Inaccurate unicorn firm valuation is a well-documented problem in the finance literature. Employees of these large, privately held companies do not have access to fair market valuation or financial statements and, in many cases, are denied access to such reports, even when requested. Unicorn employees are granted equity as a substantial part of their compensation, however due to the inferior position of employees in comparison to the start-up founders and other investors, information shedding light on the value of their equity grants has been withheld, as apparent in recent practices.
Start-up founders, investors, and their lawyers have systematically abused equity award information asymmetry to their benefit. This Article sheds light on the latest practice that compels employees, who are not yet stockholders, to waive their stockholder inspection rights under Delaware General Corporation Law (“DGCL”) Section 220 as a condition to receiving stock options from the company. Perhaps the clearest indication of this new practice is the recent amendment to the National Venture Capital Association legal forms, which is intended to standardize a contractual “waiver of statutory inspection rights.” This waiver is designed to contract around stockholder inspection rights.
This Article puts forward competing arguments and policy considerations for and against such a waiver. It fills the gap in the case law and evaluates whether a contract between the company and its employees, which operates independently and outside the charter or bylaws, can modify or eliminate the mandatory inspection rights expressly set forth in the DGCL. The resolution on this issue will have tremendous influence on corporate law, litigation, and practice.
Unicorn Firm, Valuation, Private Company, Waiver, Inspection Rights
Maryland Law Review (forthcoming)
Alon-Beck, Anat, "Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information" (2020). Faculty Publications. 2134.