Screen Shot 2013-03-18 at 2.46.53 PMA version of this post was published on Forbes from a question originally on Quora.  I thought it would be worth expanding on here.


Most of us founders are naturally transparent, or at least, mostly transparent.  It earns trust.  And it saves steps.  It’s way too much work to keep track of half-truths.

But in the pre-diligence phase, or either VCs or acquirers, I’ve learned you want to hold some things back.  Not through the whole process.  But at least until you are past the Second Date.

Why?  Well, first like, dating, you want to sequence things.  First, you want to create excitement.  Then, share the baggage.  No need to blurt it all out over the first set of drinks.

And second, you are sharing with competitors.  Maybe directly, in the case of a potential acquirer.  But even more likely, whatever you share will make its way back through VCs and others to your competitors.

In particular, “thesis” VCs definitely interview all the competitors in a space and pick one and share their learnings back to the one they pick.  E.g., if they say, I want to invest in a Next Generation Marketing Automation Play — they’ll try to meet with all of them and pick the best investment fit for them.  And whatever you share with these VCs then will be shared with one of your competitors.  This is something you should think about and be thoughtful of in your disclosures.

I know of one leading VC that took all the information I gave them, put it in their database, and simply shared this portion of the database with our direct competitor when they later invested.  Deck, data, everything.  Not the end of the world — just be aware of it.

Ok given that you have to talk to VCs if you want their $$$, you have to disclose to potential acquirers to get to the next step … that you have to take some risk to get some reward … what’s actionable here?

My only suggestions are don’t do the following without a term sheet (even if the term sheet isn’t really binding as 99% aren’t):

  • #1: Don’t Put Anything in Writing You Don’t Want Given to Your Competitors.  This is really the simplest one.  You’re going to have to share — but share orally, not in writing, the truly sensitive stuff.  The VCs can only remember so much and take so many notes.
  • Don’t share your full financial model.  A high level P&L summary is plenty for VCs pre-term sheet.  A more detailed model may be necessary for M&A pre-term sheet, but you don’t have to share exactly how operations work.  Give the highest level metrics practical pre offer.  Besides, excessive metrics just create unnecessary discussions about second-level questions that don’t really matter.
  • Don’t share your detailed customer list.  If you have to provide a list, anonymize it with Customer A, Customer B, etc.
  • Don’t share nonobvious parts of your expansion plan.  Planning some nonobvious partnerships, geo expansions, product extensions, etc.?  Look the investment isn’t going to be based on this anyway.  Don’t share it.
  • Don’t share your operational problems.  Share your weaknesses in terms of market, revenues, growth, etc.  There’s nothing really to hide there.  But your platform issues, operational issues, people issues, whatever — don’t share those until post term sheet.  These are diligence items, not pre-wanna-invest items.

I’m not suggesting being anything less than 100% honest and transparent.  That’s the way to go, always.  I’m just suggesting to sequence it.

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