world.
The Australian Financial Review has been reporting Nuix’ steady march toward a $1.5 billion-plus IPO that has included the shocking dilution of the value of an option package owned by Mr Sheehy from an estimated $110 million to a post- share split value of around $1 million.
That seems like quite a haircut, regardless of how you look at it.
The circumstances of the legal action reads like a horror movie script that is micro-targeted at startup founders, where early deeds of massive value creation ends in tears and massive equity dilution. Is this every founder’s most basic nightmare?
Mr Sheehy lodged an application in the Federal Court on October 23 claiming that Nuix treated him unfairly and differently to every other shareholder and option-holder in relation to a 50:1 pre-IPO share split.
The share split to every other share and option holder other than Mr Sheehy, which reduced the value of his equity by more than 98 per cent.
“This is a classic case of David and Goliath and the second time I have had to seek the Court’s assistance as a result of the action of Nuix,” Mr Sheehy said.
“In the first legal matter, which lasted over two years, the result was that Nuix agreed to the orders that I had sought just before the hearing of my case was scheduled to commence,” he said.
“This time, Nuix and Macquarie Bank are using their size and their current momentum in selling the business to intimidate me, a co-founder, former CEO and significant shareholder of Nuix.”
Mr Sheehy left Nuix in 2017 in the wake of an apparent dispute with co-founder and then- Nuix chairman Tony Castagna, who is also a former Macquarie executive.
In the telling that other founders will find hard to square is that the 50:1 share split was applied to Dr Castagna’s options – which will be worth as much as $75 million – but not to Mr Sheehy’s.
And this is where the longer-term negative impact of such disputes seeps into the Australian innovation ecosystem.
How can we attract the best and brightest to come to these shores to enjoy our lifestyle superpower status and set up high-value, high-growth tech companies against a backdrop of StartupLand financial battles like this?
Indeed, how can we encourage our best and brightest to leave well-paid corporate jobs to build new startups if this kind of fight is what the future might hold for them.
“It is this type of behaviour that smothers technology innovation in Australia and creates distrust among the nation’s amazing tech founder community with financial institutions, venture capital and private equity firms,” Mr Sheehy said.