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Startup Employees Invoke Obscure Law to Open Up Books

424 points by ojbyrne 10y ago

nieksand 10y ago
Is this really considered obscure? I'm pretty sure I read about it in a Nolo book on small business. Anyway, be aware this applies to shareholders. Having an option to buy shares is not the same thing.
- ganeumann 10y ago
  It's not obscure. It's pretty well understood by financial markets players, including VCs. I think it's probably not well known by startup employees because it's an issue they've almost certainly never been faced with.
- jerf 10y ago
  While many people may not be able to swing exercising all their shares or a generally-meaningful number of shares, you can exercise one. As I type this I find myself wondering if it's not a bad idea to do in general, so that you move from "options holder" to "stockholder". Comments from those with experience?
  - mcherm 10y ago
    Hmm... I exercised some of my shares in a startup I was part of, solely for the sake of becoming a "stockholder" rather than just an options holder. I felt good about being a stockholder. I did not get any enhanced access to information about the company (for several reasons, among them that they were pretty open anyhow and I didn't ask). Company later closed down. Investors with classes of shares that were guaranteed more than 1x return on their investment took all the value and common stockholders got nothing. So, obviously, I lost money by exercising my options. So I suppose I got "feeling good about being a stockholder" for the cost of what I paid for the options. And honestly, looking back on it I'm comfortable with that. I wish the company had succeeded, but I'm glad I was part of it even if it didn't, and what it cost me was not more than I could afford.
kashkhan 10y ago
transparency is good for everyone. It keeps companies honest.
- fullshark 10y ago
  That means it's not good for companies.
  - xviia 10y ago
    and companies control what goes into the employment contracts. so, I expect future contracts will include clauses for "voiding of employee inspection rights" and not "company transparency".
    - UK-AL 10y ago
      That won't hold up in court.
    - npizzolato 10y ago
      According to another comment thread, those clauses are not enforceable.
  - st3v3r 10y ago
    It's good for honest companies.
- teen 10y ago
  ok Ken M
  - icpmacdo 10y ago
    This is a meme for people out of the loop about a yahoo comments troll, here's the subreddit https://www.reddit.com/r/kenm https://www.reddit.com/r/kenm . The GP is right in his style. This is my favourite comment by KenM, http://imgur.com/KM6E918 http://imgur.com/KM6E918
stillworks 10y ago
Aren't several SV startups not even incorporated in California leave alone Delware ? Most of them are incorporated in some tax heaven such as Cayman Islands and such ?
- pge 10y ago
  Most startups are incorporated as DE companies (most common) or in the state of their founding (e.g. California). This is because the laws in these states are well known and have been tested by a large body of cases that establish precedent. As a VC investor, having a company incorporated outside the US introduces additional legal risk.
  - cloudjacker 10y ago
    That awkward moment when the only law that the startup will be tested by will be labor contracts in the state they operate in, and EEOC law at the federal level, and other federal laws Making their jurisdiction of incorporation completely irrelevant as the VCs push for settlement quickly.
    - harryjo 10y ago
      Sure but why add EXTRA legal risk by incorporating in an X-factor state?
      - cloudjacker 10y ago
        It isn't extra legal risk. You simply have legal teams copying and pasting incorporation structures and contracts, now they're about to get all their company's financials leaked. Delaware's Court of Chancery isn't even a perk for 99.9% of businesses. Delaware's "body of case law" can be leaned on by courts in ANY state if there is a conflict that state has never seen before.
        MOARDONGZPLZ 10y ago
        > Delaware's "body of case law" can be leaned on by courts in ANY state if there is a conflict that state has never seen before. That's kind of how it works, but not to the effect you hope. Delaware law isn't binding outside of DE, so if another court looked at it, they would only use it as guidance. Versus if a DE court looked at it, they would use it as binding precedent. Which is the benefit of incorporating in DE. That law is out there and binding due to the large number of incorporations there and large body of case law that has developed. So answers to random questions are really known and agreed upon. Whereas with another state's court, if you can even get them to consider DE law, you're praying that they side with DE law, which isn't always the case. There's more risk. There is an advantage to incorporating in DE, whether you believe that or not. Even if the advantage is, like using Ruby or Node or something, that everyone knows the law and it's well settled and boilerplate. You don't have to reinvent the wheel.
toomuchtodo 10y ago
Interesting. My options agreement has a clause called "Waiver of Statutory Information Rights" in which I waive my inspection rights of the company stock ledger, a list of its stockholders, and its other books and records, and the books and records of subsidiaries of the Company provided under Section 220 of General Corporation Law of Delaware until the first sale of common stock to the public. Is this waiver clause enforceable? EDIT: Let this be a lesson folks! Always have an attorney review your options grant contract.
- jacalata 10y ago
  You might like the section of the article beginning "Some companies are now pushing employees to waive their right to inspect the books as a condition for receiving stock awards, says Richard Grimm, an executive compensation attorney."
  - toomuchtodo 10y ago
    Thanks for calling that out. I missed that. Its odd, because our company opens the company books to us whenever we'd like (its public on a dashboard). Its the list of shareholders it appears they're keeping private.
    - marme 10y ago
      this is actually not always ideal. If you have visibility to the company books SEC rules about insider trading apply to you even if you have no advantage by looking at the books. For public companies any employee who can see any financial or revenue information is not allowed to trade stocks outside of 14 day window after the announcement of quarterly report. Not sure what the rules are about this for private companies
      - jerf 10y ago
        For a private company, for the people we're talking about, the answer is generally that they practically can't trade at all, so you're not losing anything by looking at the books.
harryjo 10y ago
My employer told me "Our last round valued us at $XXXX for YYY shares. you have ZZZZ options at $WWWW strike price." Is this unusual? Of course this can be diluted, but it seems I had the numbers. I guess I didn't know the updated numbers for future rounds, until buyback offers came around or people quit and exercised and filed their taxes and shared numbers.
- encoderer 10y ago
  More interesting to me would be "We made -$$ on $$$ in revenue, revenue has been growing at 120% so our runway is xx months"
- jhayward 10y ago
  Without disclosing the complete capital structure, especially debt and stock liquidation preferences and multiples, your company has essentially just misled you (unless there are no preferences and all shares have equal liquidation).
- poof131 10y ago
  It’s fairly disingenuous to use the fundraising valuation. Investors have a ton of preferences that make their shares more valuable. Probably cut that by a third or ask to see the most recent 409a valuation. Walk through possible exits with dilution, assess the likelihood of those exits, and try to make a calculated guess at the payoff. In all likelihood it is less then working for 4 years at a big company and founders saying it isn’t are selling their book. If they can’t make the follow on valuation gates and see an exit, you probably won’t make anything. Even if they exit at the valuation when you joined, your shares will likely be worthless as senior preference holders get their guaranteed returns.
- rmk 10y ago
  Not really. The simplest explanation is that you are getting a discount relative to what the investors paid. Investors usually get preferred stock, whereas rank-and-file employees usually get common stock, which has far fewer protections than preferred. They should be able to tell you this if you asked them, though.
- 10y ago
cm3 10y ago
What's the point of stock options? It's a piece of paper that allows you to buy stock if and when at a predetermined price. This price can be higher or lower, you cannot know beforehand. It's not a replacement for a salary or a stake in the company. I was handed out stock options myself for a company in the past but it wasn't worth it to use them. I mean, unless you have options from a unicorn, those don't amount to much. I have this impression that some misrepresent options with stock.
- dasil003 10y ago
  The value of options has nothing to do with unicorn status. If you join an existing unicorn, especially a public company, then your options are no better than a roulette wheel—the valuation already has captured a large amount of savvy knowledge about the future of the company. Also, because it is so big you won't be able to move the needle anyway. The point of options is to take on some risk in exchange for bigger reward. To do this you can't come in with an employee mentality of wanting to get a market salary and have a lot of security, you need to start thinking like a business owner. It's easiest to do this as a founder where you have true control, but it's also possible to do so as an early employee / late co-founder, but in that case you have convince the founders/board of your value. Taking a lower salary in exchange for more equity is a concrete demonstration that you are thinking about the company's burn rate, and that you believe in your ability to help the company succeed. None of this is to justify founder's taking advantage of early employees, by all means stick up for yourself and know your value, but recognize that a computer programmer is not worth $100k a priori, you can spend all your time building things which are worthless. The trick with a company is figuring out how to turn that energy into business value. Founders take on the biggest risk of making that happen, and likewise they get the greatest control. Options with a vesting cliff are the mechanism for realizing that value creation, and rewarding an effort over time. Your ability to succeed with options will certainly be some amount of luck, but to maximize your chances you need an appetite for risk and the desire to build a great company rather than join a great company.
- harryh 10y ago
  The point of stock options is that they let the owner of said options participate in the success of the company. If the company is very successful, that participation can be quite a lot of money. If the company is not successful or only moderately successful it's unlikely to be much money at all.
angersock 10y ago
Not having access to this basic information is one of the reasons I left my job last year. When the CEO starts getting really weird about basic questions like "How many people are invested in us? What does the equity pool look like? How much of the company do my options represent?", it's time to look elsewhere. The company had less than 10 people at the time, which made it even weirder--and I'd been there for two years, as the first engineering hire.
- conorgil145 10y ago
  I am intrigued by your story. What reason did they provide for not answering your questions? Which communication avenues did you explore before deciding to leave? Did you try to negotiate with them? Did you leave any options on the table, or did you exercise your options?
  - angersock 10y ago
    In the interest of helping fellow devs: Reasoning presented was basically handwaving about "people wanted different compensation (read: divide and conquer)"/"we don't have to tell you this". I pointed out that, under my reading of the applicable law, I could exercise one of my vested shares and then check the books for myself--they didn't like that one bit. CEO got flustered when I brought the whole thing up--I'm sure they could've dealt with things more reasonably, but being on the spot they fumbled and erred on the side of "let's say as little as possible until we understand what we're doing". By contrast, I asked a friend of mine what his company cap table looked like and he showed me the whole spreadsheet--a company with more investors, more revenue, more customers, and more traction than the one I was working for at the time. So, I couldn't by the "well we can't show you this" argument, because it was obvious bullshit. The main takeaway is that one of their senior folks (me) said "Hey, you're paying us below market wages and are refusing to make up for that with competitive equity: why?" and they failed to provide a satisfactory explanation. If you choose to be secretive about that sort of thing, more power to you--but you can't be surprised that you'll be seen as untrustworthy, dishonest, and sheisty by people that ask the questions. If an intern wants the cap table, then I can understand not spending the cycles--but people who are building your teams, building your product, and doing the work your C-level should be doing (grump grump) actually do need that information to make good decisions. As for your last question, upon my departure my options were bought back for a reasonable amount. You have to watch out for who pays taxes in such cases, but that wasn't an issue. I'm pretty sure they did this so they wouldn't have options outstanding to people that weren't working there anymore, because reasons. It's pretty silly if you ask me. There are reasons for that sort of thing, but those reasons didn't seem to apply.
andrewfromx 10y ago
this is great for share holders but most employees are option holders.
- jc4p 10y ago
  From what I can tell if you exercise a single option this still applies
  - andrewfromx 10y ago
    true, but how many employees do this? Often the company doesn't not allow them to buy the options and do the 83b election thing.
startup1411978 10y ago
what are the cons of being fully transparent re the cap table and other financial details when the startup is small (say under 50 employees)? trying to properly analyze the cost/benefit ratio of 100% financial transparency. some potential risks: * employees leaking financial details to press, future investors, competitors. * employees getting upset over smaller equity stakes.
- mikeryan 10y ago
  Employee's leaving the company en masse every time they realize you only have 3-6 months run in the bank.
  - st3v3r 10y ago
    I fail to see giving workers more information about the potential future of their career, so they can adequately plan and change direction if they feel the need as a bad thing. Just pulling the rug out from under them and not giving them a chance seems pure evil.
    - zenlikethat 10y ago
      No one forces them to take the gig. If they're smart folks they should have already done the math that "Hm, we're pre-profit, raised $X million a year ago and burn about $15k * Y employees a month... We probably have about Z months left!" Seriously, burn is not that hard to ballpark, engineers who are smart enough to code should be able to do this math and make a calculated risk.
      - gohrt 10y ago
        ballpark is nearly uses. The difference between X and 2X is huge and it's very hard to make the estimate tighter, and you don't know what not-profit metrics will impress investors to put more cash into further growth. Many many companies run for 10 years pre-profit.
        10y ago
chmaynard 10y ago
Another link to the same article: http://on.wsj.com/1OKFn27 http://on.wsj.com/1OKFn27
sulam 10y ago
Don't companies have to establish (and report to shareholders) the 409a valuation regardless of anything else? Every private company I've had stock in has done a quarterly 409a in order to demonstrate to the IRS that they are fairly valuing options. Admittedly this is a bare number, without any of the supporting material that may be of interest if one wants to do their own valuation, so DE law is still interesting here, but for the sheer purpose of valuing your stock 409a seems to do the job.
- conorgil145 10y ago
  Do you know if the 409(a) report is required to be made available to stock holders, or is it something the company can also hide? If the company reports the valuation reported in the 409(a), is there anything else of value in the report which stock holders would benefit from reading/being aware of?
  - jdavis703 10y ago
    I think the only time you get the 409(a) valuation is when you get the IRS reports after execrcising.
    - sulam 10y ago
      My wife recently needed to know the 409(a) valuation of a company she owns stock in and was able to get it within a couple days. Obviously YMMV, but consider that we pay estimated taxes quarterly -- valuing those shares at least once per quarter is a necessity.
joeblau 10y ago
I wish I would have known about this back in 2011 when I joined my first California startup. While I did learn a lot on the job, the leadership team was very shady about the value of the company and the shares. I eventually ended up leaving and not exercising my options after the C-level execs were switched out 3 times in 6 months, but having this info would have been great to know.
- r_sreeram 10y ago
  > I eventually ended up leaving and not exercising my options Knowledge of this law might not have helped directly, since you're not a shareholder if you haven't exercised your options yet. It may have spurred you to exercise some/all of your options, just to be able to peek into the books, though.
conorgil145 10y ago
Quote from the article: "There have been hundreds of Delaware lawsuits to inspect company books says Ted Kittila, an attorney with Greenhill Law Group. Most requests are settled before a suit is filed, he says." So, for the cases which went to trial, were the companies held accountable, or were they able to skirt the law somehow? I'm curious whether employees who brought the suits were able to claim damages if the value of their shares changed materially in the interim where the company refused to release the financial information which the shareholder was legally allowed to see. The shareholder could claim that they would have sold if they were given appropriate information which they were illegally denied? Thoughts?
- rahimnathwani 10y ago
  Damages would only apply if the employee had the right to sell the shares, but did not have access to the accounts. If the company only withheld the accounts during the time when insiders were prohibited from selling, then there would be no decision for the employee to make.
Goodlive 10y ago
I'm Not A Law Student. Can Anyone Specify Me What This Employee Is All About?
mathattack 10y ago
The spirit of this law is very noble. It protects minority owners of companies from abuse by management or majority owners. Are there some unintended consequences, though? Could a competitor buy 1 share from an ex-employee to get access to the corporate accounts?
- conorgil145 10y ago
  I suppose that would be possible, but I think that it is very common for private companies to work into their stock agreements that they have right of first refusal for stock sales. Therefore, they should theoretically be able to restrict a competitor from purchasing their stock by simply purchasing it from the seller themselves instead of allowing the sale to go through.
- Spellman 10y ago
  Very likely you need to hold some threshold of stock similar to how certain amounts of stock provide added benefits such as representative voting.
the_watcher 10y ago
This is interesting. As a thought exercise, would it be possible to exercise a single option? Based on the broadest reading of this law, that would entitle the employee who exercised to request financial information. Partial exercise would also be an option for those looking to keep some exposure to a former employer but without the capital (or risk profile) to exercise their whole grant
iwantitiwantit 10y ago
Someone please make me an app that automates the process of filing these requests!
andy_ppp 10y ago
It sounds as though it's not particularly obscure and very very clear why it is part of the law. If you have shares or a right to shares you should be able to see who you are sharing with. Isn't that the very point of this law?
jhallenworld 10y ago
Aren't the articles of incorporation public information? You should be able to find the the percentage of equity that your options represent from this.
known 10y ago
Transparency begets trust
hackbinary 10y ago
Uhm, if you have been offered 'Stock Options' that means you have invested (sweat) equity, and therefore, I think, that you get to see the books, just as any other 'investor'.

424 points by ojbyrne 10y ago

Is this really considered obscure? I'm pretty sure I read about it in a Nolo book on small business. Anyway, be aware this applies to shareholders. Having an option to buy shares is not the same thing.

ganeumann 10y ago
It's not obscure. It's pretty well understood by financial markets players, including VCs. I think it's probably not well known by startup employees because it's an issue they've almost certainly never been faced with.
jerf 10y ago
While many people may not be able to swing exercising all their shares or a generally-meaningful number of shares, you can exercise one. As I type this I find myself wondering if it's not a bad idea to do in general, so that you move from "options holder" to "stockholder". Comments from those with experience?
- mcherm 10y ago
  Hmm... I exercised some of my shares in a startup I was part of, solely for the sake of becoming a "stockholder" rather than just an options holder. I felt good about being a stockholder. I did not get any enhanced access to information about the company (for several reasons, among them that they were pretty open anyhow and I didn't ask). Company later closed down. Investors with classes of shares that were guaranteed more than 1x return on their investment took all the value and common stockholders got nothing. So, obviously, I lost money by exercising my options. So I suppose I got "feeling good about being a stockholder" for the cost of what I paid for the options. And honestly, looking back on it I'm comfortable with that. I wish the company had succeeded, but I'm glad I was part of it even if it didn't, and what it cost me was not more than I could afford.

kashkhan 10y ago

transparency is good for everyone. It keeps companies honest.

fullshark 10y ago
That means it's not good for companies.
- xviia 10y ago
  and companies control what goes into the employment contracts. so, I expect future contracts will include clauses for "voiding of employee inspection rights" and not "company transparency".
  - UK-AL 10y ago
    That won't hold up in court.
  - npizzolato 10y ago
    According to another comment thread, those clauses are not enforceable.
- st3v3r 10y ago
  It's good for honest companies.
teen 10y ago
ok Ken M
- icpmacdo 10y ago
  This is a meme for people out of the loop about a yahoo comments troll, here's the subreddit https://www.reddit.com/r/kenm https://www.reddit.com/r/kenm . The GP is right in his style. This is my favourite comment by KenM, http://imgur.com/KM6E918 http://imgur.com/KM6E918

stillworks 10y ago

Aren't several SV startups not even incorporated in California leave alone Delware ? Most of them are incorporated in some tax heaven such as Cayman Islands and such ?

pge 10y ago
Most startups are incorporated as DE companies (most common) or in the state of their founding (e.g. California). This is because the laws in these states are well known and have been tested by a large body of cases that establish precedent. As a VC investor, having a company incorporated outside the US introduces additional legal risk.
- cloudjacker 10y ago
  That awkward moment when the only law that the startup will be tested by will be labor contracts in the state they operate in, and EEOC law at the federal level, and other federal laws Making their jurisdiction of incorporation completely irrelevant as the VCs push for settlement quickly.
  - harryjo 10y ago
    Sure but why add EXTRA legal risk by incorporating in an X-factor state?
    - cloudjacker 10y ago
      It isn't extra legal risk. You simply have legal teams copying and pasting incorporation structures and contracts, now they're about to get all their company's financials leaked. Delaware's Court of Chancery isn't even a perk for 99.9% of businesses. Delaware's "body of case law" can be leaned on by courts in ANY state if there is a conflict that state has never seen before.
      - MOARDONGZPLZ 10y ago
        > Delaware's "body of case law" can be leaned on by courts in ANY state if there is a conflict that state has never seen before. That's kind of how it works, but not to the effect you hope. Delaware law isn't binding outside of DE, so if another court looked at it, they would only use it as guidance. Versus if a DE court looked at it, they would use it as binding precedent. Which is the benefit of incorporating in DE. That law is out there and binding due to the large number of incorporations there and large body of case law that has developed. So answers to random questions are really known and agreed upon. Whereas with another state's court, if you can even get them to consider DE law, you're praying that they side with DE law, which isn't always the case. There's more risk. There is an advantage to incorporating in DE, whether you believe that or not. Even if the advantage is, like using Ruby or Node or something, that everyone knows the law and it's well settled and boilerplate. You don't have to reinvent the wheel.

toomuchtodo 10y ago

Interesting. My options agreement has a clause called "Waiver of Statutory Information Rights" in which I waive my inspection rights of the company stock ledger, a list of its stockholders, and its other books and records, and the books and records of subsidiaries of the Company provided under Section 220 of General Corporation Law of Delaware until the first sale of common stock to the public. Is this waiver clause enforceable? EDIT: Let this be a lesson folks! Always have an attorney review your options grant contract.

jacalata 10y ago
You might like the section of the article beginning "Some companies are now pushing employees to waive their right to inspect the books as a condition for receiving stock awards, says Richard Grimm, an executive compensation attorney."
- toomuchtodo 10y ago
  Thanks for calling that out. I missed that. Its odd, because our company opens the company books to us whenever we'd like (its public on a dashboard). Its the list of shareholders it appears they're keeping private.
  - marme 10y ago
    this is actually not always ideal. If you have visibility to the company books SEC rules about insider trading apply to you even if you have no advantage by looking at the books. For public companies any employee who can see any financial or revenue information is not allowed to trade stocks outside of 14 day window after the announcement of quarterly report. Not sure what the rules are about this for private companies
    - jerf 10y ago
      For a private company, for the people we're talking about, the answer is generally that they practically can't trade at all, so you're not losing anything by looking at the books.

harryjo 10y ago

My employer told me "Our last round valued us at $XXXX for YYY shares. you have ZZZZ options at $WWWW strike price." Is this unusual? Of course this can be diluted, but it seems I had the numbers. I guess I didn't know the updated numbers for future rounds, until buyback offers came around or people quit and exercised and filed their taxes and shared numbers.

encoderer 10y ago
More interesting to me would be "We made -$$ on $$$ in revenue, revenue has been growing at 120% so our runway is xx months"
jhayward 10y ago
Without disclosing the complete capital structure, especially debt and stock liquidation preferences and multiples, your company has essentially just misled you (unless there are no preferences and all shares have equal liquidation).
poof131 10y ago
It’s fairly disingenuous to use the fundraising valuation. Investors have a ton of preferences that make their shares more valuable. Probably cut that by a third or ask to see the most recent 409a valuation. Walk through possible exits with dilution, assess the likelihood of those exits, and try to make a calculated guess at the payoff. In all likelihood it is less then working for 4 years at a big company and founders saying it isn’t are selling their book. If they can’t make the follow on valuation gates and see an exit, you probably won’t make anything. Even if they exit at the valuation when you joined, your shares will likely be worthless as senior preference holders get their guaranteed returns.
rmk 10y ago
Not really. The simplest explanation is that you are getting a discount relative to what the investors paid. Investors usually get preferred stock, whereas rank-and-file employees usually get common stock, which has far fewer protections than preferred. They should be able to tell you this if you asked them, though.
10y ago

cm3 10y ago

What's the point of stock options? It's a piece of paper that allows you to buy stock if and when at a predetermined price. This price can be higher or lower, you cannot know beforehand. It's not a replacement for a salary or a stake in the company. I was handed out stock options myself for a company in the past but it wasn't worth it to use them. I mean, unless you have options from a unicorn, those don't amount to much. I have this impression that some misrepresent options with stock.

dasil003 10y ago
The value of options has nothing to do with unicorn status. If you join an existing unicorn, especially a public company, then your options are no better than a roulette wheel—the valuation already has captured a large amount of savvy knowledge about the future of the company. Also, because it is so big you won't be able to move the needle anyway. The point of options is to take on some risk in exchange for bigger reward. To do this you can't come in with an employee mentality of wanting to get a market salary and have a lot of security, you need to start thinking like a business owner. It's easiest to do this as a founder where you have true control, but it's also possible to do so as an early employee / late co-founder, but in that case you have convince the founders/board of your value. Taking a lower salary in exchange for more equity is a concrete demonstration that you are thinking about the company's burn rate, and that you believe in your ability to help the company succeed. None of this is to justify founder's taking advantage of early employees, by all means stick up for yourself and know your value, but recognize that a computer programmer is not worth $100k a priori, you can spend all your time building things which are worthless. The trick with a company is figuring out how to turn that energy into business value. Founders take on the biggest risk of making that happen, and likewise they get the greatest control. Options with a vesting cliff are the mechanism for realizing that value creation, and rewarding an effort over time. Your ability to succeed with options will certainly be some amount of luck, but to maximize your chances you need an appetite for risk and the desire to build a great company rather than join a great company.
harryh 10y ago
The point of stock options is that they let the owner of said options participate in the success of the company. If the company is very successful, that participation can be quite a lot of money. If the company is not successful or only moderately successful it's unlikely to be much money at all.

angersock 10y ago

Not having access to this basic information is one of the reasons I left my job last year. When the CEO starts getting really weird about basic questions like "How many people are invested in us? What does the equity pool look like? How much of the company do my options represent?", it's time to look elsewhere. The company had less than 10 people at the time, which made it even weirder--and I'd been there for two years, as the first engineering hire.

conorgil145 10y ago
I am intrigued by your story. What reason did they provide for not answering your questions? Which communication avenues did you explore before deciding to leave? Did you try to negotiate with them? Did you leave any options on the table, or did you exercise your options?
- angersock 10y ago
  In the interest of helping fellow devs: Reasoning presented was basically handwaving about "people wanted different compensation (read: divide and conquer)"/"we don't have to tell you this". I pointed out that, under my reading of the applicable law, I could exercise one of my vested shares and then check the books for myself--they didn't like that one bit. CEO got flustered when I brought the whole thing up--I'm sure they could've dealt with things more reasonably, but being on the spot they fumbled and erred on the side of "let's say as little as possible until we understand what we're doing". By contrast, I asked a friend of mine what his company cap table looked like and he showed me the whole spreadsheet--a company with more investors, more revenue, more customers, and more traction than the one I was working for at the time. So, I couldn't by the "well we can't show you this" argument, because it was obvious bullshit. The main takeaway is that one of their senior folks (me) said "Hey, you're paying us below market wages and are refusing to make up for that with competitive equity: why?" and they failed to provide a satisfactory explanation. If you choose to be secretive about that sort of thing, more power to you--but you can't be surprised that you'll be seen as untrustworthy, dishonest, and sheisty by people that ask the questions. If an intern wants the cap table, then I can understand not spending the cycles--but people who are building your teams, building your product, and doing the work your C-level should be doing (grump grump) actually do need that information to make good decisions. As for your last question, upon my departure my options were bought back for a reasonable amount. You have to watch out for who pays taxes in such cases, but that wasn't an issue. I'm pretty sure they did this so they wouldn't have options outstanding to people that weren't working there anymore, because reasons. It's pretty silly if you ask me. There are reasons for that sort of thing, but those reasons didn't seem to apply.

andrewfromx 10y ago

this is great for share holders but most employees are option holders.

jc4p 10y ago
From what I can tell if you exercise a single option this still applies
- andrewfromx 10y ago
  true, but how many employees do this? Often the company doesn't not allow them to buy the options and do the 83b election thing.

startup1411978 10y ago

what are the cons of being fully transparent re the cap table and other financial details when the startup is small (say under 50 employees)? trying to properly analyze the cost/benefit ratio of 100% financial transparency. some potential risks: * employees leaking financial details to press, future investors, competitors. * employees getting upset over smaller equity stakes.

mikeryan 10y ago
Employee's leaving the company en masse every time they realize you only have 3-6 months run in the bank.
- st3v3r 10y ago
  I fail to see giving workers more information about the potential future of their career, so they can adequately plan and change direction if they feel the need as a bad thing. Just pulling the rug out from under them and not giving them a chance seems pure evil.
  - zenlikethat 10y ago
    No one forces them to take the gig. If they're smart folks they should have already done the math that "Hm, we're pre-profit, raised $X million a year ago and burn about $15k * Y employees a month... We probably have about Z months left!" Seriously, burn is not that hard to ballpark, engineers who are smart enough to code should be able to do this math and make a calculated risk.
    - gohrt 10y ago
      ballpark is nearly uses. The difference between X and 2X is huge and it's very hard to make the estimate tighter, and you don't know what not-profit metrics will impress investors to put more cash into further growth. Many many companies run for 10 years pre-profit.
      - 10y ago

chmaynard 10y ago

Another link to the same article: http://on.wsj.com/1OKFn27 http://on.wsj.com/1OKFn27

sulam 10y ago

Don't companies have to establish (and report to shareholders) the 409a valuation regardless of anything else? Every private company I've had stock in has done a quarterly 409a in order to demonstrate to the IRS that they are fairly valuing options. Admittedly this is a bare number, without any of the supporting material that may be of interest if one wants to do their own valuation, so DE law is still interesting here, but for the sheer purpose of valuing your stock 409a seems to do the job.

conorgil145 10y ago
Do you know if the 409(a) report is required to be made available to stock holders, or is it something the company can also hide? If the company reports the valuation reported in the 409(a), is there anything else of value in the report which stock holders would benefit from reading/being aware of?
- jdavis703 10y ago
  I think the only time you get the 409(a) valuation is when you get the IRS reports after execrcising.
  - sulam 10y ago
    My wife recently needed to know the 409(a) valuation of a company she owns stock in and was able to get it within a couple days. Obviously YMMV, but consider that we pay estimated taxes quarterly -- valuing those shares at least once per quarter is a necessity.

joeblau 10y ago

I wish I would have known about this back in 2011 when I joined my first California startup. While I did learn a lot on the job, the leadership team was very shady about the value of the company and the shares. I eventually ended up leaving and not exercising my options after the C-level execs were switched out 3 times in 6 months, but having this info would have been great to know.

r_sreeram 10y ago
> I eventually ended up leaving and not exercising my options Knowledge of this law might not have helped directly, since you're not a shareholder if you haven't exercised your options yet. It may have spurred you to exercise some/all of your options, just to be able to peek into the books, though.

conorgil145 10y ago

Quote from the article: "There have been hundreds of Delaware lawsuits to inspect company books says Ted Kittila, an attorney with Greenhill Law Group. Most requests are settled before a suit is filed, he says." So, for the cases which went to trial, were the companies held accountable, or were they able to skirt the law somehow? I'm curious whether employees who brought the suits were able to claim damages if the value of their shares changed materially in the interim where the company refused to release the financial information which the shareholder was legally allowed to see. The shareholder could claim that they would have sold if they were given appropriate information which they were illegally denied? Thoughts?

rahimnathwani 10y ago
Damages would only apply if the employee had the right to sell the shares, but did not have access to the accounts. If the company only withheld the accounts during the time when insiders were prohibited from selling, then there would be no decision for the employee to make.

Goodlive 10y ago

I'm Not A Law Student. Can Anyone Specify Me What This Employee Is All About?

mathattack 10y ago

The spirit of this law is very noble. It protects minority owners of companies from abuse by management or majority owners. Are there some unintended consequences, though? Could a competitor buy 1 share from an ex-employee to get access to the corporate accounts?

conorgil145 10y ago
I suppose that would be possible, but I think that it is very common for private companies to work into their stock agreements that they have right of first refusal for stock sales. Therefore, they should theoretically be able to restrict a competitor from purchasing their stock by simply purchasing it from the seller themselves instead of allowing the sale to go through.
Spellman 10y ago
Very likely you need to hold some threshold of stock similar to how certain amounts of stock provide added benefits such as representative voting.

the_watcher 10y ago

This is interesting. As a thought exercise, would it be possible to exercise a single option? Based on the broadest reading of this law, that would entitle the employee who exercised to request financial information. Partial exercise would also be an option for those looking to keep some exposure to a former employer but without the capital (or risk profile) to exercise their whole grant

iwantitiwantit 10y ago

Someone please make me an app that automates the process of filing these requests!

andy_ppp 10y ago

It sounds as though it's not particularly obscure and very very clear why it is part of the law. If you have shares or a right to shares you should be able to see who you are sharing with. Isn't that the very point of this law?

jhallenworld 10y ago

Aren't the articles of incorporation public information? You should be able to find the the percentage of equity that your options represent from this.

known 10y ago

Transparency begets trust

hackbinary 10y ago

Uhm, if you have been offered 'Stock Options' that means you have invested (sweat) equity, and therefore, I think, that you get to see the books, just as any other 'investor'.