Do Startups and Other Private Companies Have to Provide Info to Employees?

If the employee is a stockholder, private companies, including secretive tech startups and other private emerging growth companies, must provide some company information, as confirmed by old law and new case.

Some ink is being spilled regarding the Biederman v. Domo case about a former employee and current stockholder suing Domo for financial information.  Some of the ink tells the story, but some get it wrong.  Let’s take a look.

I’m using news reports since I could not find an opinion or ruling, so accuracy may vary as we will see.

Domo usually keeps its financial information secret, like most companies.  Domo also pays its employees in stock and options, like many tech and startup companies.  Domo was richly valued in VC rounds, like many tech and startup companies.  Domo’s value may have declined, like many tech and startup companies that were richly valued in VC rounds.

Biederman wanted information about Domo’s financial condition, Domo wanted a confidentiality agreement.  Biederman refused.  According to the Information, this

“highlighted an obscure Delaware law that gives investors the right to financial information of private tech firms in which they hold stock.”

The San Francisco Business Times (the “SFBT“) misreports the Information by stating that

The Information reports that a Delaware law applies to any privately held company that has issued more than $5 million in stock awards in a year and is incorporated in the state. The rule allows employees of any U.S. private company a right to detailed financial information — even if they work for the famously opaque and sometimes secretive tech sector.”

Let’s unpack this a bit.

First, Section 220 of the Delaware General Corporation Law is not obscure.  It is commonly invoked by stockholders who demand information.  The universe of documents available to the stockholder is limited and related to the stockholder’s purpose for requesting the information.

Second, with respect to the SFBT, Delaware law cannot apply “to any privately held company,” only those subject to Delaware’s jurisdiction.  The $5 million figure refers to SEC Rule 701, which exempts certain compensation benefit plans from SEC registration requirements and has nothing to do with Delaware law.  Basically, certain disclosure requirements are triggered if the value of equity awards in a 12-month period exceeds $5 million.

None of this is new.  There are those, particularly in the tech world, who don’t understand that old rules apply to them.  You can’t force a stockholder to sign an agreement as a condition to exercising statutory rights.  I suppose you can try, but a court may disagree.  In some states, a company may be subject to penalties for refusing access to books and records.

Generally speaking, private companies do not have to make disclosures to stockholders (employee or otherwise).  However, there are circumstances where statutes and regs require opening up, such as:

  • pursuant to a proper books and records inspection request (most states have statutes requiring this, and the request has to be in proper form);
  • while there are usually no specific disclosure requirements for stockholder meetings, fiduciary considerations apply when asking for stockholder vote, such as M&A transactions; and
  • state and federal antifraud and registration/exemption rules apply when securities are involved.
Probably a different Domo, but Domo wants his stockholder books and records information.
Probably a different Domo, but Domo wants his Biederman stockholder books and records information.

Snap Common Stock and Structuring Lessons for Startups and Those Aspiring to an IPO

Does the non-voting feature of Snap’s Class A common stock offer lessons to startups or corporate governance gurus?

No.

Even before Snap’s Form S-1 filing a few weeks ago, commentators were shocked and appalled that Snap dared to offer non-voting shares to investors willing to purchase non-voting shares.  There are people who believe deeply in “best practices” and one-size-fits-all corporate governance rules. Erin Griffith at Fortune’s Term Sheet newsletter has declared that “This isn’t a rational investment.”

Griffith then goes on to describe how Snap and companies like it need to constantly change to be ahead of trends, and describes why Snap management needs the freedom to operate:

“Aside from pent-up IPO demand, Snap’s selling point is its ability to repeatedly tap into the next trend before its competitors. Ben Thompson calls this the “Gingerbread Man strategy.” (As in “Run, run, as fast as you can, you’ll never catch me, I’m the gingerbread man!”) By the time competitors start ripping them off (ahem, Facebook…), it doesn’t matter. They’re already working on the next thing.”

By the time the IPO closes, there will be about 4.5 billion shares of Snap outstanding of various classes.  Does anyone really expect that owning even a few million voting shares would have made a dent in their ability to be heard?

The demand for this offering is not based on their ability to bend Evan Speigel’s ear and provide ideas about kids messaging.

At their last shareholder meeting, Google* had about 294 million shares of Class A with one vote per share and about 49 million shares of Class B with 10 votes per share.  Management controlled almost 60% of the vote.  How meaningful was the Class A vote?  Feel empowered when you filled out that proxy?

I remember when Twitter was applauded for the plain vanilla structure of their common stock, as it was compared to the then-recent Facebook IPO, which had voting rights similar to Google.

Since their IPOs:

  • Google went from $50.12/share on August 19, 2004 to $831.66 as of this writing
  • Facebook went from $38.23/share on May 18, 2012 to $136.16 as of this writing
  • Twitter went from $44.90/share on November 7, 2013 to $16.10 as of this writing

Even Enron, the poster boy for all that is bad in corporate behavior, had state of the art governance structures in place:

“Whatever its flaws, the committee followed all the rules laid down by federal regulators, stock exchanges, and governance experts regarding director pay, independence, disclosure, and financial expertise. Enron collapsed in large part because the rules didn’t accomplish what the experts hoped they would.”

This is not to say that “oppressive” structures lead to good results.  It is to say that structures that deemed “not rational” by commentators may have a purpose that benefits shareholders.  Maybe one-size doesn’t fit all.

Snapchat doesn't care about your opinion.

Reg CF’s Crowdfunding Green Shoots

SEC notes early Regulation Crowdfunding results

Regulation Crowdfunding finally went live in May 2016 to much fanfare.  Detractors saw the beginning of a new age of fraud.  Optimists saw the beginning of a free flow of capital to small companies and a flow of riches to investors traditionally shut out of private, early-stage investments.

The answer?  Who knows?

What we do know is that the SEC released some early stats about how Reg CF has been doing since last May.

First, there are 21 funding portals. Each one of those portals is competing for the business of facilitating funding for private companies.  It will be really interesting to see how these early-stage portals survive.

Of the 163 deals that have been initiated, 33 have been completed.  There was no indication of how many are still pending or how many have been withdrawn.

The amount raised is approximately $10 million. *chicken-scratch on back of envelope to get about $300,000 per deal*

It will be educational to see if the SEC breaks out those numbers on a per-deal basis since a simple average does not tell us much.

Did one very successful deal account for a large part of the $10 million?

Did one or more deals stop at a few thousand?

How many of them are restaurants or breweries?  There seems to be a lot of those when I look at the portal homepages.
Early equity crowdfunding results from Reg CF and SEC