Your Employees May Have the Right to See Your Company’s Books

Most startups are usually very private about their books and financials — one of the benefits of being a small, private company instead of a publicly-traded company is that you don’t have to show anyone your books. However, if your company is a Delaware corporation (as many startups are), that may not necessarily be the case, particularly if you’ve issued stock to your employees.

Section 220 of the Delaware General Corporation Law permits any stockholder of a Delaware corporation, upon written demand, to inspect and copy the corporation’s stock ledger, a list of its stockholders, and its “other books and records”, which can include financial records, for any proper purpose. Recently, employees of startups have been exercising their right under Section 220 to inspect their companies’ financial records for the purpose of determining the true value of the equity compensation they’ve been given. 

While some startups do provide their equity-compensated employees with regular statements of business and financial health, if your Delaware-incorporated startup does not do so, be mindful of the fact that your stockholding employees can, under Delaware law, demand to inspect and copy your company’s books. Of course, this is also another reason why it is a best practice to make sure that your employees (particularly your key employees who are compensated with equity) are signed to employment agreements that include confidentiality provisions. In any event, if your company is a Delaware corporation and a stockholding employee does ask to see the company’s books, it may be a good idea to make sure that the information you divulge is protected under a confidentiality agreement.

Further Reading: http://www.wsj.com/articles/startup-employees-invoke-obscure-law-to-open-up-books-1464082202

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