This post is by Jeff Carter from Points and Figures
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One of the things that entrepreneurs often do is forget about their seed/early investors. They raise institutional capital and the big VC firms don’t really worry about the seed investors. The new term sheets change the definition of what it is to be a major investor and who gets information rights. I think this is okay, because you need to protect a lot of this information since it is so strategic. At the same time, all investors have a right to know something.
I have been in deals where institutional capital comes in and either buys out seed, or asks them to relinquish their pro-rata rights. I mean, I took the early risk, why shouldn’t I have the option of investing more? That always sort of bugs me but I understand. Clean looking cap tables are not unimportant.
Whether someone is currently actively investing or just a line on cap table, entrepreneurs shouldn’t forget who they danced with to get to where they are at.
This is around the time it is great to get an update on the business. It’s past the turn of the year and enough time has elapsed so you can get Q4 numbers. The firm has probably budgeted and strategized about the coming year and they can give that information to investors.
I don’t think that it’s proper to send out full financial statements. But, talking about the increase/decrease in sales is proper. Talking about the general strategic direction of the firm is proper. Talking about a new C level executive hire is proper, or if a C level exec left the firm. If a founder is leaving, it’s proper to inform investors of this too. If strategic suitors have come to talk to the firm, it might or might not be proper to divulge that depending on the goals of the firm.
Investors have networks and they might be able to help you with strategic goals. If the firm asks in the correct manner, investors might be able to help find employees or customers without being meddling.
I also think it’s proper to lay expectations on future funding rounds. I wouldn’t say, “We are going out for a Series C in Q3 and plan to raise XX at XX”. But, I might say the company is exploring future funding rounds and think it might happen inside the year, or QX of next year. If you are talking to VC firms, you might mention that without mentioning the firm. If VC firms are seeking you out, you might mention that as well. Again, investors have networks and if they can help, they might.
I think it is very important that investors know where they stand in the capitalization stack. How diluted have seed investors become? What’s their investment worth today? You don’t have to give them anything but the current stock price and how many shares they own. They should know what their initial check size was, their follow on check sizes, and how much they have invested. If you run an angel group, get that information to investors.
At our VC firm, we like to help entrepreneurs share information with investors. Often, we have them schedule a 30 minute investor call where the C level team talks through points with investors and takes questions. I think this helps the firm learn to talk about their business succinctly, and it helps investors feel like they are part of the process. It’s also about transparency. Yes, I can see why people are paranoid but you have to trust your investors too.
At the end of the day, it is about ringing the cash register. If a seed investor put money in for altruistic reasons, they still want to know where they stand and if there is a chance of cash coming back. It’s called venture capital, and the capital part also entails capitalism.