This week, a Bay Area founder was taken aback when an engineer being recruited by his startup asked for both its cap table and information regarding the liquidation preferences of its venture backers. The candidate presumably “worked somewhere where he discovered that these things matter,” says the founder, who asked not to be named in this story.
Though the startup is still debating how much information to give to the candidate, it will likely need to produce a policy around such requests soon. The amount of information that privately held companies share with employees is becoming a bigger issue, largely owing to the rise of so many billion-dollar valuations.
Just yesterday, CB Insights, the research firm, published an attention-grabbing report about “unicorn” valuations, reporting that 2015 has already seen growth of $143 billion in combined unicorn valuations year-to-date, a 47 percent increase over their aggregate valuation at the end of 2013. It also reported that the number of still-private companies now valued at $1 billion or more has grown by around 50 percent in 2015. (That jump represents a stunning 39 companies that have been assigned billion-dollar valuations by their investors this year.)
The report follows another widely read report by the law firm Fenwick & West. It analyzed the financing terms of 37 U.S.-based venture-backed companies that raised money at valuations of $1 billion or more in the 12-month period ending March 31 and reported that, in all cases, investors in these financings received significant downside protection in case the companies’ value declines. (Called a liquidation preference, the companies’ later-stage investors have basically received the right to get paid ahead of other investors, as well as the companies’ management teams and employees.)
“In many of these cases, company valuations could fall 80 percent in value, and investors would still get their money back,” Barry Kramer of Fenwick & West told this reporter in May, when the report was published.
Some observers don’t think employees are paying much attention to the complicated cap structures of unicorn companies. Earlier this week, during a panel discussion at the Fortune Brainstorm Tech conference, Stacey Bishop of Scale Venture Partners was among other investors asked whether employees likely understand the impact of soaring valuations.
“Some do and some don’t,” said Bishop. “I think a lot of employees think, ‘I have 20,000 shares and therefore [my holdings] are worth X.’ I don’t think they understand reverse stock splits and all the changes that happen before a company goes public.”
Added Bishop, “I think executives understand ownership of the company, but the general rank and file don’t.”
Joe Riggione, managing partner with recruiting firm True Capital, underscores Bishop’s point when asked what he’s seeing. “Employees do ask for [sensitive information], but specifically, VP and director-level candidates all ask for both the cap table, as well as what kind of preferences are in place.”
When people “came through the tech bubble of the early 2000s,” Riggione says, “a lot of them caught [in the downturn] learned a lesson. Now they want to know what will happen in case of X outcome, and they’ll ask the company to take them through that and really force the conversation.”
Companies should prepare for engineers and others of their employees to start demanding the same.
Ben Silbermann of Pinterest, the social sharing company reported to be valued at $11 billion, told Fortune this week that Pinterest regularly makes information about its finances available to all employees, despite the risk that someone could leak such information to the press.
Jared Simon, cofounder of the mobile hotel booking application company HotelTonight, said he’s seeing – and trying to meet – similar demands for transparency at his company, which has raised roughly $80 million over four rounds of funding.
In general, says Simon, “We’ve become an open book about financials. We want to empower employees to take the most informed risks they can. We know there’s a risk that something will get disclosed, and that would be a sub-par situation. But if you trust people and believe in them, it’s like a self-fulfilling prophecy.”
Still, Simon acknowledges that discussing equity specifically is tricky . “We’re conflicted,” he candidly offers. “Our equity is worth a lot, and I have all the confidence in the world that it will be worth a lot more in the future. But I also know that not all employees are the savviest about these things, and I want to make sure my beliefs aren’t construed as any sort of guarantee.”
Figuring out “how to walk that line is an art, and I don’t know that anyone has perfected it yet,” he says. “We’re working on it.”
Says the Bay Area founder still deciding how much information to share: “There are just so many complications involved” in sharing the nitty gritty of who owns what, and who will be paid first in the event of a sale or a public offering. “We’re still thinking through all these things.”
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