Own Startup Shares? Know Your Rights to Company Financials

The Wall Street Journal (May 24, 2016) Privately held startups have fewer disclosure requirements than their publicly traded counterparts. But in the eyes of their employees and shareholders, private companies shouldn’t be so private. At least three laws require startups to disclose financial information to their stockholders, but lawyers say many don’t comply. (One of those laws is) California Corporations Code, Section 1501 is an obscure California law that requires larger startups based in the state to send an annual report with financial statements to all shareholders. Section 1501 applies to all companies with headquarters in California, whether or not they are incorporated in Delaware, says Keith Bishop, the state’s former commissioner of corporations, now a corporate attorney at law firm Allen Matkins. The exception is for companies with fewer than 100 shareholders who waive the requirement in their bylaws. That means the law likely encompasses dozens of private technology companies valued north of $1 billion, as well as hundreds of smaller tech startups. The law states the annual report should include a balance sheet as of the end of the fiscal year, and income and cash-flow statements for that fiscal year. Lawyers say most companies ignore the law because they either aren’t aware of it, or they don’t want to share their information. Penalties for violating it top out at $1,500, Mr. Bishop said.