The Importance of Being Transparent About Business Risks

June 30, 2020

So you have a business plan all worked out. You’re feeling confident, optimistic, excited. You’ve done the analysis and the numbers look very promising. There are few competitors in the space and your business is set to take off into the stratosphere. You have your investor pitch put together and have received strong interest from those you’ve shared it with, with some even giving you verbal commitment. In short, you see your business as a slam dunk investment.

This is all good news. Confidence is an extremely important ingredient for success, and when backed by rigorous analysis it can be easy to overlook the risks associated with investing in your venture. Sure, you know there are risks, there always are, but you haven’t yet discussed these with potential investors because you think to yourself “everyone knows there are risks in investing, I don’t need to point out the obvious risks that I don’t have control over”. That thinking is fine when talking through your pitch, but when it comes time to actually taking funds from an investor, you must be transparent with the risks, in fact not doing so not only puts your company at risk, it also shows a level of naiveté that seasoned investors will catch as a red flag.

So the question is how do you disclose this to would be investors and what risks should be mentioned.

I tend to think of business risks in 3 buckets:

  1. Risks local to our company. These are risks that are present based on the business model you have selected for your company.
  2. Risks in our industry. Whatever industry you are in, there are industry factors and trends that may negatively impact your business.
  3. Risks in the Macro Economy. These are things that are out of the control of companies in your industry.

All these must be disclosed in the Private Placement Memorandum (PPM) or Prospectus document. This protects both you and your investors, ensuring that you have done your duty to inform investors of the risks prior to their subscription, and giving investors the opportunity to contemplate the risks.

If you are raising capital for your business, please give us a call for a free consultation and flat price quote. We’ve assisted thousands of companies around the world in virtually every industry. We can advise on the appropriate risks to surface and how to surface these in your offering documents.

Call us today at (212) 812-2127