These three startups were recently accused of misstating their financial information, highlighting how little such companies may have to disclose to their VC backers and other investors
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Although financial shenanigans can take place at both private and public companies, the fact that there's less information available to investors about private companies can make it harder for investors to assess their performance, startup experts told Business Insider.One of the benefits private companies enjoy is they don't have to follow all the rules that govern publicly traded ones, particularly when it comes to disclosing their financial information.
Oddly enough, although some of the VC firms that invest in a startup may have the right to review its financial condition and performance, other investors in the same fundraising rounds may not have that access. By contrast, a publicly traded company must reveal its financial condition not only to all its shareholders, but also to the general public.
But what counts as "material" information is fairly vague, Fockler said. Also, private companies generally aren't required to have their financial information audited or to disclose it to the public at large. And such companies often limit access to their financial results to only certain investors. Post-investment financial reporting requirements are typically included in the investor-rights agreements that startups sign with investors when they get new financing. Generally the companies' board members have pretty wide-ranging access to their financial information and records. The contract terms also could require companies to provide to investors things such as quarterly and annual reports and even monthly financial updates.
Those thresholds usually go up as the company gets larger, raises more money, and new investors are brought in. So, even longstanding investors in the company can find themselves no longer getting updated information on its results.
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