Why You Don’t Want to Give Financial Information to All of Your Investors
We all know that funding markets have changed for startups. The trends are well understood: more angels, more seed funds, more crowdsourcing and so forth. We all can intuit the benefits to founders of these trends so there’s little reason to elaborate. What is less understood are the consequences of these changes.
we have pointed out some of the downside consequences of the changes and the private information I have says the consequences are much worse than is reported in the press since few people publicly talk about
1. How founders get screwed on negoitiations
How party rounds can burn you if it takes time to find your rhythm
There’s another issue we can add to your list of things to be aware of – information rights. Generally speaking in venture capital financings the legal documents will specify that only “major investors” (a threshold set in the agreement – which can be $500,000 investor or more). There is a reason for this. In a funding round with 1 or 2 VCs and 15-20 angels or 4-6 seed funds if you gave every investor you financial information and performance metrics your proprietary information would increase in its probability of leaking out.
But shouldn’t an investor who has given you $50,000 of his or her hard earned money be entitled to know how you’re doing? Yes. And no.
I am generally a fan for providing management updates periodically for all investors but in doing so you must assume that what you send out will get read by others and thus hold back on your most sensitive information.