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What’s the Minimum Information to Give Your Investors?

By: Dave Berkus


Whats the Minimum Information to Give Your Investors

Every investor wants regular information from companies taking their money. And most of us investors are frustrated by the lack of regular communication—unless, of course, the company needs more money.

On the other side, entrepreneurs and CEO’s usually have a natural fear of giving too much information to us investors after the initial investment is received. They worry that we will not keep the information confidential and that financial data will find its way into competitors’ hands. Others worry that we will latch onto individual line items within financial data and engage in inquisitions regarding telephone bills, marketing costs and other tactical line items in detailed financial statements.

The minimum legal requirements

First, let’s cover the absolute minimum legal requirement a company must provide to its investors. There must be an annual meeting of the shareholders, and that meeting must be announced with a written notice at least ten days prior to the meeting. (There is a provision that a waiver of notice may be signed preventing this need, but it requires that all shareholders sign).

Required actions by shareholders

At the annual meeting (which can be attended by phone), there are actions that require a vote of the shares present either by proxy or in person. These include election or re-election of board members if required by the bylaws of the corporation, approval of any increases to stock option plans (which would dilute the worth of shares outstanding,) and approve any additions to the capital stock authorized to be issued. Shareholders may vote on other issues during the year by written consent, including acquisitions, stock issuance, changes to the articles of incorporation and bylaws, and more.

Prepare for your annual meetings well. But don’t worry. Few investors will show up that day. But make it easy for them by creating a video or phone link to the meeting. More will attend, and all will feel included.

How much financial information must our companies give?

But the question that is most often asked is: “How much financial information must be divulged?” The answer is that the minimum requirement is to provide an income statement and balance sheet to all shareholders annually. There is no requirement that either be detailed by general ledger account, and those statements should rarely be that detailed anyway. Summarizing income statements with a line for revenues, cost of revenue, general and administrative expenses, sales and other direct costs, all leading to net income, would satisfy the legal requirement for statement of income and expense.

Requirements created by investment documents

When a company accepts an investment from professional or organized investment groups, such as angel groups, venture capitalists or corporations, there is usually a document signed entitled “investors rights agreement” that calls for additional financial and narrative reporting requirements due to that class of shareholder. This could include the need for audited financials, monthly financial and narrative reporting and more. That burden is an ongoing cost of taking the investment, much as a public company takes on the additional burden of governmental reporting, both adding to costs over time.

Good practices vs. minimum requirements

Good relations with us investors can be maintained only by keeping current with information between the company and with us. If there is a concern over some investors gaining a competitive advantage, the amount of information may be reduced to the minimum for some classes of those investors. A good example of this is the information provided to common stock holders, many of whom may be former employees who have exercised stock options and moved on to join the ranks of the competition.

Of course, a public company is not entitled to pare its information to reduce exposure to competitors. That is one of the many costs of becoming a public entity as many CEO’s have found and dealt with over the years.

Published: April 26, 2019

Source: Berkonomics

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Dave Berkus

Dave Berkus is a noted speaker, author and early stage private equity investor. He is acknowledged as one of the most active angel investors in the country, having made and actively participated in over 87 technology investments during the past decade. He currently manages two angel VC funds (Berkus Technology Ventures, LLC and Kodiak Ventures, L.P.) Dave is past Chairman of the Tech Coast Angels, one of the largest angel networks in the United States. Dave is author of “Basic Berkonomics,” “Berkonomics,” “Advanced Berkonomics,” “Extending the Runway,” and the Small Business Success Collection. Find out more at Berkus.com or contact Dave at dberkus@berkus.com

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