The information rights section of term sheets and deal agreements describes what information an investor is entitled too. It is usually used to clarify and increase information rights in comparison to what corporate law specifies. This section may include what content is reported, reporting frequency and a definition of the audience.
What Information is Commonly Shared with Investors?
Generally speaking there are two groups of metrics a company may publish to its investors. Financial and Non-Financial information.
1.) Financial Information
Financial information relates to accounting reports, either audited or not. Audited reports are commonly produced on a yearly basis and non-audited ones are usually disseminated on a monthly or quarterly basis. The audited reports follow strict, regulated formats. They are produced by your auditor on the basis of the information you have provided. The un-audited reports have a little more room for creativity. They usually come directly out of your accounting software and technically can be produced for any cut off day. Additionally their detail level can be adjusted quite freely. That means they can show varying time ranges and summarize or detail your full chart of accounts to your liking.
For early stage companies it can be relatively more attractive to look at monthly accounting reports. Revenues still change a lot and looking at monthly expenses in accounting will likely be your most direct view at how much the company is actually burning. Accounting figures are of course very much invoice date based for most of your transactions. In practicality, looking at income statement and cash flow statement will give you a good idea of your actual monthly cash burn.
One of the main downsides of financial information is that its data needs to be adjusted periodically through so-called month-end or year-end adjustments. Specifically depreciation and deferred revenues have a big impact. They render daily financial statements to be usually at least greatly skewed if not unusable. Period-end transactions to a large degree need to be verified and produced with manual inputs. This means even creating accurate and timely monthly financial reports is a strain on human resources. Switching to quarterly reporting definitely saves time.
2.) Non-Financial Information
Non-financial information relates to any metric that doesn’t come out of accounting. Examples could be:
- User data (User No, Site Visits, Page Views…)
- Customer data (Customer No, Repeat Customer No, Customer Churn,…)
- Sales rep data (visits, phone call, leads,…)
- Supplier data (number of suppliers on your market place, sales per supplier,…)
While a lot of the above data points relate to revenues and customer data which may be present in accounting software, its not always the case. The detail level may vary and many parts relating to behavior such as customer repeat purchase rates or churn rates will not be available in an accounting software. Frequently, non-financial information is collected from a host of different data sources, such as Google Analytics, Mixpanel, Accounting Software Add-ons, or plain old Excel.
Given the many different sources, of which at least some will not be instantly available, reporting overall takes time. Producing too many and too detailed reports can block your employees from working on other tasks.
Downsides of Sharing too MUCH Information with Investors
There are two main downsides to sharing too much or too frequent information.
- Increased workload
- Investors might worry too much
As described above, reporting is not perfectly automatic as accounting needs supervision and works with cut-off periods. And non-financial data comes from so many, ever changing software systems it will require collation and usually some clean up of the data. So the more detail you guarantee to investors, the higher the burden on your team. You might suddenly have your accounting, sales, marketing and maybe even product team stressing over detailed, monthly Excel reports that nobody ends up reading.
Secondly, not every investor is experienced enough to correctly interpret your business internals. Additionally every human being gets a little emotional when numbers are on a temporary downswing. An excessive detail level and reporting frequency will end up exacerbating communication between management and investors for very little purpose. To put it bluntly, investors have already paid their money and the next timing for a shareholders vote is likely still far off.
Downsides of Sharing too LITTLE Information with Investors
Sharing too little or too infrequent information also has its downsides:
- Loss of trust with investors
- Reduced investor readiness for decision making
The problem with not sharing enough data with investors, is that they might start questioning what is going on “behind the curtain”. 12 or even 3 months can be a life time in Startups when the runway is getting short. Given the frequent, usually at least yearly funding rounds, Startup investors frequently will need to vote on certain business decisions. This might relate to approving dilution in exchange for a new fund raise, changing the business direction or maybe even helping the business with new funds when its struggling.
In all these situations its important to have the trust and support of investors.
Conclusion: How to Strike a Balance?
In figuring out the detail level of how much and how frequent to provide information to investors, founders must strike a balance. They must create trust and keep shareholders ready for decision making, but also avoid granting too much room for endless discussion over trivial data points. Typically, more data is creating less clarity. The more you share, the more questions you will get.
To manage your time wisely try to negotiate for the following:
- Maximum quarterly investor reporting for un-audited financial and non-financial data
- This significantly reduces the reporting
- Don’t list out detailed metrics in the deal agreements
- List generic terms such as “User” or “Customer data” so that you have more leeway to change your reports down the road
- Implement investment thresholds
- Only grant full information access to larger investors by setting a minimum investment amount or share ownership percentage as a threshold.
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