Raising Capital 101: Financial Statements Investors Expect to See

Legal and Regulatory Framework

Raising capital – even from a “friendly” investor – happens inside a legal box. Your financial statements aren’t just a sales tool; they’re part of a regulated disclosure package.

In Canada (and Quebec), key frameworks include:

Securities law and the AMF
If you’re issuing shares or other securities to investors, even privately, you are subject to provincial securities rules. In Quebec, that’s overseen by the Autorité des marchés financiers (AMF)↗.
You may be relying on a prospectus exemption (e.g. accredited investors, family/friends/business associates, minimum investment threshold, private issuer exemption). Each exemption has documentation expectations. At a minimum, investors typically receive:

• Historical financial statements (often GAAP/ASPE or IFRS)

• Pro forma / projected financial statements

• Cap table and share terms

If you misrepresent your financial condition or omit material information, you risk civil liability for misrepresentation and, in egregious cases, securities offences.

Corporate and financial reporting standards
Most Quebec SMEs use ASPE (Accounting Standards for Private Enterprises), larger or international-facing startups might use IFRS. Even if you’re not required to file audited statements, sophisticated investors will expect:

• A clean balance sheet

• A clear income statement

• A cash flow statement (often neglected by founders)

• Notes explaining major policies and assumptions

If your company ever moves toward a public listing or large institutional round, the expectation quickly shifts to audited IFRS financials. Building projections consistent with these standards from day one makes that growth path smoother.

Tax and disclosure laws
Your financial statements must also respect:

• The Income Tax Act↗ (federal)

• The Taxation Act (Quebec)↗

• The Excise Tax Act↗ (GST/HST)

• The Tax Administration Act (Quebec)↗

Investors understand that overstated assets, understated liabilities, and wishful tax assumptions can lead to future audits, reassessments and cash flow shocks that damage their returns. A smart investor will ask:

“Are these numbers compliant, or am I buying into hidden CRA / Revenu Québec problems?”

A good capital-raising financial pack, therefore, is:

• Prepared under recognized accounting standards

• Consistent with filed tax returns

• Transparent about any uncertainties

That’s the legal baseline.

Owner and Director Liability

When you raise capital, you’re not just risking the company’s reputation – you may be exposing yourself.

Duty of care and fiduciary duty
Directors have a duty to act honestly, in good faith and with the care of a reasonably prudent person. Presenting financial statements to investors that you know (or ought to know) are misleading can be a breach of that duty.

If the business later collapses and investors allege they were misled by inflated projections or doctored statements, you can face:

• Civil suits for misrepresentation or oppression

• Personal liability if courts find you acted in bad faith or were grossly negligent

Personal guarantees and side agreements
Even in equity raises, investors sometimes ask for:

• Personal guarantees (e.g. for shareholder loans or bank lines they backstop)

• Non-compete and non-solicit agreements

• Founder vesting terms

If you sign these casually without understanding the financial implications, your personal risk increases. Financial statements and projections you share are the basis on which those agreements are made.

Tax director liability
Directors remain personally liable for:

• Unremitted payroll source deductions (federal and Quebec)

• Unremitted GST/HST and QST

If your projections ignore realistic tax remittances to make the business look more attractive, and you run out of cash, CRA and Revenu Québec can assess you personally.

Bottom line: when you sign off on financials in a fundraising data room, you’re not just “selling” – you’re making legal representations that can follow you personally if they’re reckless.

Jurisprudence

Canadian case law is full of cautionary tales where investors relied on financial statements and later sued when reality diverged too far.

Key themes from the courts:

Negligent misrepresentation
Courts have repeatedly held that:

• Officers and directors can be liable for negligent misrepresentation if they provide financial information to investors without reasonable basis or verification.

• Reliance: if investors show they relied on your financials when deciding to invest, and those financials were materially wrong, you can be on the hook.

Fraudulent misrepresentation
When numbers are outright falsified or key liabilities concealed, courts have:

• Voided investment agreements

• Awarded damages against companies and individual officers

• In extreme cases, opened the door to regulatory and criminal actions

Due diligence matters
The flip side: directors have successfully used a due diligence defence where they:

• Engaged qualified professionals (CPAs, valuators)

• Asked probing questions

• Corrected errors when discovered

Courts recognize that forecasts are uncertain; what they punish is careless or dishonest forecasting.

Takeaway:

If your projections and financial statements are:

• Built with professional help

• Based on documented assumptions

• Updated when conditions change

you’re in a far better position if an investor later challenges them.

CRA and Revenu Québec Audit Risks

Investors don’t want surprise tax bombs in their portfolio. Poor financial reporting can cause exactly that.

Common tax-related risks visible in financials:

Aggressive revenue recognition
Over-recognizing revenue to look “hot” for investors (e.g., booking multi-year contracts up front, recognizing non-binding LOIs as revenue) can:

• Inflate taxable income now

• Trigger CRA / RQ reassessments if audited

• Create awkward explanations in due diligence when investors reconcile tax filings with your pitch deck

Under-accrued liabilities
Things like:

• Payroll source deduction arrears

• Unremitted GST/QST

• Unpaid instalments

If these aren’t on the balance sheet, you’re essentially hiding debt. CRA and RQ know how to cross-check bank statements, payroll records and sales levels. An audit that uncovers hidden tax liabilities will reduce equity value and may scare investors away.

Over-optimistic use of tax credits
If your projections hinge on:

• SR&ED credits

• Quebec R&D credits

• Multimedia, e-commerce, or other niche credits

but your underlying projects or documentation are weak, CRA and RQ may deny or reduce claims. That can blow a hole in your forecasted cash inflows and hurt investor trust.

Best practice is to:

• Include tax credits conservatively in projections

• Note assumptions clearly

• Get pre-emptive advice on eligibility and documentation

Financial statements that line up with filed returns, and anticipate CRA/RQ behaviour, are significantly more “investable”.

Late Filing Penalties

Investors read between the lines. Late filings scream “this management team can’t stay on top of basic compliance”.

Late financial or tax filings create three problems:

1. Cash leakage
   Penalties and interest for late T2 / CO-17 corporate returns, GST/QST, or payroll filings directly erode cash that could have funded growth.

2. Signal of weak controls
   In due diligence, investors will ask for:

   • Notices of assessment

   • Proof of filing dates
     Consistent lateness suggests poor internal systems and increases perceived execution risk.

3. Higher audit probability
   Chronic late filers are more likely to be selected for audit. Investors don’t want to inherit that risk.

Your projections should:

• Assume timely filings (no penalty line as a “normal” expense)

• Show that you’ve built in capacity (internal or external) to keep books current

• Reflect realistic timelines for receiving tax refunds/credits (delays happen, but late filing is within your control)

Investors expect a capitalized company to behave like a grown-up. Tight compliance is part of that.

Industry Operational Realities

Investors don’t just look at the numbers; they ask if the numbers fit the operational reality of your sector.

Some examples:

SaaS or tech

• High upfront R&D and sales costs

• Recurring subscription revenue

• Often negative cash flow in early years

Investors expect to see:

• Clear ARR/MRR (annual/monthly recurring revenue) metrics

• Cohort retention data, churn rates

• Cash burn and runway clearly plotted

Manufacturing / product businesses

• Heavy capital expenditure (machinery, tooling)

• Inventory cycles

• Supplier and customer terms

Investors expect:

• CAPEX schedule and depreciation

• Inventory and working capital forecasts

• Gross margin assumptions compared to industry benchmarks

Service firms / consultancies

• Labour is the main cost

• Utilization rates drive revenue

Investors expect:

• Headcount plan tied to revenue

• Realistic billable hours per employee

• Clear separation of owner salary vs profit

Your financial statements and projections should clearly mirror how your business actually runs. If you’re a seasonal operation and your monthly forecast is perfectly flat, sophisticated investors will not trust it.

Best Practices: Financial Statements Investors Expect to See

Here’s what a professional-grade capital-raising financial package usually includes:

Historical financial statements
Investors will expect at least:

• 2–3 years of historical income statements and balance sheets (if available)

• Cash flow statements where possible, not just P&L and balance sheet

• Ideally reviewed or audited statements for larger rounds

Tie these to your tax returns. Any mismatch between reported profit and taxable income should have a clear explanation (e.g. permanent differences, non-deductible items).

Forward-looking statements (projections)
At minimum, provide:

• Monthly projections for the next 12–24 months (P&L and cash flow)

• Annual projections for 3–5 years

• Balance sheet projections at year-end for each year

Each forecast should be backed by:

• Documented key assumptions (growth rates, pricing, hiring, margins)

• Driver-based logic (e.g., users × ARPU for SaaS; units × price for product businesses)

Cohort and unit economics (for growth companies)
Especially for venture and growth investors, include:

• Customer acquisition cost (CAC)

• Lifetime value (LTV)

• Gross margin and contribution margin

• Payback period on CAC

These can be presented alongside the financial statements or in notes.

Cap table and instrument terms
You need a clear:

• Current capitalization table (who owns what, types of shares)

• Post-money cap table scenarios (pro forma, after the raise)

• Summary of share class rights (prefs, liquidation, anti-dilution, etc.)

Investors will reconcile your cap table with the equity section of your balance sheet.

Scenario analysis
Showing:

• Base case

• Downside case (e.g. –20% revenue)

• Upside case

Even if you only present the base case formally, having scenario logic built and ready to discuss makes you look prepared and realistic.

Narrative + numbers
The best financial packs have a short narrative that explains:

• How you make money

• How cash moves through the business

• How the new capital changes the trajectory

Investors want both story and spreadsheet, tightly aligned.

Common Errors in Investor-Facing Financials

Avoid these mistakes; investors see them daily and they destroy confidence.

No cash flow statement
Only giving a P&L and balance sheet is a red flag. Cash is how investors get paid back (via exits or dividends), not accounting profit. Cash flow is non-negotiable.

Hockey-stick revenue with flat costs
Massive revenue growth with:

• No increase in marketing

• No increase in headcount

• No increase in COGS

is not credible. If sales triple, something else will also change – staff, infrastructure, ad spend, support costs.

Ignoring dilution
Founders often:

• Forget option pools

• Forget convertible notes that will turn into shares

• Present ownership as if no dilution ever occurs

Serious investors will model dilution themselves. Better to pre-empt this:

• Show projected ownership post-round

• Show impact of future option grants

It builds trust.

Owner lifestyle expenses in the business
Running personal expenses through the company (car, travel, “marketing” trips that are really vacations) and then presenting that P&L to investors is a fast way to lose a deal. Clean up your statements. If necessary, restate historical financials “normalized” without those items.

Inconsistent numbers between documents
If:

• The pitch deck shows one number for historical revenue

• The financial statements show another

• The tax return shows a third

you look disorganized at best, deceptive at worst. Reconcile everything before you share it.

Not updating projections
If market conditions change (interest rates, input costs, regulations) and you keep circulating a stale projection that no longer reflects reality, investors will notice. It’s okay to say, “We updated our forecast last month to reflect X.” It’s not okay to pretend nothing changed.

Salary vs Dividends: How Investors Look at Founder Pay

For private companies, owner compensation is a big signal. Investors look at both how much you pay yourself and how you pay yourself (salary vs dividends) through the lens of alignment and sustainability.

Salary

Pros:

• Transparent and easy to model

• Shows up as an expense, diluting profit appropriately

• Easier to benchmark against market rates for similar roles

Cons:

• Higher immediate personal tax for the founder

• Slightly lower corporate profit

Investors generally prefer:

• Founders to be paid a reasonable salary, not ultra-low (which is unsustainable) or ultra-high (which extracts too much cash too early)

• Strategic increases as the company de-risks and grows (salary rising with revenue/milestones)

Your projections should include founder salaries at levels that:

• Keep you focused and stable

• Don’t starve the company of growth capital

Dividends

Pros:

• Tax-efficient for owners in some situations

• Don’t reduce accounting profit (they come out of retained earnings)

Cons:

• Pull cash out of the business

• Can signal misalignment if large dividends are taken while the company still needs capital

Growth investors (VCs, PE) typically do not like early dividends. They want all spare cash reinvested to maximize value growth, not paid out. For capital-raising projections, it’s usually safer to:

• Assume no dividends (or minimal) until the business hits clear profit and cash thresholds

• Explicitly state your dividend policy (e.g. “No dividends will be paid until investors have received return X or until debt covenants are met.”)

If your current financials show large historical dividends, be prepared to explain:

• Why they were taken

• Why the policy will change going forward

Ultimately, investors want founders who are:

• Fairly compensated

• Not draining cash

• Aligned with long-term value creation

Your statements and projections should reflect that balance.

Holding Company Strategy: Friend or Foe for Investors?

Many Quebec entrepreneurs have a holding company (Holdco) that owns:

• Shares of the operating company (Opco)

• Real estate

• Investments

This can be smart for tax and asset protection, but investors will look closely at it.

Why investors sometimes dislike complex Holdco structures

• They can obscure where value sits (is the IP in Holdco or Opco?)

• They may complicate exits (forced to buy both Holdco and Opco interests)

• They may be used to extract value pre-investment (e.g. moving cash or assets up to Holdco before investors come in)

For institutional investors, cleaner is usually better: they want to invest into the entity that actually owns the business assets and operations.

How to make Holdcos investor-friendly

• Ensure key assets (IP, contracts, operations) are clearly owned by the company investors are investing into (often Opco).

• Use Holdco primarily to:

  • Hold personal investments

  • Receive dividends from Opco (after the raise, subject to investor agreements)

• Be transparent: map out the structure in your deck and in notes to financial statements.

Sometimes, investors will insist on a reorganization before investing:

• Moving assets from Holdco to Opco

• Collapsing unnecessary entities

• Simplifying share structures

If you’re planning a raise, it’s wise to review your corporate structure in advance with a CPA and lawyer to:

• Make sure it’s tax-efficient

• But not so convoluted that it scares off investors

Projections should be clear about where capital is going (Opco) and where value will accrue.

Financing & Grants: Blending Equity with Other Capital

Equity funding rarely stands alone. A well-structured growth plan often combines:

• Equity (investors)

• Debt (bank loans, BDC, CSBFP)

• Non-dilutive funding (grants and tax credits)

Investors actually like to see that you’re smart about using cheaper capital where appropriate.

Examples:

Bank / BDC debt alongside equity

• Use equity to fund risky R&D and market entry

• Use debt to fund more predictable assets (equipment, real estate, vehicles)

Your projections should:

• Show both streams of capital

• Include loan repayment schedules and interest

• Demonstrate that debt service is manageable even in downside scenarios

Tax credits and grants

• SR&ED and Quebec R&D credits – non-dilutive, but subject to compliance risk

• Sector grants (export development, digital transformation, environmental tech)

• Wage subsidies for certain hires

Investors like these if:

• They’re realistic (you’ve applied or are highly eligible)

• Not over-relied upon (the business isn’t doomed if a grant is delayed or denied)

• Their timing and compliance costs are properly modeled

When raising capital, position grants and credits as accelerators, not crutches.

What investors expect in your statements regarding other capital

• A clear “Sources and Uses” schedule

• Integration of all financing (equity, debt, grants) into the three financial statements

• No double-counting (e.g. not using the same dollar of equity and grant to fund the same cost twice)

Done right, your financial package tells a story of leveraged growth: every equity dollar is amplified by smart use of debt and non-dilutive funds, without adding excessive risk.

Why Mackisen

Raising capital is one of the most important and stressful milestones for any entrepreneur. Investors will scrutinize your financial statements, projections, and structure with a fine-tooth comb. You don’t need a generic accountant for that – you need a partner who understands Quebec law, CRA and Revenu Québec, securities rules, and investor expectations.

Mackisen CPA Montréal helps SMEs and startups:

• Clean and normalize historical financial statements so they tell a compelling, truthful story

• Build investor-grade financial models – integrated P&L, cash flow, and balance sheet – grounded in realistic assumptions and industry data

• Align projections with tax and legal reality, so investors don’t find ugly surprises in due diligence

• Structure owner compensation, holding companies, and shareholder agreements in ways that are both tax-efficient and investor-friendly

• Integrate grants, tax credits, and smart use of debt into a coherent capital stack

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to and positioning themselves as credible, investable companies. Whether you’re preparing for your first angel round or a larger institutional raise, our team ensures your financial package is clear, consistent, and compelling.

If you’re planning to raise capital and want your financial statements to work for you – not against you – Mackisen can help. We’re a Montreal CPA firm near you, ready to sit down, roll up our sleeves, and build the financial story investors expect to see.