How to Write a Shareholder Letter
Communicating with your shareholders
Congratulations you’ve raised funding! Now that you have capital from others, you will need to keep your investors informed about the status of the business they invested in with a shareholder letter. Just as public companies issue quarterly reports, the CEO should send a quarterly letter to the shareholders, reporting on the progress of the business. Quarterly communication can build a nice bank of goodwill with your shareholders.
Don’t procrastinate on writing your shareholder letter.
It’s tempting to put off writing to shareholders, especially when there isn’t a lot of positive news to report. Create a schedule and stick to it; don’t let regular shareholder communication become an unwelcome chore. It’s actually one of the most important things the CEO does.
What to Include:
- Financials: Write the letter when the financials for the quarter have been completed. Include at least a summary of the financial results for the quarter and year-to-date. It’s good to provide some commentary, explaining progress against the budget, and comparing results to results from prior periods.
- New news: A good shareholder letter includes information on sales and the sales pipeline; product development status; any significant partnerships; key personnel changes, and the company’s cash position. Report the good news, but also the bad news. Tell shareholders what the company is doing to address challenges. Sharing the full picture builds trust with shareholders.
- Significant concerns: You don’t like surprises, and neither will your investors. Alert your shareholders to significant potential problems before they happen. Tell them your plans to manage through; seek their advice. Many investors in startups are entrepreneurs themselves. Keep them on your side. Investors in startups can forgive a lot, but they typically won’t be as forgiving when bad news comes as a surprise.
- Forecast: The letter is an opportunity for the CEO to demonstrate to the shareholders that she/he understands the realities of the business and the business model. Sending projections that you never hit tells the shareholders that (at best) you haven’t reached the point of really understanding how your business works. Conversely, the ability of management to accurately predict future results, especially sales, separates a business that has graduated from being a startup from the rest of the start-up pack. When you report forecasts that you actually achieve, shareholders will develop trust and confidence in you as a manager and will be much more inclined to want to make further investments in your company.
- Cash: If cash is tight, don’t hide that fact. Be very clear to the shareholders about when you anticipate running out of cash. Let them know your plan to address the issue—whether it be cutting expense, new fundraising, or both. If your shareholders fully understand the company’s situation, there may be things they can do to help. At the very least, you’ll ensure that they aren’t surprised when they get your next letter asking for more money.
What Not to Include
- Exaggeration, embellishments, or lies: The fundamental currency you have with shareholders isn’t cash; it’s trust. Never give them a reason—by words, actions, or omissions—to feel distrust of you.
- Too much detail: Keep shareholders appropriately informed and communicate openly but be brief and succinct. They can always contact you if they want to know more.
- Personnel Information: While it’s appropriate to tell shareholders about key hires, departures, and open positions, reserve any discussion of individuals (positive or negative) for closed sessions with your Board.
- Highly confidential information: While open communication with shareholders is critical, it is also important to remember that your shareholders may not be subject to any confidentiality agreement with the company. There may be times when you will need to seek legal advice as to whether (and when) you can disclose certain highly confidential information to shareholders, and the form of such disclosure.
A startup CEO must be an optimist, at least at some level. But if every shareholder letter is a compilation of “great news” and wildly optimistic projections (with lots of exclamation points), shareholders will eventually discount or ignore everything you say. When that happens, you can forget about further investment by them in the company.
The shareholders are the owners of your business. Communicate with them regularly in quarterly letters and via phone calls in between. Be transparent. Treat them like you’d want to be treated.
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