Tech investors including Mike Lynch will be free to sell almost £3bn shares in Darktrace in the coming days, piling further pressure on the beleaguered cybersecurity company.

A freeze on insiders offloading shares will expire for the company’s biggest investors on Wednesday, days after Darktrace lost a fifth of its value when a City analyst said it was overvalued.

Mr Lynch, the former Autonomy boss, owns almost £900m in shares through stakes alongside his wife Angela Bacares, meaning his stake is worth more than the $815m (£593m) he made from the contentious 2011 sale of his software company to Hewlett-Packard. 

Mr Lynch is fighting extradition to the US, where he has been charged with fraud over Autonomy’s £7bn sale to HP, and also awaits judgement in a $5bn civil fraud trial brought by the company in the High Court. He denies the charges. 

3110 Darktrace share plummet

Mr Lynch’s venture capital firm, Invoke, has been an investor since Darktrace’s early days.

Other shareholders able to dispose of their stakes include partners at Mr Lynch’s venture capital firm, Invoke, who own another £380m of shares, and major investors Summit Partners and KKR.

Darktrace, one of the biggest technology flotations this year, soared to FTSE 100 status this month after quadrupling in value since its April float.

However, shares fell by 21pc last Monday when broker Peel Hunt said the company was worth half its value and suggested that its marketing was not matched by its technology. 

The end of lock-up periods can push prices down by flooding the market with new shares if early investors choose to realise their gains. In Darktrace’s case, it will more than double the number of shares available to be traded.

The company has previously warned that the end of the 180-day “lock up” period could send shares falling.

Darktrace’s prospectus said: “The market price of the shares could be negatively affected by sales of substantial amounts of such shares in the public markets, including following the expiry of the lock-up period, or the perception that these sales could occur.”

Ghosts of Autonomy continue to haunt Darktrace

For Mike Lynch, it will have felt like deja vu.

Darktrace, the cyber security firm Lynch had shepherded from foundation to London listing, was on the cusp of joining the FTSE 100. Shares had almost quadrupled since its April float to value it at over £6bn, placing it among Britain’s biggest publicly traded tech companies.

A decade after minting an $815m fortune by selling his software firm Autonomy to Hewlett Packard, Lynch’s stake in Darktrace was worth around £1bn – a stunning return after backing the company from its early days as a Cambridge University research project in 2013.

But last Monday, two days before it entered London’s blue-chip index, a research note landed in traders’ inboxes. Titled “a reality check”, City brokers Peel Hunt claimed Darktrace was worth half of its stock market value and that its current share price represented an overly rosy assessment of its potential customer base.

Shares plunged, falling as much as 27pc that day and wiping £1.3bn, or 21pc, off its value – turning around a spectacular rise in six months as a public company.

While Peel Hunt’s sell note was a first for Darktrace and its founder-cum-chief executive Poppy Gustafsson, for Lynch it will have conjured up old ghosts.

In 2008, Autonomy was also on the cusp of a FTSE 100 entry when questions began to emerge. The business software company, founded by Lynch in 1996, had fallen out of the index in 2001 during the dotcom bubble before clawing its way back through steady growth.

Mike Lynch is battling extradition to the US to face criminal charges

Credit: Hollie Adams/Bloomberg

At one results meeting, JP Morgan analyst Daud Khan stood up and challenged Lynch and finance chief Sushovan Hussain over Autonomy’s numbers. The exchange sparked a years-long battle between Autonomy and a handful of City analysts that lasted until HP bought the company for £7bn in 2011.

“Nobody was negative on Autonomy at the time, I think the best you could get was maybe neutral on valuation terms,” says Khan, who has claimed Lynch attempted to get rid of him by offering JP Morgan work. This was denied by Lynch.

“Mike and [CFO] Sushovan were very good at being friendly with City analysts. I published my note as a sell recommendation, and that started a two and a half year battle with Mike and his management team. They objected wildly to the content I was producing, despite the analysis being evidence-based.”

Khan says he was excluded from meetings for a year and Autonomy entered the FTSE 100. Meanwhile, other analysts turned negative on the stock, including Peel Hunt – the same house that just sent Darktrace shares plummeting.

HP’s takeover of Autonomy led to an $8.8bn writedown and allegations that executives had fraudulently inflated its value.

Lynch’s battle with the City then moved to one with the courts after he was hit with US criminal charges in 2018 and a $5bn civil lawsuit from HP that started the following year. He has denied fraud and is currently fighting extradition to America.

Mike Lynch vs HP timeline

There are no suggestions that Autonomy’s alleged actions have been replicated at Darktrace but the company has struggled to distance itself from Lynch.

“Mike is a visionary technologist and was an early investor in Darktrace but he isn’t involved in the day-to-day running of the company,” Gustafsson said earlier this year.

UBS, which advised Autonomy on its sale, pulled out of the listing, while major advisers such as Goldman Sachs, Morgan Stanley and Citigroup did not take part. Jefferies and Berenberg, which handled the float “did an absolutely fine job,” said one City source. “But it would be a fair comment to remark upon the absence of the usual roster of big names.”

Listing in the US was ruled out, due to Lynch’s legal issues. Darktrace’s head of investor relations, Luk Janssens, happens to be married to Berenberg’s head of European equities, who was rescued from the float.

Lynch has no executive role at Darktrace and left the board in 2018, although continues to sit on its two-person science and technology committee. His venture capital firm, Invoke, no longer shares the company’s Trafalgar Square office, putting an end to the days when he would roam the building accompanied by his dog Bella. 

But he remains its second biggest shareholder with a combined 16pc stake with wife Angela Bacares. Concerns that Lynch could have to sell those shares as a result of his legal battles have previously hit Darktrace: shares fell by as much as 17pc in July when a judge ruled that he should be extradited to the US.

Darktrace founder Poppy Gustafsson has said Mike Lynch isn't involved in the daily running of the company

Credit: Jon Enoch / eyevine

This week Darktrace will face a new test as a 180-day lock-up expires on share sales from insiders including Lynch. It has warned this could send its price falling further.

Last week’s note by Peel Hunt said customers described its technology as “snake oil” and that relative underspending on research and development meant its marketing, and share price, was not backed up by reality.

Unusually, the company responded and said Peel Hunt had misrepresented the market and customers were happy.

Khan, the analyst who turned bearish on Autonomy in 2008, says he sees parallels between the companies including disagreements with analysts about the potential market. Most remain bullish, which itself points to high customer satisfaction scores.

Former employees say Lynch’s influence at Darktrace is clear, although impending decisions in his civil trial with HP and his extradition case are likely to be more time consuming. This time, he is at least likely to stay out of any more rows with the City.