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SMART ANSWERS
By Karen E. Klein
JUNE 6, 2000


How Public Should a Private Company Be about Its Stock?

The SEC doesn't have rules covering this question, but honesty is the best policy when dealing with employees

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Q:  Do any laws or SEC regulations prevent a privately held, early-stage startup from disclosing the total number of company shares outstanding to its prospective employees? Are there other reasons that a CEO or venture capitalists should keep employees from knowing what percentage ownership they're being offered in the company?

--D.L., San Jose, Calif.

A:  First of all, no Securities & Exchange Commission rules stop a private company from revealing its capital structure to its employees. Indeed, the SEC generally encourages all companies to be more open. But privately held companies are not subject to SEC regulations, which typically apply to public companies. There are, however, broad antifraud provisions in the SEC code that all businesses need to take note of, and some may interpret these rules as making it unwise to disclose information in certain circumstances.

An entrepreneur who is wary about disclosing detailed information on a stock-option plan to his or her employees should talk to the lawyer or organization helping to structure the scheme about how much detail should be revealed to current and prospective staff.

Experts say some specifics might reasonably be kept confidential, such as the stock-option plans and relative compensation levels of some employees so that jealousies do not arise from staff within the same management or responsibility levels. But when a CEO seems secretive about fairly basic information, it could arouse suspicions that there may be something illegal or unethical going on, even if the CEO's intentions are innocuous.

IT'S ALL RELATIVE. Indeed, if a company wants to attract and retain key employees, disclosure in good faith and an open attitude about things like compensation and stock options are important. "No smart senior executive would take a job without knowing some key elements, such as total shares, their relative percent of options, and -- at least generally -- the ownership piece of the CEO and outside investors," says investment banker and financier Peter Cowen of Peter Cowen & Associates in Westwood, Calif. "A very important piece of information for a prospective employee to know is the total number of shares issued, including potential stock options for employees and potential stock options for investors that have not yet been exercised."

"A grant of 100,000 shares or options may sound terrific in absolute terms until an employee learns that the grant represents only 0.0000001% of the company," says Joe Stubbs, an attorney specializing in business startups at Los Angeles-based law firm Troop, Steuber, Pasich & Reddick. "However, most employers provide honest answers to questions about just how much of an equity percentage a stock or option grant really represents."


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