Investors typically require startups to disclose a ton of information, and rightfully so. Venture capitalists and investment firms must understand the ins and outs of early-stage businesses and vet potential and market viability before pouring their capital into your business.
The type of information startups should be ready to share depends on what stage the startup is in, what the investor’s role is, and if any complications arise. Especially for new founders, it can be difficult to know what information is absolutely necessary, what information should remain proprietary, and what your legal disclosure responsibilities are.
While founders should understand the obligation to share a reasonable amount of information, it’s important to be informed enough to uphold your own rights and boundaries. Let’s take a look at what should be disclosed to investors and what should remain confidential.
Do Share
Investors should have the ability to gain a comfortable understanding of the startup’s standing, and multiple items must be disclosed. Various milestones like ownership changes, filings, and fundraising rounds can trigger necessary disclosures including organizational documents, financials, and performance indicators.
Financials
Core financial statements should be disclosed, including P&Ls, income statements, balance sheets, and cash flow statements.
Organizational Docs
Up-to-date cap tables should be shared, and should outline shareholders, option pools, and equity distributions. Some investors prefer to see these organized into a single spreadsheet, with a few columns showing future projections based on model assumptions.
KPIs
There are a multitude of metrics early-stage businesses evaluate, but not all of them necessarily need to be disclosed. Choose performance indicators that best tell the startup story, which usually include revenue rates along with burn multiples and LTV:CAC ratios.
Company Changes
Sharing major company changes keep investors informed while avoiding surprises – something investors don’t typically care for. Significant leadership changes or hires, operational shifts (i.e. new vendors), or new product launches or developments are all key to investor understanding.
Don’t Share
While it’s important for startup founders to share enough business information to paint a clear picture for investors, there are some documents that investors don’t actually have the right to see, or could potentially damage pending deals. A startup attorney can advise founders if it is or is not a good idea to share these pieces of sensitive information, or if an NDA should be signed before proceeding.
Proprietary Information or Trade Secrets
Unique details that define a startup’s competitive advantage should be kept confidential. It will be important for documents or details like unfiled patents, unique concepts, or trade secrets to remain internal unless advised otherwise.
Unvetted or Raw Data
For early-stage businesses building software products, raw blueprints, unfinished core coding, or unvetted data can misrepresent final products or jeopardize secure files. Not only can these kinds of data points be inaccurate, it could also damage brand trust by presenting an unfinished picture. Proprietary software infrastructure should also remain protected.
Inflated Future Projections
Founders want to present their startups in the best possible light, and for many a good reason. However, future projections are better conveyed conservatively. Inflating future projections may temporarily excite investors, but if numbers fall significantly off-track, it could damage the startup’s reputation. Unpublished internal roadmaps are also just that – internal.
User Details
Startups should uphold consumer privacy during investor and partner conversations. Personally identifiable information, specifically names, addresses, phone numbers, and email addresses, should remain confidential. Customer and client financial information and/or health records should be upheld with the utmost privacy care.
HJF Law Can Ensure Your Disclosures Meet Obligations While Protecting Your Startup
It’s never too early to hire a lawyer. As your startup begins to consider funding, partnerships, or professional advisement, it’s important to understand what data needs to be shared — and what data is important to keep confidential.
Our team of startup experts can help guide you through disclosures before major milestones are reached, ensuring founders are well informed and well prepared before discussing a significant amount of sensitive information.
Reach out to us at (917) 726-8184 or contact us here to learn how we can help.