A Blog by Jonathan Low


May 31, 2016

Startup Employees Invoke Obscure Law To Open Company Books, Value Shares

"You don't know what you got till it's gone..." JL

Rolfe Winkler reports in the Wall Street Journal:

Valuations of tech companies are in doubt after years of hype and endless cash from venture investors. Mutual-fund(s) are marking down their stakes. And the market for tech initial public offerings is all but shut, another sign startups are overvalued. “Our collective challenge is to look past the eye-popping valuations and examine this for investors, including employees,” also raising concerns about the accuracy and availability of financial information.
For more than a year, Jay Biederman has pestered Domo Inc. for its financial statements. The former manager wants to estimate how much his tens of thousands of shares in the tech startup are worth.
Domo, whose software analyzes corporate data, has rejected those requests, he said, keeping its financial records under wraps like most privately held startups.
But the law may be on Mr. Biederman’s side.
He recently discovered section 220 of Delaware’s corporate law, which can compel locally incorporated companies such as Domo to open up their books to shareholders. The law, little known in Silicon Valley, is a potentially valuable tool for thousands of tech workers who received stock awards to join fast-growing startups, as well as other small investors, who now question their shares’ worth.
To take advantage of the law, stockholders must simply prove they own at least one share and send the company an affidavit that states which documents they want and why. The magic words for unlocking financial information? “ ‘For the purpose of valuing my shares,’ ” says Michael Halloran, a securities lawyer with Pillsbury Winthrop Shaw Pittman LLP.
Companies must then comply or face the possibility of legal action. Shareholders are backed by strong case law, say lawyers. To keep their financial data private, companies often ask the shareholder to sign a nondisclosure agreement.Valuations of private tech companies are in doubt after years of hype and seemingly endless cash from venture investors lifted values to new heights. Many of those investors are now stepping back, pushing startups to deliver profit over growth. Mutual-fund firms are marking down their stakes in some startups, adding to the confusion. And the market for tech initial public offerings is all but shut, another sign startups are overvalued.
As companies stay private, their financials remain concealed. Only top investors typically receive periodic updates on revenue, profits and financial projections.
Some highly valued companies, such as software firm Palantir Technologies Inc. and ride-hailing company Uber Technologies Inc., share little if any information with smaller shareholders, say people familiar with the matter. Spokeswomen for the two companies declined to comment.

Companies say keeping their financial information private, even from some stockholders, prevents it from falling into rival hands. The lack of public scrutiny also gives them freedom to invest for the long term.


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