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The care and feeding of your investors

Kevin LearnedI have been involved in more than 30 angel investments over the last nine years. Some of those companies have done a superb job interacting with their investors; others a terrible job.

If you take capital from investors, you have partners who will expect to be kept informed and consulted with on major issues. Usually these responsibilities are set forth in the deal documents, but a surprising number of entrepreneurs seem to forget about their shareholders once they have the money.

Worse, shareholder and entrepreneur objectives are generally in alignment, at least at the time the investment is made. The shareholders, while they may not know the specifics of your business model, generally have had substantial experience with early stage companies and can help those entrepreneurs who are open to advice and counsel. If the entrepreneurs don’t maintain open communications, they miss this opportunity to benefit from those who have gone before.

Most deals give the investors “information rights.” That is, the investors have a legal right to financial and other information about the company. But no investor wants to have to enforce those rights. Rather, investors expect the company will deliver timely and accurate information on a regular basis without the company being hounded.

This can be a real pain to the entrepreneur. Entrepreneurs are crazy busy. Taking the time to communicate to the investors doesn’t always make the priority list, especially if the news is not good. But this is a mistake.

Our expectations in the Boise Angel Alliance and the related funds are:

1. On a quarterly basis the company will send the investors financial statements prepared in accordance with generally accepted accounting principles and a narrative discussing the company performance.

2. Annually the company will hold an annual meeting of the shareholders, even if there is no official business requiring a shareholder vote. At that meeting the company will give an overview of the last year and expectations for the coming year.

3. On an ad hoc basis, company management will consult with the investors about major changes in strategy, such as plans to raise additional capital, or to pursue a new market not contemplated at the time the investment was made.

All corporations have boards of directors. Usually if outside capital has been invested, the investors will have the right to select one or more directors. But, once elected, that director has a fiduciary responsibility to all investors, not just the class that elected him or her. Companies should not expect the director to be the conduit for information back to the investors. That’s not the board member’s responsibility. It’s the company’s responsibility.

Several years ago the Boise angels invested in two technology companies. Both were new and unproven. Both struggled, which is usually the case. One entrepreneur reported like clock work every quarter. He covered the good and the bad and didn’t try to gloss over the problems the company was having. The other never sent out a report without being hounded. Then the reports were glowing and incomplete. Of course, both companies ran out of money. The angels supported the first company with additional investment. The second did not receive additional funds, not because the angels didn’t believe in the product—they no longer believed in the entrepreneur.

Today the first company is alive and moving forward. The second is not.

Think carefully about the expectations investors will have before you take their money. If you do so, bend over backwards to keep them informed.

Kevin Learned is co-founder and director of Boise State’s Venture College, past president of the Boise Angel Alliance, and a member of Loon Creek Capital Group, which helps local communities create angel funds to support their entrepreneurs.

 

About Kevin Learned