No Good
So far most litigation, involving Mu Sigma and other startups like OrderUp Inc. and Stiefel Laboratories Inc., focuses on problems created by a booming market for late-stage startup financing and secondary trading of already-issued private tech shares flowing from that. In each case, investors complain they missed out on bigger gains because they weren’t told about good news that other shareholders, typically corporate insiders and bigger backers, knew.
However, late-stage private tech valuations have begun to fall back to Earth and financing is harder, so future disputes may revolve around the opposite scenario: Investors weren’t told about bad news that other shareholders knew and lost money by not selling before prices fell.
Good Technology Corp. employees sued management in October following BlackBerry Ltd.’s acquisition of the mobile security startup for $425 million, less than half the private market valuation in 2014. At a June company meeting, management told staff Good was thriving and still IPO-bound. Based on those comments, some employees purchased additional stock for $3.34 a share in August, only to discover when the BlackBerry deal was announced a few weeks later that the common stock was actually worth 88 cents a share and had been since June, according to the complaint.
Money = Information
As it stands now, the more money you have, the more information you get in private markets. Sven Weber launched the SharesPost 100 index fund in 2012 to let unaccredited investors (with a net worth below $1 million) own shares in late-stage startups, including DocuSign Inc., Spotify AB and Social Finance Inc., with a minimum investment of $2,500. He could only write $500,000 checks at first and it was hard to get information to gauge if he was getting a fair price. As the SharesPost 100 grew to 34 startup positions and $71 million under management, he got more access.
Weber said one Silicon Valley unicorn provided virtually no information when he was trying to purchase shares last year. Based on historical statements and publicly available documents like articles of incorporation, he invested anyway. During the past year, he increased his stake, got to know company executives and eventually convinced them to share quarterly revenue updates and forward-looking statements. He declined to name the company because he wants to maintain a good relationship and access.
Difficult by Design
Getting information from a startup is difficult by design. Private companies relish that they aren’t required to disclose financial, product or other information. Keeping such details under wraps is the main advantage they have over public rivals.
EquityZen Inc., a marketplace that pairs buyers and sellers of startup stock and helps execute transactions on their behalf, provides information about companies to potential buyers. But the depth and breadth of that data "depends on the size of the deal, how recently the company has raised a round of financing and what information they (the sellers) are willing to offer," said EquityZen CEO Atish Davda.