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For a private, venture backed tech company, should i inform our employees on the total number shares outstanding so they can determine their fully diluted owneship? Or should the total number of shares issued be confidential?

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

For a start-up I was associated with, we did the following - If people own shares based on their purchasing of the shares, then of course yes. If people own shares based on grants associated with sweat equity, then yes. If people own options (un-exercised) then making the info public should not be required, but should be provided when asked. Transparency is always the best course when dealing with investors.

(Agent, JKS Solutions, Inc.) |

The financial statements that you will more than likely be asked to publish for the benefit of your investors will include a statement of changes in owners equity, or some similar title. Even for private companies there will be some form of shares reconciliation needed as part of that financial statement.

You should contact the CPA firm who is helping you with your annual statements and ask them for the proper format. If they are issuing a compiliation report or review report or even an audit report, they will have the most current layout that is required under the SSARS or other guidance.

The calculation guidance might be part of the GAAP associated with Share Based Payments and from that you will determine the amounts to put on OE statement. Some of these items will hit your Cash Flow reconciliation as well where you are amortizing until pay out.

If you are instead relying on your VC to hire the CPA firm, then contact your VC and ask them to put you in touch with the firm doing the work.

This is an advanced topic so if you are uncertain, seek guidance from your CPA.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

If they purchased the shares alongside investors then they should already know based on the offering terms. If they acquired shares through a restricted stock purchase plan or early exercise of options than I would still say yes. Presumably these employees were "granted" or given the shares as a form of incentive plan equity participation. If the employees dont know their percentage share of the Company they cannot relate any value to their investment so there will be no incentive impact.

Thomas Phillips
Title: President
Company: Effective Agreements
(President, Effective Agreements) |

I agree with the concept of transparency. Simon makes a great point: if you are giving your employees a benefit, but they cannot determine its value, then the value of the benefit as an incentive is severely eroded. One caveat: I would find out how the venture capitalists feel. My experience is that they want a motivated workforce and will want the information out there.

Dennis Milosky
Title: Senior Controller
Company: Makena Capital Management
LinkedIn Profile
(Senior Controller, Makena Capital Management) |

I also believe that transparency is important in order for your employees to clearly understand the value of the incentive that they are being offered. If employees do not have a clear picture of their diluted percentage, when a liquidity event does occur, that 'incentive' becomes a disappointment. Those employees who had a perception of a larger stake in the company can feel that they were misled and manipulated by management.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

I totally support the commentators' endorsement of transparency. I cannot see why even the VC's would not want a fully engaged and informed employee population.

Derek Quackenbush
Title: CFO
Company: Rising Data Solutions
(CFO, Rising Data Solutions) |

Part of the start-up bargain is the potential value of the equity--forgoing other perks in the hopes that hard work will pay off. I believe transparency is key in order to maintain that bargain. But it's not so much the number of shares outstanding. It's also the liquidation preferences of the preferred, right? And of course the EV. So it can be misleading to tell some engineer that they own 0.5% of the company if the LP is high (including if there is also participation) and the current EV is not very attractive. Kind of along the lines of Dennis' comments above. You don't want to mislead folks or over share while keeping them informed. Not easy. Good luck!

Judd Rabb
Title: Corporate Controller
Company: Main Street Hub
LinkedIn Profile
(Corporate Controller, Main Street Hub) |

I agree with Derek's comment. In my experience, I have not seen broad disclosure of preferred financing details such as the liquidation preferences to employees, and I question whether or not the employees would be sophisticated enough to independently determine the enterprise value and do the waterfall calculations. So, the most likely outcome is that they will ultimately derive an inaccurate (potentially grossly inaccurate) value for their shares which could lead to big disappointments on an exit. If the company provides this info, does it also have an moral obligation to help the employee do the complex calculation? Based on my experience, I'd say that the answer is "no" because I have never seen it happen. So, providing ownership % is being transparent, but to provide information that is not truly useful without the other data. Probably best to work with your CEO and Board to develop a position on this first.

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