by Michelle Delio
Your potential investors – assuming they aren’t your family and friends – almost certainly performed extensive due diligence before deciding to fund your company. You should do the same with them. Before you sign off on the deal, make sure you know the answers to the questions below.
Are they accredited?
A private company who is raising funds for a non-public offering may be legally required to accept funding only from accredited investors. Even if not legally required, it’s often a best practice to limit your capital raise to accredited investors. There are quite a number of individuals and entities that qualify as accredited investors. For most individuals to qualify, they must have a net worth (individually, or jointly with their spouse) of at least $1 million or have earned a salary of at least $200,000 or more ($300,000 for a couple) for at least two years and have a reasonable expectation of achieving the same income in the current year.
While there are possible “family and friends” exemptions, your regulatory compliance burden will be far less onerous if all of your shareholders are accredited investors. You will need to meet a minimum federal standard of proof to ensure that your investors are indeed accredited.
What do they expect?
Make sure that you and your potential investor are in agreement regarding what you are intending to accomplish with their money. Try to ensure that there are no unsaid but assumed expectations. The law requires you to disclose all material information that a reasonable investor would think was important to consider in making an investment decision.
What is their track record?
Check the performance of other companies that have received funding from the investors that you are considering working with. Talk to the founders of those companies to gauge their satisfaction with the investor’s near and long-term commitment to their company. Find out how the investor reacted during difficult business cycles. See whether the investor has the ability and desire to infuse new capital into your company when it is necessary (and it will be necessary at some point).
How highly do they value you?
Not the financial valuation your investor is placing on your company, but whether they value you and your company enough to work for its success. Ask potential investors why they are interested in funding your company. Find out what they know about your market – this is particularly important if they will have veto power over your business decisions. And get a good feel for how they operate. It’s easier for everyone involved if your corporate culture and business ethics mesh well with those of your investor.
Michelle Delio has been reporting on the connections between business and technology for twenty years. Her work has appeared in Wired, Popular Mechanics, Salon.com, U.S News and World Report, Wired, Popular Mechanics, MacLife, Financial IT Security, and Homeland Defense Today.
courtesy of Michelle Delio | reynermedia