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Datto Board Member Steps Down Before $561M IPO

Vista Equity Partners Co-Founder and President Brian Sheth, who has served on the Datto board since the MSP platform provider was acquired by Vista three years ago, has given up his board seat.

Vista Equity Partners Co-Founder and President Brian Sheth, who has served on the Datto board since the MSP platform provider was acquired by Vista three years ago, has stepped aside just before an expected $561 million Datto initial public offering, according to a U.S. Securities and Exchange Commission filing.

Sheth, 44, was one of just nine Datto directors that signed the company’s Sept. 29 S-1 IPO filing. An amended S-1 filing on Oct. 14, however, does not include Sheth, who worked at Bain Capital on leveraged buyouts of technology companies before co-founding Vista.

Datto’s IPO is scheduled for Wednesday with 22 million shares set for an offering range of $24 to $27. At the midpoint of $25.50 Datto would have a market value of $4.2 billion.

CRN reached out to Datto and Vista Equity Partners but had not heard back at press time.

Replacing Sheth as one of the Datto directors is Adrian Dillon, a former top finance executive for Skype and Agilent Technologies, who joined the Datto board in August 2020. Dillon is a member of the Datto Audit Committee.

The change in board leadership comes with Norwalk, Conn.-based Datto warning that Vista Equity’s 72.2 percent ownership stake after the IPO would pose a conflict of interest for investors and Datto itself.

“Vista controls us, and its interests may conflict with ours or yours in the future. Vista will control the vote of all matters submitted to a vote of our board of directors, or our Board, or shareholders, which will enable it to control the election of the members of the Board and all other corporate decisions,” Datto warns in its Risks section of the S-1 filing. “In addition, our bylaws will provide that Vista will have the right to designate the Chairman of the Board for so long as Vista beneficially owns at least 30% or more of the voting power of the then outstanding shares of our capital stock then entitled to vote generally in the election of directors.”

As a result of the Vista Equity ownership stake, Datto will be classified as a “controlled company” – which gives it the right to not comply with traditional publically held governance requirements. That means Datto can forego governance measures that include the requirement that a majority of the board be independent; the requirement for a compensation committee composed entirely of independent directors; and the requirement to have a nominating and corporate governance committee composed of independent directors.

In the S-1 filing, Datto said it intends to take advantage of the “controlled company” corporate governance exemption.

The Datto IPO is set to go off just one week after Vista Equity CEO Robert Smith, 57, admitted to committing “serious crimes” in what federal prosecutors are calling a $2 billion tax fraud case.

The man Smith has “agreed to cooperate” against is a former business partner and current Reynolds & Reynolds CEO Robert Brockman, who is accused of carrying out the largest ever tax fraud by an individual, prosecutors said.

As a part of his deal, Smith signed a six-page statement of facts that details more than a decade of criminal activity to avoid taxes, including creating shell companies in Belize and Nevis, and filing false tax returns between 2006 and 2014.

Bloomberg is reporting that Smith informed executives on a call last week that Sheth may leave the private equity company.

Sheth had told executives in December that he wanted to leave or retire, Smith said on a call, according to Bloomberg.

How MSPs will react to the Vista fraud depends on which one of two possible camps they fall into, said Dave Seibert, CIO of IT Innovators, an Irvine, Calif.-based MSP and Datto channel partner.

The first camp consists of a majority of MSPs in the Datto ecosystem who see the growth of Datto and the positive impact the vendor has had on their business, Seibert told CRN. Datto has a good reputation and good rapport with these MSPs, many of whom probably never heard the news, and so are not concerned about the fraud, he said.

“The typical MSP looks at Datto’s growth, and sees Datto as a positive, full-steam-ahead company,” he said.

The second camp is those MSPs who follow the news and understand the financial issues, Seibert said.

“They see the $2 billion tax fraud, and they realize that Vista controls 72 percent of Datto’s share and control the board of directors, which means Vista controls the direction of Datto,” he said.

The result, Seibert said, is two different paradigms: the MSPs who just follows Datto and sees the momentum from its growth, and the MSPs who follow the financials and worry about Vista’s control over the board of directors.

“They have totally opposite views,” he said. “And they’re both right.”

Seibert said he straddles both camps.

“I see the growth Datto has,” he said. “Datto was valued about $1.6 billion when it was acquired by Vista, and at the IPO when it will double in value. I see it will continue to grow and develop more solutions, and I say, ‘That’s awesome.’ And I look at the fraud and who controls Datto, and worry about what it means.”

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