Private companies often fail to set aside sufficient time to communicate regularly with their shareholders, viewing them as a nuisance rather than the reason that they exist. But shareholders are not mushrooms – they cannot be fed rubbish or kept in the dark.

There are,of course, honourable exceptions. Every business can benefit from a review of how they communicate with their investors from time to time,particularly since shareholders playan important role in the company’s long term prospects with their ability to limit future financing opportunities.

Some £1.25bn was lent to small firms in September this year, up 55 percent on the year before, according to the National Association of Commercial Finance Brokers (NACFB). With more small businesses raising finance from angel networks and crowdfunding platforms, the number of small business shareholders is growing.

There are over 2,500 companies with turnover over £15 million in the UK that have at least 10 shareholders.  Additionally, there are now hundreds, if not thousands, of start-ups with 50 or more shareholders from their through raising early stage equity funding.

Although there is no legal requirement for private companies to keep shareholders up to date –no need for interim results for example and even AGM’s are now just a guideline – it is counterproductive not to do so.

Without regular updates, a company can riskdisenchanting private investors, and reducing the chances that they will re-invest in the business, which can limitthe flow of capital to small businesses as well as venture capital and Angel Investing sectors.Shareholders can also be ambassadorsfor the business and brand.

The good news is that technology makes it relatively easy to communicate, so keeping shareholders up to date does not need to be too onerous and the costs can be kept to a minimum.

But what sort of information should be shared?  Well it doesn’t have to be a glossy annual report. Keep it simple.  Quarterly or semi-annual updates for shareholders can be structured simply as a letter, or email, from the CEO. It is the information and the message conveyed that is important. Investors want to be kept up to date with the latest news and other highlights on company performance such as client wins, sales, awards, new hires, product developments and so on. The aim is to keep them feeling warm and fuzzy about the company they have invested in.

Send a copy of annual results to shareholders before filing it with Companies House too.

Don’t leave communications until the next time you are looking for investment and don’t isolate one or two super-shareholders at the expense of others.

Regular investor communications

The process of structuring regular investor communications has the added bonus of giving management the opportunity to survey their business terrain every few months and perhaps consider a change of direction or a renewed focus on another goal.

Although not a legal requirement, it could be useful for private businesses to hold some form of annual general meeting (AGM). This could be structured as a webinar or held on site and would provide shareholders with key highlights for the year and future plans, giving them a chance to get a ‘feel’ for the company and the board of directors as well as ask questions and input into future plans.

Try not to look at shareholder relations as a chore. Compared to the environment that public companies operate in – where thereare increasing requirements to communicate with and seek the approval of shareholders on a growing number of business decisions such as remuneration, risks and future strategy – the task is really quite straightforward for private, unlisted firms.

Path to exit

As well as forming a communications strategy, private businesses should also consider providing their shareholders with clear options for liquidity. This can be an attractive proposition for new investors too.

Selling shares held inprivate companies has always been a bit of a problem. To attract investors, newly funded businesses often make vague promises of an eventual IPO or trade sale.  Until then shareholders just have to sit tight unless the management have the cash and are willing to buy back the shares.   The investment can be sound if the business is thriving of course but with no transport mechanism to determinethe value of the shares, agreeing a value is not straightforward.  This means they are often bought and sold at a value that both parties can mutually agree on, rather than at market derived one.

The growing alternative finance space has led to new online share auction services – such as provided by Asset Match. They appeal to private firms of all sizes, from a range of sectors – from brewing through life sciences and financial services to manufacturing – who want to provide liquidity to shareholders.  These firms will have varying numbers of shareholders ranging from as few as 50 up to 4,000 or more.

With more alternative finance providers now regulated by the FCA, there is growing acknowledgement of the role that they play in the global finance sector.  NESTA estimates that the alternative finance sector will be a £1.7 billion industry by the end of 2014.

Online share trading creates new opportunities for investors too, giving them access to a previously hard-to-reach small business sector.

It also creates much needed transparency since all of the trades are online and open for both buyers and sellers to see. This results in a sale price for shares that’s much more market-driven and a closer reflection therefore to their real value.

Providing a clear path to exit is something that every private business needs to consider, for itself as well as its shareholders.  While private shareholders may not be as demanding as angel or VC investors, it doesn’t mean that they shouldn’t be treated with as much respect, kept well informed about company developments and given a clear path to exit.  They are, after all, the reason that the business exists. Investors want to be more like plants, not mushrooms. If they get sunlight, and occasional watering, they and the companies they invest in will flourish.

Iain Ballie, co-founder of Asset Match, the online marketplace where private businesses and their shareholders and buy and sell shares