Are you at the point where you are thinking about how to share information with investors?
Knowing how best to share information with investors can cause entrepreneurs a real headache. After all, the product designs, patents, and marketing materials you have developed are priceless resources for your business.
While you may be ethical, some people are not.
By gaining access to these materials, they may use your own business ideas against you in some capacity. Furthermore, how you share these materials with potential investors carries a security risk. Even when you do want to share the information, how can you do this safely?
In this article, I’m going to explore how to share information with investors in a way that protects your business and yet helps potential investors understand more about the entrepreneurial opportunity you’re offering.
Due Diligence is Essential
Whether you’re an investor or a start-up founder, you should be entering into a reliable and robust form of due diligence. This process allows you to ensure, as best as possible, that the parties you are negotiating with are being forthright and honest about their capabilities. When thinking about how to share information with investors the due diligence is the part where everything falls into place around sharing info.
It also protects you and your business from risks associated with new potential partners and their business operations.
During the due diligence process, you may be asked to share one of the following with a potential investor, with each being key to sharing proprietary information:
- Business model and any business plans you have developed
- Personal business track record
- Financial details such as profit and burn rate
- Team reputation
- Detailed information about owned assets
- Contractual obligations
- Current and future risk/liabilities your business faces
- Insurance agreements
- Revenue streams and your supply chain information
- The debt and share structure of your business
- Trademarks and patents, both existing and pending
- Your market research data
- Details about exactly how your product/service works
When taking all these points into consideration, sharing all this information with an investor does carry some risk that this information could fall into the wrong hands. Throughout the pitching process, you will be sharing much of this information with several investors. Each time you do this, the risk of your information being accessed or misused increases.
For this reason, robust and safe procedures must be carried out to share any proprietary information about your business with investors with confidence. However, my recommendation is to avoid putting confidentiality agreements for just sharing exploratory documents such as the pitch deck.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
Sharing Proprietary Information Securely
When you are thinking about how to share information with investors keep in mind that the best way currently to share proprietary information with an investor, is to do so digitally. In the past, handing out or sending sensitive information physically meant this could be easily copied or could fall into the wrong hands. The 21st century equivalent of this is being hacked.
Also, I’d like to point out, as a follow up to the above concerning confidentiality agreements, that asking investors to sign non-disclosure agreements before they have committed to backing your idea, is a bad move. Doing so signals to the potential investor that you don’t trust them.
In any case, often an NDA agreement doesn’t offer you complete protection, as your ideas could probably be reverse engineered in some ways or incorporated into a competitor’s business operations or business model.
When you are thinking how to share information with investors and want to do it online, if you are sharing something digitally, it’s got to be done securely.
While collaborative services like Dropbox, Trello and Google Drive are great for bringing people together to work on some project aspects, I highly recommend using a secure data room for your proprietary data.
Most cloud-based services like Dropbox do have an element of security, but it’s not really robust enough when sharing sensitive information. There are a number of services out there specifically designed for high security remote data viewing, using a secure data room. It’s best to use these rather than be tempted by other cloud services.
A secure data room is usually a virtual server in a remote location with cutting edge security protocols. While collaborative websites like Trello focus on a wide range of services, data room companies focus entirely on providing a secure place to store digital information.
There are many options out there, so shop around to see which ones work best for you, depending on your budget. Some examples include:
- Secure Docs
- IBM Security
This doesn’t mean you shouldn’t use things like Dropbox and Google Drive for your business, it just means that you should use a more rigorous service when sharing proprietary information with investors, so you can be certain that no one else can access it.
How Should I Share Proprietary Information with Investors?
When wondering how to share information with investors, know that the key to sharing proprietary information is to know when to reveal critical details and when to hold off. I’d split this into five discrete stages. At each subsequent stage, you will be in a better position to reveal more about your business to an investor:
1) First Contact
When first contacting an investor, you shouldn’t reveal everything about your business in one overwhelming information dump. What you should do, is provide concise information about your business; enough to pique the interest of a potential investor. Focus really on the why before you dive into the what and the how.
Venture capitalists and successful angel investors see pitches all the time, so they don’t want a 50 page report on your business at this stage.
2) During a Pitch
When pitching, you’ll need to share some details about your product/service and how it works. You’ll also have to be clear about various trademarks and patents. However, you don’t need to share the intimate details of the technologies you are using for your product.
As I’ve outlined before, the best pitch structure contains concise, powerful information about your business’s financial prospects and market size.
3) Pitch Follow-Up
After your initial pitch, interested investors will follow-up with you. This is when they will ask for more details like the financial model.
At this stage, it’s up to you how much you share with them. You need to tread the thin line between revealing enough to make them more interested, but not everything because this is not a concrete offer. They are most likely to ask about production data, market research, and more detailed financial data here.’
4) Preliminary Offer
When an investor tells you they are seriously considering investing and want to know more, that’s when you should pull the curtain back further. Remember, however, without a term sheet, this is still not an official offer, so treat your information carefully.
5) Concrete Offer
If a concrete offer is made with a term sheet, then due diligence will be carried out. This is a critical part of how to share information with investors. This is when you should share any requested information with the potential investor. If you want to go ahead with an NDA this is really the stage where you would bring it in to seek some form of protection.