Investor Updates: Dos and Don’ts

August 10, 2024

Investor updates can feel like just another task on a founder’s endless to-do list, but they’re actually one of the most powerful tools in your startup toolkit. Done well, regular updates strengthen relationships with investors, unlock new opportunities, and ensure your company stays top-of-mind when it matters most. Done poorly—or not at all—they risk creating frustration or missing out on crucial help when you need it.

This post is your guide to writing updates that are not just sent but read, valued, and acted upon. From building a sustainable habit to crafting updates that inform and engage, we’ll cover the dos and don’ts to help you get the most out of every email.

Getting It Done

Do Start Small. A lot of founders, riding a wave of initial enthusiasm, start off writing huge, detailed missives… for a couple of months. But few can keep up that pace while running a high growth business. Then, in their own minds, they’ve set the bar too high and struggle to meet those self-imposed expectations. Better to start with a small, core update. Build the habit. Add to it incrementally. Same advice as for starting an exercise program if you want to get long-term results.
Don’t Let Perfect Be the Enemy of Adequate. Founders tend to be goal-oriented, and those goals tend to be big. Many seem to have a vision of the perfect update in their minds--capturing all the excitement, possibility, and heartache they’re experiencing. That’s a lot of pressure to put on yourself every month while staring at a blank page, especially with all the other demands on your time. Let yourself off the hook and come up with a very basic template you can fill out in 10-20 minutes (see our Minimum Viable Investor Updates post for ideas).
Don’t Fall into a Shame Spiral. Often, it seems founders miss an update, then feel like the next one has to be even better. Which makes the chance of delivering it lower. Which means the next one has to make up for two missed updates. And so on. Again, let yourself off the hook. Offer a brief apology, go back to Step One, and Start Small.

Getting It Read

Do Send as Email. Email is the least common denominator. All investors have it. Nearly all investors have evolved a system for organizing email that works for them. There are lots of tools for managing email lists. Don’t use Slack. Don’t try completely new platforms. Feel free to use other platforms in addition to email. But put your core updates in email. (We could provide detailed reasons why each alternative platform is inferior but they all essentially boil down to standard least common denominator platform arguments.)
Don’t Put the Content in an Attachment. Honestly, I don’t understand why founders attach updates as PDF, Word, and PowerPoint. Sure, supplementary material is fine in those formats. But we receive a lot of updates where the founder has clearly written a specific update document and attached it as a file. Forcing the opening of a file just introduces friction and attachments break/slow some forms of searching. One founder said he felt it was more secure. As our founder Kevin Dick, a former security guy, puts it: “Uh, no.”
Note: There is an exception here. If the choice is between not sending a useful update at all and sending a pre-existing file like a board deck or pitch deck traction slides, go ahead and send the file.
Don’t Rely Solely an Online Service Like Reportedly. Anything that requires a login introduces friction. But it also causes particular problems where partners in a firm jointly help portfolio companies and/or have a process for actively synthesizing a view of each portfolio company’s state. You don’t want a process that makes it hard for multiple people at a firm to look out for you. If you really want to use something like Reportedly, perhaps to manage discussions, copy the body of the update into the email as well.
Note: if you want to centralize your detailed financial reporting as part of your accounting system, that’s fine. Just link to it from your update emails.

Maximizing Usefulness

Do Put Metrics Up Front. Most founders seem to think the metrics are the punchline, but they should be the preamble. First, for the same psychological reasons that you want to put your traction up front in a pitch deck, as we explained in Your Pitch Deck is Wrong. Second, purely from a practical standpoint, if an investor is short on time, the metrics give the most information. Third, the metrics provide useful context for absorbing all the other information. Traffic shot up? I’m looking forward to finding out why. Burn spiked? I’ll expect an explanation. CAC and LTV both went up? This should be interesting.
Do Include Financial Metrics. Financial metrics are your startup’s basic vital signs, like pulse and blood pressure. It’s really hard to maintain situational awareness of how things are going without them. Always provide Net Burn and Ending Cash. If you’re generating revenues, provide revenues. Better yet, break it down as applicable: recurring vs one time; COGs vs margin, inbound vs outbound, etc. Whatever is most relevant to your current situation. But please don’t use non-standard or ambiguous terms without defining them. If you’re not generating revenues, provide some indication of what the timeline is, whether it’s a target shipping date for revenue generating product, details of where prospective customers are in the pipeline, etc.
Note: some founders think that financial metrics should be confidential. Not from people who gave you money! If there are people on your update list who are not investors and you don’t want them to know, split the distributions. If this sounds like a hassle, go to Step One and Start Small.
Never Just Provide a Percentage Change. Perhaps even more frustrating than no financial metrics at all is seeing just a percentage change. Again, the motivation here seems to be confidentiality, but the same response applies. Statements like, “User acquisition costs dropped by 30% last month,” or, “Revenue rose 30% last month” are not only useless to your investors, they are extremely frustrating. The goal of your update is probably not to frustrate your investors.
Do Provide Values as Well as Graphs. Graphs are great! But often the graphs will have weird scales or multiple scales or be generally hard to read. So if you graph a quantity, be sure that each point is either clearly labeled with the corresponding value or also put the values for the most recent period in text below the graph.
Do Provide Fundraising Details. Investors can often help with fundraising. If not this round, then maybe the next one. We also like to get validation that our previous investment is appreciating! So knowing exactly where you are in a raise or where you ended at close is important. If you’re raising, report the target amount, the target valuation (a range is fine), how much you have committed, how much closed, and from whom. If you’ve completed a raise, report the final total, final terms, and final participants. And again, don’t use non-standard or ambiguous terms like, “We secured $500K from [firm].” What does that mean? A verbal promise, a written commitment, signed investment documents, a check?
Do Organize Content into Digestible Chunks. Paragraphs of unbroken prose or lists of unbroken bullet points are hard to digest. Use descriptive and logical headings to group related information together. Never have more than three consecutive paragraphs of prose--and only then if the paragraphs are reasonably short. Never have more than seven consecutive bullet points. Only have more than three consecutive graphs if they’re all closely related and seeing them together is necessary to provide a coherent picture. For reference, here are the sections we use in our internal app for summarizing company updates: Metrics, Fundraising, Team, Business Model, Product/Engineering, Customers/Sales/Channel, Miscellaneous

What Investors Need from Your Updates

You may have specific circumstances not addressed by this list. In general, it helps to have a model of what your investors are looking to get out of the updates. First, remember that they are looking at your company mostly from the outside and can’t possibly have all the context you have, and there’s no way you can load it into their heads in a reasonable period of time. Second, investors want to be helpful if possible. But you don’t necessarily know if you need help or the best way each investor could help. Experienced investors actually have more context than you on how startups in general develop and the challenges they encounter. They obviously have more context about their own capabilities. So the best path is to give them a high-level and reasonably transparent view that both maintains consistency over time but also notes “inflection points” when you think you hit them. You should always feel free to ask investors what they want to see.

The Power of Staying Top of Mind

The absolutely most important thing is to send out an update regularly. Your investors and their extended networks are a valuable asset--but only if they are up-to-date on your company. If you have six investors, and they each give you just a single strategic introduction every other year, that’s three extra opportunities per year for good things to happen. You could be missing out on introductions to acquirers, channel partners, next-round funders, experienced potential hires, relevant advice, and much more. All because your investors don’t know what’s going on with your business. Can you really afford not to put this free upside in play?

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This post originally published on 08/07/2018 and was last updated on 8/10/24.

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The Two Most Common Mistakes: Too Much Money & Fixating on a Lead Investor

The biggest fundraising mistakes we see are:

Setting a target raise that’s too high.
Getting anchored on the idea of securing a "lead" investor.

Raising a seed round is rarely easy. But the difficulty increases dramatically when moving from a $500K target to $1M+. At that stage, you usually need significant revenue, a well-known founding team, or truly breakthrough technology. While it’s possible to find investors who fall in love with your idea, the odds are low, and the effort required is high.

Even if you meet these extreme criteria, raising $1M+ often requires a lead investor. You might think, That’s fine, I want a lead! But consider this analogy: If you’re an engineer, would you design an architecture with a single point of failure? In marketing, would you create a campaign targeting the lowest-converting users? In sales, would you prioritize prospects with the longest sales cycles? Probably not—yet that's effectively what founders do when structuring a round around a lead from the outset.

If you don’t secure a lead, you could end up with nothing. The universe of lead investors is smaller, they take longer to engage, and closing them is a lengthy process. This delays fundraising and distracts from building your business. Unless your company has at least $20K in monthly revenue, a dozen professional investors already interested, or an absolute need for a large capital infusion, this approach is suboptimal.

A More Effective Strategy: Modest Raise, Brick-by-Brick, Graduated Pricing

If you have little revenue and a limited investor network, start with a modest raise—$250K to $500K. Ensure your plan demonstrates clear progress with this amount and that your cash burn aligns with reasonable milestones.

Step 1: Secure Initial Commitments

Begin with your strongest supporters—friends, advisors, early customers. Many founders hesitate to ask for small checks, thinking it won’t move the needle. But at the start of a raise, momentum is more important than amount.

Offer attractive terms to incentivize quick commitments. A convertible note with a 20% discount, 5% interest, and a compelling cap is a good starting point. A lower cap at the beginning rewards early investors for moving quickly.

Step 2: Raise the Cap Gradually

Once you’ve secured $100K–$200K, bump the cap up. The “great deal” becomes a “good deal.” The increase should reflect investor demand—if early commitments came quickly, raise the cap two notches; if it took longer, only one.

Continue creating urgency. Tie limited-time offers to natural deadlines, such as an accelerator Demo Day, a major product release, or a customer launch. Investors respond to scarcity—use it.

Step 3: Build Toward an Optional Upgrade

Once you’ve closed 50% of your target, you gain leverage. You now have money in the bank, customer traction, and reduced risk. At this stage, you can:

Tap into bigger geographies. If you’re outside SF or NYC, start pitching investors in those markets.
Leverage platforms like AngelList. A strong lead can attract syndicate funding.
Approach small funds that lead rounds. With momentum, you can explore a larger raise.

Sidebar: Process Matters

Fundraising requires structure. Track your prospects in a CRM or spreadsheet. Categorize investors into:

First check: Early believers who can move quickly.
Second check: Investors who follow others’ lead.
Later check: Those who need more traction before committing.
Lead investors: Professional funds who might anchor the round.

Initially, focus on first and second-check investors. Ask them for referrals to expand your pipeline. Engage with later-check and lead investors early but don’t prioritize closing them until you’ve built momentum.

Oversubscribing, Securing a Lead, and Converting if Necessary

If demand is strong, you may be in a position to upgrade your raise. There are two paths:

Oversubscribe: If interest exceeds your target, tell investors you’re at capacity and need firm commitments. Use scarcity to drive action.
Entertain a Lead Investor: If a fund expresses interest in leading, push for a term sheet within 7–10 days. Avoid holding out so long that you lose other investors.

Most institutional investors are comfortable leading a seed round with a convertible note. If you’ve already raised via notes and a fund insists on a priced round, don’t worry—you can always convert the notes into equity.

Final Thoughts

It’s easy to adjust when things go better than expected. Plan for the typical case, not the outlier.

Depending on market conditions, only 10-20% of seed rounds have a true lead, and another 10-20% are oversubscribed. That means 60-80% of rounds follow the standard path: a gradual raise without a formal lead. And that’s completely fine.

Fundraising is difficult. Raising $250K to $500K gives you roughly a year of runway. And we’ve seen firsthand how much founders can achieve in a year. Focus on building, execute strategically, and the capital will follow.

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This blog post was originally published on 07/18/2016 and was last updated on March 12, 2025.

For Investors

Tax-Free QSBS Gains: The Best Kept Secret in Venture Capital

For venture capital investors, Qualified Business Stock (QSBS) is one of the most lucrative tax benefits hiding in plain sight. It offers investors the chance to keep more of their returns by eliminating taxes on gains.

Despite being part of the U.S. Tax Code since 1993, QSBS was unused for decades—overshadowed by shifts in capital gains rates and overlooked by even seasoned investors. But today, thanks to key legislative changes, QSBS is making waves as a game-changer for venture funds, angel investors, and entrepreneurs alike.

In this post, we’ll explore the history and mechanics of QSBS, how it can transform your tax implications, and what you need to know to take advantage of it. If you’re investing in early-stage startups, this might just be the most important tax benefit you’re not fully using—yet.

QSBS first appeared in 1993, but was largely ignored

In 1993, Congress set out to incentivize investment into U.S. small businesses. As a result, Section 1202 of the IRS Tax Code was created as part of the Revenue Reconciliation Act of 1993. The goal was to give tax breaks to investors who purchased Qualified Small Business Stock (QSBS) and held it for more than five years. Initially, the tax break offered a blended tax rate of 14% on the first $10M of qualifying gains, or gains equal to 10 times the investor’s cost basis – whichever was higher. This was achieved by exempting 50% of the gains from taxes and taxing the remaining gains at a special rate of 28%.

At the time of Section 1202’s introduction, the maximum tax rate for long-term capital gains was 28%, making the effective 14% rate on QSBS gains highly attractive. However, very shortly afterwards, Congress reduced the maximum long-term capital gain tax rate to 20%, diminishing the relative impact of the QSBS benefit. By 2003, when the maximum long-term capital gains rate was further reduced to 15%, Section 1202 became virtually irrelevant. Saving 1% was not compelling enough to justify the extra complexity and tracking required.

The 2008 financial crisis sparked a QSBS revolution

The U.S. and global economies were plunged into a deep recession in late 2008 and 2009. In response, Congress incrementally expanded the QSBS tax break over the following years. Initially, these increases were temporary, lasting for short periods and sometimes applied retroactively. It wasn’t until 2015 that QSBS, as we know it today, became a permanent fixture of the U.S. Tax Code.

Key legislative changes included:

The American Recovery and Reinvestment Act of 2009: This act temporarily increased the tax-free exclusion from 50% to 75% for stock acquired after February 17, 2009.
The Small Business Jobs Act of 2010: It temporarily raised the tax-free exclusion to 100% for stock acquired after September 27, 2010, although only for a short period. This act also excluded QSBS gains from Alternative Minimum Tax (AMT) calculations.
The American Taxpayer Relief Act of 2012: This act retroactively reinstated the 100% tax-free exclusion and extended it forward for stock acquired through January 1, 2014.
The Protecting Americans from Tax Hikes (PATH) Act of 2015: This legislation permanently codified QSBS benefits, making qualifying gains 100% tax-free federally, exempt from AMT calculations, and free from the 3.8% Medicare tax. This was the true game-changer!

QSBS is now one of the best tax breaks in U.S. history

Today, QSBS stands out as one of the most impactful tax incentives in the history of the U.S. Tax Code. However, it wasn’t until the late 2010s and early 2020s that investors began to fully recognize the economic advantages of QSBS tax gains.

Here is the current tax treatment for qualifying QSBS gains:

Tax-Free Federally: Gains are entirely excluded from federal income taxes.
Exempt from Medicare Tax: The 3.8% Medicare tax does not apply.
No Alternative Minimum Tax (AMT) Impact: QSBS gains are excluded from AMT calculations.
State Tax Benefits: Gains are tax-free in 45 out of 50 states, with exceptions in Alabama, California, Mississippi, New Jersey, and Pennsylvania.

This combination of tax benefits makes QSBS an unparalleled opportunity for investors seeking to maximize their after-tax returns.

Holding Period Requirement

To be eligible for tax-free gains, Section 1202 requires that a taxpayer must hold QSBS stock for at least five years.

Limitations on QSBS gains

Section 1202 limits the amount of tax-free gain from any individual QSBS sale to the greater of $10M or 10 times the investor’s basis in the stock. Notably, this limitation applies on a per-company basis, not per taxpayer. As a result, an investor can claim up to $10M in tax-free gains for each eligible QSBS company they invest in, with no annual or lifetime cap on the total benefit.

What makes a company qualify for QSBS?

To qualify as a Qualified Small Business (QSB), a company must meet several criteria. While we won’t cover all the details here, the primary high-level requirements pertain to:

Corporate structure: The company must be a U.S. C-corporation.
Business activity: The company must actively conduct a “qualified trade or business.” (See definition below.)
Asset limitation: The company must have less than $50M in aggregate gross assets immediately after the funding round in which the stock is purchased, as well as at all times prior.

What is a “qualified trade or business”?
The IRS defines it by exclusion, specifying what does not qualify. The following types of businesses are excluded:

Businesses providing services in fields such as health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage, where the principal asset is the reputation or skill of one or more employees.
Banking, insurance, financing, leasing, investing, or similar businesses.
Farming businesses, including those involved in raising or harvesting trees.
Businesses engaged in the production or extraction of resources for which deductions under Section 613 or 613A apply.
Businesses operating hotels, motels, restaurants, or similar establishments.

Almost all other types of businesses qualify, meaning that the majority of U.S.-based tech startups structured as C-corporations (which is most of them) meet the criteria for Qualified Small Business status during the early years of their operations.

Can you get the QSBS tax break by investing in VC funds?

Yes. The QSBS tax benefit extends to partnerships or LLCs treated as passthrough entities for tax purposes. This means that investors in most early-stage VC funds are eligible for tax-free QSBS gains, provided the VC firm properly tracks these gains and reflects them as QSBS gains on the K-1 tax forms issued to investors each year.

In fact, a VC fund can generate well over $10M in QSBS gains from a single investment, and 100% of that gain can still pass through to its investors tax-free. This is because each individual investor in the fund has their own $10M QSBS limit per investment (as illustrated in Example 3 below).

QSBS tax benefit examples

Example 1:

An investor purchases QSBS in a qualifying company for $200k. After holding the stock for more than five years, they sell it for $5.4M, realizing a $4.4M gain. Under Section 1202 of the U.S. Tax Code, the entire $4.4M gain is tax-free federally. Additionally, the $4.4M gain is not subject to state tax in 45 of 50 states.

Example 2:

An investor purchases QSBS in a qualifying company for $1M. After holding the stock for more than five years, they sell the stock for $25M, realizing a $24M gain. In this instance, the investor exceeds the maximum $10M QSBS tax benefit. As a result, $10M of the gain is tax-free, while the remaining $14M gain is subject to long-term capital gains taxes.

Example 3:

An investor commits capital to a VC fund, which invests $1M in QSBS stock. More than five years later, the fund sells the stock for $30M, generating a $29M gain. How much of this $29M gain will investors receive tax-free? Surprisingly, it’s likely all $29M.

Here’s why: Each individual investor in the VC fund has their own $10M tax-free limit per investment. For example, if a single investor holds a 20% stake in the fund, the IRS treats them as having invested $200k in the company (20% of $1M) and as receiving $6M in liquidity (20% of $30M). This results in a $5.8M gain for that investor—well below the $10M cap—making the entire gain tax-free under QSBS.

But wait, there’s more: Investors can offset QSBS losses with Section 1244

Section 1244 is another lesser-known part of the U.S. Tax Code relevant to QSBS. It provides a unique benefit: If your investment is part of the first $1M invested in a QSBS company and the investment results in a loss, that loss can be deducted as an ordinary loss rather than a capital loss. In practical terms, this means the loss can offset ordinary income, providing a significant tax advantage.

Losses under Section 1244 are capped at $50,000 per year for individuals and $100,000 per year for married couples filing jointly.

Section 1244 has limited relevance in the traditional VC landscape since venture capital firms are rarely involved in the initial $1M invested in a company. Even Pre-Seed stage rounds typically exceed this threshold. However, individual angel investors and VC firms that focus on smaller funding rounds (such as ours) can benefit from this additional QSBS tax advantage.

How RSCM’s strategy benefits from QSBS

Although we didn’t initially design our strategy to take advantage of QSBS when we started our firm in 2012, it turns out that our focus aligns perfectly with the type of small funding rounds the government intended to incentivize. As a result, RSCM funds and investors have benefited greatly from the tax advantages provided under Sections 1202 and 1244 of the U.S. Tax Code. On average, we estimate that more than 80% of the gains from our funds will qualify as QSBS gains, and in some cases will exceed 90%. For example, over 90% of our Fund 1 distributions have been QSBS-eligible.

When combined with the tax benefits from Section 1244 losses, the federal tax rate for most of our funds is expected to fall within the low-to-mid single digits.

QSBS: Encouraging innovation and benefitting investors

The U.S. government introduced the QSBS tax break to stimulate investment in U.S. startups and small businesses, recognizing the vital role these companies play in innovation, job creation and overall economic growth. By reducing the tax burden on successful investments, QSBS encourages more capital to flow into early-stage companies, helping to fuel entrepreneurship and economic progress.

Although it took years for QSBS to gain traction, it is now recognized within the small business and early-stage venture investment communities as a significant advantage. QSBS has come to fulfill its intended purpose, becoming a powerful tool for investors while supporting the broader goal of a dynamic and growing economy.
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This blog post is NOT professional tax advice

This blog exists to summarize the history and benefits of the QSBS tax breaks. It should NOT be construed as a complete or exhaustive overview, nor should it be considered tax advice. There are additional criteria not mentioned in this post that can disqualify a company and its investors from receiving QSBS tax benefits. Please consult a tax professional before making any personal investment decisions.