I have personally found it very frustrating to deal with venture-backed startups on behalf of departing employees. Typically the employees have to decide whether to exercise option grants within 90 days of termination, and the strike price might be a meaningful amount to someone who has just lost a job (whether voluntarily or not). Both for economic as well as tax reasons, we need insight into the value of the underlying stock. But companies are quite tight-lipped about it, and their lawyers often stonewall. They may also try to impose new contractual requirements on exercise that were not agreed to in the original option grant! I view this as the height of bad faith vis-a-vis former employees. But appears to be standard operating procedure for certain companies and law firms, who shall remain nameless...

Section 220 rights are statutory. You cannot waive them. If you own stock in a Delaware company, you are entitled to inspection rights.

It's hard to see how a NDA could survive sale of the stock. If an employee sells some of their shares to another party, that party gets the right to examine the books, but isn't subject to the NDA.

[1] http://files.ali-cle.org/thumbs/datastorage/lacidoirep/artic...

They do invoke it, and they sign the non-disclosure agreement, and they don't talk about what they found. However since the valuation changes pretty slowly generally (only on new shares being issued, excluding those from vesting employees) and the fact that there are generally two classes of stock (preferred and common).

This argument appears to be about a fight between a person and their high school friend who was the CEO, who said one thing (in terms of ownership), but in fact did something else. A number of employment agreements these days include boiler plate text that says you wave your 220 rights when you join, but it isn't clear that that wavier survives your separation (parts of the agreement certainly do) and of course it isn't clear that Delaware law even allows you to waive those rights.

Personally I think Domo is not thinking straight here, settle with this person and move on. But personal egos may be involved and that can be an impediment to forward progress.

The issue is the huge can of worms this (could) open up if every shareholder realizes access to financial information is a #right and not a #privilege

At least as far as I understand the law, which is (admittedly) limited.

The questions here are two fold, disclosure limitation and rights waivers.

The first is the question "Can a corporation compel a shareholder to sign a non-disclosure in order for that share holder to exercise their rights under rule 220?"

As I mentioned I've never experienced anyone who has been part of a funding round (investing) balking at the idea of signing a non-disclosure which prevents them from disclosing the financial information to third parties. They person in the article is refusing to sign a non-disclosure. Which suggests they are considering disclosing that information to third parties (most likely other employees) and (I presume) management feels that would be detrimental to the business.

The second question, which doesn't seem to be part of this suit, but one that bears on it, is whether or not a corporation can compel an employee, who will become a future shareholder, from exercising their rule 220 rights by having them waive their future rights as part of their employment agreement. See the Chriscross sibling comment where it is asserted the 220 right is statutory and thus immune to waiver.

And what will probably be an interesting future question, since California is an at will work state, can a company fire an employee for invoking their rule 220 rights? Whether or not they sign a non-disclosure agreement? I'm guessing that they can (fire the employee) which would make it the last thing you got to request at a company.

so people can, and will, and should, ask

this also calls into question the general practice of "forfeit right X to get benefit Y" that appears common

In cases where "benefit Y" is actually "right Y", then it raises the question of whether these agreements are valid.

I don't know if that's actually happening, but probabilistically would not be surprised if it were - just given the legal complexity involved in these documents.

--Jeron @ capshare.com

Last year, I learned that a similar law was invoked by college students to gain access to their application files kept by the University Registrar [1]. The student, upon making the information request, would go into the registrar office and "inspect a physical copy" of the file, just like you said.

[1] My alma mater wrote to me about this since a student I had interviewed as part of the application process had made this request, and my report was part of "his file".

If you are working for a company and they wont give you this information, leave and join one that will. If you are thinking of joining a company, ask for all the stock option information. Ask for the details of the funding rounds including liquidation preferences. If they don't give it to you, join another company that will. If no private companies will give you this information (though I know of many that do), join a publicly traded company.

Additionally what would more legislation do that the existing Delaware law doesn't? The fact that a lawsuit is being filed here is a good thing... a company isn't fulfilling its legal obligations and the courts will settle it.

I'd prefer a state law for transparency, so if your SV start-up wants to play Wild West, they have to move to Texas or a similar state where it is a lot easier to abuse your employees legally.

A likely extremely highly paid employee is working at a company where they aren't sure whether their stock options are valuable are not. It is extremely likely if they ask the company for information necessary to value those stock options, they would get it. Completely unrelated, founders of the business may or may not have sold stock during a previous round of funding.

How is this person a victim exactly? If an employee doesn't want any risk in their compensation, they should reject stock options in favor of salary. If they decide to take stock options there is always going to be risk, not only due to the information risk we are talking about but because the future is uncertain even to people with all the relevant information.

And FWIW, almost every startup is incorporated in Delaware which already has this law on the books.

We're talking about startups, aren't we? A group of companies who are notorious for paying well below market wages because the promise of stock is supposed to make up for it?

And who cares how "well paid" they are? How does that change things one bit? Here, tell me the exact dollar amount one can make where they can no longer complain about wrong treatment at work. And tell me why it's not ok to treat someone like that at one point, but pay them one dollar more, and suddenly it is ok.

"It is extremely likely if they ask the company for information necessary to value those stock options, they would get it."

Except the whole point is that the company isn't giving it to them.

"How is this person a victim exactly?"

Because they are not being treated fairly by the company.

"If an employee doesn't want any risk in their compensation, they should reject stock options in favor of salary."

That's not the situation at all, and you know it.

"If they decide to take stock options there is always going to be risk, not only due to the information risk we are talking about but because the future is uncertain even to people with all the relevant information."

Except right now you're advocating that the risk be artificially exacerbated due to not getting that information.

And again, there is already is a law in place requiring a company to give this information to shareholders -- the one the OP is talking about. I'm not defending the company that is breaking the law, I'm defending that the existing law is good enough. The fact that one company is breaking the law in one situation doesn't mean it is a widespread problem.

But I'll bite on the hypothetical. This is a widespread problem and people are being defrauded left and right. What should the new law say? What disclosure is required of the company, and to whom? The text of every funding round so the potential or current employee can investigate all the liquidation preferences (which are often incredibly complicated and company specific)? The full cap table so I know the equity amounts of every shareholder? The full details of any past share transactions and the associated prices? At what level of disclosure are people not getting abused anymore?

Choice is irrelevant. There is absolutely no reason whatsoever to allow employers to be shady like this. None.

I don't support companies being "shady". I wouldn't work for a company that didn't give me all the information I needed to evaluate any stock options. However, unless you are giving me a specific law or regulation that intends to fix the problem without creating many more, you don't know if the solution is any better than the status quo.

Ironically this is the case often when they are making an offer, too. They won't tell you the number of shares outstanding, but they offer you 100k shares, as if that's a lot. Is it a lot? Or is it a trivial amount? Are they so stupid they don't realize that without knowing the total number authorized or outstanding that we can't evaluate the offer? Or do they think we are that stupid?

And when you do ask the total outstanding, you often get, again, off the head, old or inaccurate information delivered in a way that implies you're being nosy.

Not to mention that, usually when you try to get the information, its after you've already joined and already have some shares. Your suggestion is to just simply drop that, and walk away. How on earth is that a reasonable thing to suggest?

This issue has come up before with other companies.[1] The company trying to keep the financials secret lost. Stockholders have a clear right to see the financials and the ownership ("cap table") for valuation purposes.

[1] http://courts.delaware.gov/opinions/download.aspx?ID=205650

> A Domo spokeswoman says the company had asked Mr. Biederman to sign a nondisclosure agreement before providing financial records, but that he refused to do so.

> The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.

Unless the court has told Biederman that he needs to sign that NDA, it doesn't seem that he has to and that Domo is still acting against subsection 220.

Why is an NDA reasonable? I am really curious of the mechanics of a startup that would make this different from any other company under that law.

Though of course, any such NDA should be revealed ahead of time, including the precise language of the NDA, so that investors (and yes, employees who receive equity in lieu of cash are investors) make a fully informed decision.

Is this a common thing with NDAs? ISTM it's rare that during the hiring process one would receive a folder containing all the NDAs one might potentially be asked to sign while working at a firm. One might receive an "initial" NDA, to sign before starting, but every time there is an ownership change one can expect a new round of NDAs, because apparently NDA terms are a rapidly-evolving area of contract law.

What's going on in this world where your phone call is recorded, yet people sheepishly suggest "oh maybe a NDA is okay here, ya know".

Don't want all your private company secrets legally broadcast to the public? Be careful who you grant shares of ownership to. Can't trust your employees? Guess you have to find something besides ownership to incentivize them with.

The law in DE states that he has a right to see the data anyway if he has a valid reason, and "valuing my shares for tax reasons" is a valid reason. So NDA or not, the company needs to show him the numbers.

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.

This is not true. They've invested in private companies for some time now.

http://www.wsj.com/articles/fidelity-marks-down-startups-inc...

To be fair to you it is a new development.

As an aside, just checked out your website. You've got a very interesting background!!

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...

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?