The external blog post titled “Why You Don’t Want to Give Financial Information to All of Your Investors” explains how the funding opportunities for startups have increased dramatically in recent years. It talks about how nowadays, startups get funded not only by big venture capitalists, but also by small investors through crowdsourcing and other methods. While this makes it easier for startups to raise capital, it also means that startups are now funded my countless small investors that in many cases are not trustworthy. Therefore, it is important that startups don’t share their financial performance data with all of their investors but instead only with big investors, as they risk unethical and dishonest small investors leaking this data to other companies or competitors by doing this.
While public companies are forced to declare a quarterly financial report to their investors four times per year, startups that get funded by venture capitalists are not public and therefore can choose how often and what financial data to report to their VC investors, since their financial reports don’t have to comply with GAAP. This poses big questions for startups: how much access to delicate financial performance data should be given to small, sometimes non-trustworthy investors? How often should this data be reported to these investors? In my opinion, finding a balance is crucial. Giving too much detailed financial performance data to small investors raises the risk of the data leaking out, whereas giving these small investors too little financial data might cause them to feel uncomfortable investing in the business as they can’t really know how the business is doing.
In fact, a promising solution would be to report this delicate financial performance information to only big investors that have more than a certain amount of money invested or a certain percentage of the company’s shares, as these are the investors that most likely care about the wellbeing of the company and act on the company’s best interest.
External blog post source: http://www.bothsidesofthetable.com/2014/11/09/why-you-dont-want-to-give-financial-information-to-all-of-your-investors/
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