Venture capital · Investors

How much information one should share about past investor to new investor?

Michael Epstein Founder at Zap Technology

November 14th, 2016

Situation: Angel funded company seeking series A round. Series A round investor wants to buy out angel investor. However, in order to make the decision on whether they would like to invest in us or not, they want to know what is the equity and valuation of the angel investor. Is this a reasonable ask before signing any document or making any offer? Should we disclose equity and valuation of angel investor to the series A investor?

65% of startups fail due to co-founder conflict, according to Harvard professor Noam Wasserman. To help you avoid conflict, we’ll give you the tools you need to determine the right equity split, including the framework to measure contributions, case studies and more.

Peter Weiss President at American Outlook, Inc.

November 14th, 2016

Put another way, if I'm evaluating an investment and the company will not share this information it makes my decision easy:  walk away.

This is not to say you need to provide it early in the process.  You could agree to provide the information prior to closing with the understanding that if the investor does not like what they see they are likely to withdraw.  

Bottom line:  showing respect for your current investors is good; refusing reasonable requests from prospective investors is self-defeating.

By the way, does the angel wish to sell?  If they don't know this is under consideration you should bring them into the discussion.  There are financial, tax and personal/emotional implications you may need to consider including the potential loss of section 1202 tax benefits if the position has not been held for at least five years.

Tom DiClemente Management Consulting | Interim CEO/COO | Coach

November 14th, 2016

Yes, absolutely!

Ian Shearer Executive Chairman at Parakeetplay

November 14th, 2016

Michael,
Its pretty simple, the answer in general is "yes this is a reasonable request for a serious investor to make". Especially as it would be totally disclosed in your cap table. However if you feel that your angel investor would have a problem with you showing this information, then ask for his consent as a courtesy. However there is no real basis for him to refuse his consent.

Michael Epstein Founder at Zap Technology

November 14th, 2016

Rob, so you feel it is okay to disclose all this information to new investor even before they make any offer or decision?

Michael Epstein Founder at Zap Technology

November 14th, 2016

Thank you all. So I will share the information. 

Rob G

November 14th, 2016

@ Michael, you can decide when to share the information, but the bottom line is an investor is considering purchasing a portion of your company and they want to know exactly what they are buying before they sign docs. It is certainly reasonable that they know what the cap table looks like even before they agree to move forward in discussions with you.   They might change their mind for any reason or no reason.  The current angel(s) should welcome follow-on investors and if they have any experience at all they know that all the pertinent information will be shared with new investors. certainly the cap table is pertinent. 

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

November 14th, 2016

Any investor is entitled to all of the material facts about your business and the terms of a prior financing would certainly be included. 

David Martin

November 14th, 2016

Your angel has invested in you first so do all that is required to respect their investment/faith in you.  Last thing you want is for the buyout to fall through, and you have ticked off the investor you may still need.  But any smart investor is going to want a full disclosure of who is involved and the condition of the company.  Ex: no one wants to buy a company that has potential lawsuits on the horizon.  But that comes upon serious interest, and you are not there yet because the Series A has no idea what they are getting.

Martin Omansky Independent Venture Capital & Private Equity Professional

November 14th, 2016

Reasonable or not, the investor will almost always want details on the previous investors. This is not negotiable. If you want their money, you would be obliged to furnish the requested information. Due diligence would also disclose the info, and all investments I know about are subject to due diligence findings. Lots of other matters pertain, but feel fortunate that you have a Series A investor who wants to buy out the angels! Sent from my iPhone

Rob G

November 14th, 2016

it is certainly reasonable (and common) that your follow-on investors know who currently owns what regardless of round: who, what percentage, at what valuation and in what form (common, preferred, convertible note, etc.). should be right there in your cap table.