
Former employee sues startup for financials in order to value granted stock - nstj
http://www.wsj.com/articles/legal-fight-escalates-over-tech-startups-financials-1471512602
======
chollida1
The article links to the actual law cited, read it, it only takes a few
minutes.

[http://delcode.delaware.gov/title8/c001/sc07/#220](http://delcode.delaware.gov/title8/c001/sc07/#220)

It does make it seem very cut and dry that any employee who has a single share
is allowed to view not only the financials but also the cap table and
shareholder list.

To be honest, if this is the case I'm very surprised that fund managers like T
Rowe Price and Fidelity haven't been invoking it for as long as they've held
shares to do their monthly marking of their private positions. I mean, doesn't
it seem like they actually have a fiduciary duty to do this as it lets them
most accurately value the holdings that they have?

If this is really the case then, unless the companies can force some sort of
NDA on shareholders, then this opens the floodgates where any company that has
vested shareholders, not just option holders, is going to have its books made
public?

This seems like a positive thing for employees as each new round would be
scrutinized looking for provisions in the new raise that could screw
employee's ie ratchets or liquidation preferences.

~~~
libertymcateer
> To be honest, if this is the case I'm very surprised that fund managers like
> T Rowe Price and Fidelity haven't been invoking it for as long as they've
> held shares to do their monthly marking of their private positions. I mean,
> doesn't it seem like they actually have a fiduciary duty to do this as it
> lets them most accurately value the holdings that they have?

T. Rowe Price and Fidelity only trade in publicly traded securities.

The amount of information available in publicly filed SEC documents, under
normal circumstances, dwarfs what you have access to as a result of your
shareholder rights under the Delaware BCL.

~~~
runamok
Totally tangential question but is there any resource you know of that
provides a layman's "explain like I'm 5" explanation of this Delaware BCL?

A privately owned company (in which I bought my shares of when I left) was
purchased via an asset sale and us common stock shareholders got zilch. I am
trying to learn if I have any legal standing...

~~~
JonFish85
"was purchased via an asset sale and us common stock shareholders got zilch"

Just based on this (I am not a lawyer or giving financial advice), I'd guess
that you can have legal standing to your share, which is probably $0.
Investors often have preferred shares, and since it was an asset sale, it
doesn't sound like things went well. The shares you bought were holding your
place at the very back of the line, and the money ran out long before you.
Your shares are probably literally worth $0. Consult a tax attorney or CPA to
figure out if you can write off some losses on taxes, maybe?

------
will_brown
Assuming the facts as true, the shareholder might also have a claim for
retaliation against the company, specifically:

1\. Pursuant to DE law shareholder requested the books be opened to value his
shares;

2\. His request was not just unlawfully denied, but company in writing
explained, by law shareholder was not entitled to the requested documentation;

3\. Then "a few days later" the company fired the shareholder in his capacity
as employee.

Could be a great claim for retaliation, though not the federal title 7 type,
but the DE state equivalent.[1] Note the citation includes whistle blower
claims, which is similar/associated with retaliation claims but they are
separate. Basically the DE retaliation claim is triggered by the employer
taking action contrary to DE public policy (i.e. Being fired for trying to
exercise a right as a shareholder)

[1] [http://www.workplacefairness.org/whistleblower-
retaliation-c...](http://www.workplacefairness.org/whistleblower-retaliation-
claim-DE)

------
gjem97
"Mr. Biederman holds 64,166 Domo shares that would be worth $540,919 at the
$8.43-per-share price where Domo sold stock to investors last year."

Is there any reason to believe that these are the same series of shares? Isn't
it more likely that the investors bought preferred shares that are worth a lot
more than the common shares that he probably has?

~~~
thegranderson
They almost certainly aren't the same series of shares, but that in and of
itself isn't a reason to expect them to be worth less. Usually preferred
shares have additional rights (e.g., preferred share holders will get returned
their original cost or some guaranteed return before common shareholders get
any returns).

Some have features that get them some incremental value over time (e.g., a 10%
return paid through additional ownership over time), but this would differ
wildly depending on funding round, investor, etc.

If the business keeps growing and the whole equity cap table is "in the
money," his shares could probably be close to this estimated value.

Caveat: you can go totally nuts with complicated share structures, so this
could not at all be the case for Domo.

~~~
20yrs_no_equity
This brings up a good question. Companies have to price their options to
employees at the "market value". They often make the exercise price the same
as the preferred share sale price. Yet the options are for common shares.

How can a company know what these options or shares are worth when they aren't
preferred-- because there is no market events for them?

~~~
icedchai
The common shares are priced through a 409a valuation, generally done by a
CPA. And, actually, the common exercise price is almost NEVER the same as the
preferred shares. In some cases, it is 90% lower.

~~~
freddyc
Exactly. We went through the 409A process for the first time a couple of years
back and the valuation firm will typically take the preferred price (assuming
there's been no secondary sales of common) and then apply discounts for lack
of liquidity etc which gets you anywhere from 70-90% lower than the cost of
preferred. The valuation firm usually comes in conservative and then you
negotiate the FMV down. Assuming you haven't raised any more money, subsequent
409As are a lot quicker with a pretty light touch from the valuation firm.

------
koolba
So if one exercises even just one of their stock options would they have full
access to the cap table for a standard Delaware C-corp anytime they want to
value their shares?

~~~
toufka
That actually seems quite reasonable. How else _can_ the stock be valued?

~~~
koolba
> That actually seems quite reasonable. How _else_ can the stock be valued?

I'm not saying it's unreasonable. Far from it. I'm trying to casually suggest
a way for the startup proletariat grab the reins of their futures!

------
justinzollars
This is cute. Go to Domo website: "Information is empowering."

