EARLY backers of fantasy sports outfit FanDuel are looking into the possibility of bringing legal action against the firm’s private equity funders after their shareholdings were wiped out as part of an acquisition by Paddy Power Betfair.

Due to the way the deal was structured by majority shareholders Kohlberg Kravis Roberts (KKR) and Shamrock Capital Advisors - both significant players on the US private equity scene - only preference shareholders will make a return on the sale.

Ordinary shareholders, including the firm’s five founders, scores of former employees who paid to convert options into shares, and angel investors including Kevin Dorren and Ian Ritchie, will get nothing. Share options awarded to current employees are also now worthless.

Mr Ritchie, who has been involved with numerous Scottish start-ups and currently serves as chairman of Glasgow cloud computing firm Iomart, said that while it is not unusual for seed investors to walk away with nothing once private equity funders become involved, FanDuel’s early backers feel that the firm has been undervalued as part of the Paddy Power Betfair deal.

FanDuel, which was founded in Edinburgh just under a decade ago, is reckoned to be worth $465 million once its debts have been paid off. This is not much more than the $361.2m the firm received from five fundraising rounds - $345m of which was led by KKR and Shamrock.

The private equity backers have used this as a justification for locking out the ordinary shareholders, arguing that the valuation is not even enough “to satisfy the aggregate preference payable on the A preference shares”.

However, as the deal was struck just as the US Supreme Court delivered a ruling that is expected to see sports betting legalised across America, it is thought that the business could be worth significantly more than $465m.

Until the ruling FanDuel, which generates all its revenues in the US, had been hampered by most states classing fantasy sports as gambling. The prospect of sports betting being allowed across the US removed that obstacle and had a significant positive effect on the valuation of other firms that are expected to benefit.

Indeed, Paddy Power Betfair saw its share price rise by 12 per cent on the day the ruling was handed down and by a further 6% when it first announced its talks with FanDuel two days later.

When the full terms of the deal were announced the firm’s stock was sitting 21% higher than it had been prior to the court ruling. The firm said it is acquiring FanDuel to “target the prospective US sports betting market” via the latter’s established customer base.

Similarly, Canadian firm theScore, a technology-driven business whose chief executive John Levy said is “uniquely positioned to deliver amazing fan experiences on mobile and in-game as the betting market develops”, saw its share price rocket by 87% on the day the judgment was delivered.

Mr Ritchie said that as the full terms of the FanDuel-Paddy Power Betfair deal were announced just a week after the court made its decision the valuation must have been agreed beforehand.

“The thing that I think we might have is that the valuation of this transaction is too low,” he said.

“If the company floats in a couple of years for $2 billion or something we would have a very strong case to say that the deal was done at the wrong valuation.”

Another investor who was involved with the business in its early days agreed, noting that “the view of the ordinary shareholders is that the value being agreed is not reflective of the true value of the business”.

Despite this, ordinary shareholders have not been given a say in whether to accept the deal because KKR and Shamrock have exercised their drag-along rights to push it through. Drag-along rights enable majority shareholders to accept an offer on behalf of all investors.