When and how an entrepreneur should provide information to a potential investor has gotten a lot of recent attention in the blogoshere. This blog post does a pretty good job of addressing this topic and includes links to other relevant blogs.
To a large degree, the issue has do with how an entrepreneur should share bad news with a potential investor. An entrepreneur tries to avoid bad news. He fears that such information will scare an investor away, or lower the valuation of his company. The natural inclination of an entrepreneur is not to volunteer any information above and beyond what’s been asked for, and even then an entrepreneur will try to put the most positive spin on any of the “bad news” that might be exposed. This entrepreneur can rationalize this posture by thinking to himself, “The investor is a seasoned professional. It’s his job to ferret out any problems. If he doesn’t ask, I don’t fell obligated to tell.”
Reality is much different. To highlight one of the points made in the linked blog, somewhere along the line of working with a potential investor that individual will have to be the entrepreneur’s advocate with his partners or other investors. Just as the entrepreneur has “sold” the investment opportunity to the investor, that investor will have to “sell” the investment to others involved in a transaction. That individual is putting his credibility on the line by promoting the investment.
If “bad news” surfaces at this time, not only will the investment enthusiasm wane, but that individual will have his professional reputation forever tarnished. That’s not a good outcome.
Click through for more discussion around this topic: http://edgrapenutzimm.blogspot.com/2012/08/pause-points-for-diligence-in-venture.html