He apparently lied about leading the round with another big VC (when he only put in a small amt), sent out emails with this and the startups sensitive docs, tried to trick his fund’s LPs into giving more money based on this, they found out when they called the other VC who actually led the round to confirm. If you know who, them spill the tea! It would be good to know which bad vc to avoid.
The article: http://is.gd/AqjfRV
While what happened with that VC is bad, there were other parts of Suster's article I strongly disagree with.
Specifically, limiting information rights to specific investors.
As a shareholder in a few private venture companies, I would immediately sell my positions if I no longer had information rights nor would I invest in a new deal without them.
Sometimes these helpful VC's who have an audience that blindly follow them are doing them a dis-service.
If you are out raising money and don't want to include information rights in your doc's. this will be a very real barrier to a meaningful segment of non-institutional investors.
Then how do you counter the potential info leak, especially in a large group of investors? It's not a matter of following advice blindly; Suster has a good pt in that with a public company, most investors are not given detailed info until after the fact in quarterly reports. Restricting info does not mean lying or disrespect, just risk management and many private companies do it. If you want more say, then expect to put more money where your mouth is.
If I invest a few hundred thousand dollars I personally expect to have information rights.
I don't need the most sensitive information re: strategy, hiring, product roadmap, etc.
I do want financials with some brief MD&A. High level operating metrics (i.e. churn) are good, but I can understand really restricting that to a truly high level.
As an investor I want this (beyond basic monitoring an asset) to know whether I should exercise my pro-rata rights (if need be) and to get a sense of how I should manage my personal liquidity to fund that exercise.
Also, some of us non-institutional investors can add a bit of value via our own networks (there is a good chance I am in a deal in an industry I am very familiar with and have relationships in).
A broader point: if management can't set-up a proper investor rights agreement and manage appropriate level of reporting (providing useful information without unduly disclosing strategic information) they probably aren't worth investing in or are due to be replaced.
Finally, as an investor this reporting is a great framework to evaluate how the board is performing.
Look at his example - the company was sending around powerpoint decks with presumably sensitive information. Where was he and the board? Any coaching or guidance on this? Seems to be a hot button issue for him after he got burned.
[BTW, respect your points - just like a healthy debate]
You seem to assume that non-institutional investors automatically fall under those to get less info, while I don't. I view the info restriction threshold as something occurring post investment and set by per percentage of total ownership, not amount. E.g. a 5% limit = if your few $00,000 that you mention equates to more than this then you get more info. This precludes info for in this round, ie you'd receive same level of detail sent to all "screened serious" investors for this round because you obviously need some detailed info to make your final decision. Serious meaning those who have gone through 2nd meetings, dug deeper and looking to invest, versus more general info sent out to all prospectives at first bite.
Suster also does mention in the post that he recommends a high-level reports a few times a yr. For me sensitive info would be strategic like you mentioned and some tactical like detailed financials. I'd go for sending high level overview of finances (rather than none) but refrain from details.
"the company was sending around powerpoint decks with presumably sensitive information. Where was he and the board? "
Good point - he may not have known they did so until after, or none of them realized that there were no info rights clause in the termsheet until after?
I understand your concerns, but there's nothing as bad as having your competitor know how you're doing now in detail; where you're vulnerable, etc. due to leaks.
+The other thing that also just occurred to me is: This is overall mostly VCs fault because they usually refuse to state who put in how much in a given round. If they embraced transparency, that investor wouldn't have been able to pull that shit. Really though, what good reason do they have to hide their stakes in a round?
Here is my take on it:
he led the deal, but let the cap table get filled up with small investors that he has no relationships with. He even "allowed them in." (presumably to distribute downside risk in actuality)
he led the deal, but doesn't seem to be aware of what the investor rights agreement said re: information rights.
he led the deal, but his deal doc's didn't reflect the thresholds he sees as best practices
he led the deal, but didn't discuss with management what to send out.
These are things LPs pay attention to: fail to live up to your "value add" / actually doing your job, have issue, air dirty laundry in public in the name of being "helpful." But keep that blog flowing...
His issue is that someone is trying to raise money (improperly) on the basis of this deal; this is not a "competitor just got all our information" situation. Remember "he led the deal" - credit should flow to him.
re: transparency - if it doesn't serve a specific marketing purpose, you won't see it.
Interesting perspective and great points raised.
But it seems what the VC leaked was info he got as participant in the current funding round (vs ongoing stats thereafter), which by default was subject to confidentiality anyway.
From founders' viewpoint, this case outlines why it's better to have fewer investors writing more substantial checks - easier to manage anyway. But unfortunately, not everyone can swing that, hence the party rounds.