Why you should tell your investors everything

Today one of our portfolio companies is having a shareholder meeting in which they’re going to disclose important information to all investors and answer questions, and I couldn’t be happier about it.   DAN Fund is a board member so we’re unlikely to learn anything new, but the reason I’m happy to have and attend the meeting is because the benefits of keeping all investors informed are significant.  If you’re not communicating with your investors regularly (at least monthly), you should be.  Here’s why:

 

-The more info you share, the fewer questions you’ll answer.  I can attest to this personally.  At DAN Fund we have a lot of investors and one thing I feared was getting weekly sets of random questions from all of them, crippling my productivity.  To prevent this from happening, I share a weekly update with my investors talking about our portfolio, opportunities we’re looking at, the fund’s financials (monthly).  As a result, I almost never get lists of questions because our investors feel well informed. 

 

-They can help you and they’ll want to help you.  You should talk about the bad just as much as you talk about the good because you never know how your investors can help you.  Trying to find a contact at a big enterprise client? Maybe your investors knows the CEO.  Looking for a new attorney or accountant? Your investors know someone, I promise.  Need a killer VP of Sales? You get the idea…

 

-One day you’ll need them to help you.  Investors are much more inclined to help you when you’ve been transparent and forthcoming with information.  By help, I’m not talking about advice, I’m talking about money.  The path of a startup is almost never up and to the right even though entrepreneurs (especially first timers) always think it will be.  There could come a point where you need a small cash infusion to chase after a new hot marketing channel you’ve found, build a product feature, bridge to a financing, or even make payroll.  Smaller amounts of this sort (sub $500k) can often come from some of your smaller investors and in some cases they may be the only option, so keeping them informed is critical. 

 

-It can prevent you from being sued.  If you share bad news as well as good news, investors are a lot more inclined to believe the good news when it happens and truly bad news, like revenue falling significantly or the company shutting down, won’t be a surprise.  When investors feel surprised, they tend to sue, whereas when they’re informed the whole time, they can see you’ve been working hard and will be more inclined to understand failures and setbacks. 

 

-Amendments and votes will be much easier.  In all likelihood you will need a majority or supermajority of your current investors to make amendments to the operating agreement/certificate of incorporation.  This happens any time you raise money, issue more shares, do M&A, or a variety of other major strategic initiatives.  Getting the majority of each class is much easier when investors have been apprised of what’s going on since day 1.  When you leave investors in the dark, they may use a re-opening of the agreement to play hard ball asking for better terms themselves or in a worst case, hold the company hostage in exchange for better terms.   

 

All the benefits aside, you should be sharing information with all your investors and be as transparent as possible because it’s the right thing to do.  Don’t ever forget who believed in you and who entrusted you with their money, so do right by them and keep them informed of what’s happening.  

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