Private Companies May Need To Disclose Financial Data To Employees

There have been a number of speculations about private companies being overvalued. Many worry that a technology “bubble” is inflating, and may soon burst. One law is countering this high valuation, forcing employers to share financial information with their employees. Surprisingly, the law that is causing such a shake-up is not a national law, but a chapter of Delaware’s corporate law.

This chapter of Delaware’s law can force startups to be financially transparent with their shareholders, provided that the startups are locally incorporated. One person using this law to his advantage is Jay Biederman, a former manager at Domo, a Salt Lake City-based software service that is currently valued at $2 billion. Biederman is using the law to convince Domo to show him the books. According to the Wall Street Journal, Biederman’s doing so will allow him to better value his shares in the company. Biederman claims that before the rule was invoked, he was denied access to Domo’s financial data.

Typically, the only people who are granted access to a private company’s revenues, profits, and projections are major investors. Over the years, an increasing number of startups have been receiving larger injections of capital for multi-million, sometimes billion-dollar valuations. Because of this trend, analysts question the value of individual shares, warning that companies are overvalued.

Many investors are now demanding to see profit over growth. This is forcing a number of high profile tech startups to cut costs in the form of retracting benefits, laying employees off, or closing offices. Birchbox, for example, got rid of 15 percent of its staff in February. Birchbox cited reasons such as steep shipping prices to Canada and a “hostile” funding climate. Other startups that have been affected include Dropbox, Jawbone, and Evernote.

Silicon Valley entrepreneur Steve Blank, who has started eight successful companies, argues that valuations are no longer based on revenues and profits. This could be a big problem for the founders behind a lot of America’s startups.

Mary Jo White, the head of the the U.S. Securities and Exchange Commission, recently spoke out against high valuations and called for private companies to have more fiscal transparency.

In Delaware, hundreds of lawsuits have been made to examine company statements. However, according to the Wall Street Journal, most of these lawsuits are settled before being filed, and it’s still unclear whether companies are complying. Chris Biow, a former executive and shareholder inMongoDB and MarkLogic has asked to see the profits, revenues and a list of other stockholders in the companies. MarkLogic did eventually show him the statements, but they refused to share a list of stockholders with him. MongoDB and MarkLogic are both startups that are valued at over $1 billion, and this law could place them on thin ice if they aren’t willing to disclose their data.

A number of privately owned companies that are very successful may soon get busted for high valuation. While this law may only be in one state, its implications can affect privately owned companies everywhere. Additionally, if other states believe they see the value of this, lawmakers in many states could turn this local law into a common, potentially even federal, law.