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Vetting a startup prior to investment

I am considering investing in a retail product startup that is currently wholly owned by the founder. He is interested in bringing in investment/partner to build inventory and take the business to the next level. The business is practically pre-revenue.

I plan on making an office site visit, looking through bank statements, e-mails with attorneys, review of patents along with proof of filing and correspondence, face to face with attorneys that set the company up, verification of payments made to vendors/manufacturers, review of company formation/filing, etc.
  1. If I am doing my due diligence prior to investing, is there anything that is off limits?
  2. Does anyone have a list of things I should look into or ask?
Just a little background - him and I met at a startup event two years ago and we have become friends since then. We tend to bounce business ideas and such off each other and I have attended many of his product events. I still want to comb through everything efficiently and not let that cloud my judgement or cause me to look past things.


8 Replies

Irwin Stein
1
0
Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
You certainly have the right attitude. Due diligence requires a fair amount of skepticism. I assume that 1) you can afford to lose your investment, because that is the probable outcome with startups and 2) you will have a good attorney draw up the agreements. If the intent is to use your money to buy inventory, then the agreement can direct that is what it is used for. You can also put your money in piecemeal versus milestones. Since it is just the two of you should try to protect yourself as well as possible. I recommend a credit and background check. You may find nothing, but you never know.
William Morgenstein
0
0
William Morgenstein Entrepreneur
20+Yrs Business/Finance Consultant | Funding Broker | Construction/SBA Loans | Author | Autobiography by New York Guy
This is a business transaction so you must remove the friendship, emotional aspect out of it. You need to get an executive summary detailing a good story and including how much is available, including assets, which will show borrowing power. Are there any similar companies that can be used as a gauge. Make sure that you also consult a good attorney. I would also consult with SCORE (a free service division of SBA). As far as off-limits? Nothing is off limits when you are risking your money. Think like a bank and be risk adverse. This means that you entitled to see personal balance sheets. If you have any questions you are always free to ask. Bill Morgenstein Marquesa Funding & Consulting Corp [removed to protect privacy] _www.marquesafunding.com_ (http://www.marquesafunding.com) P. S. My auto-bio ("The Crazy Life of a Kid From Brooklyn") which amongst other things details my work and business life. In a message dated 6/27/2016 9:26:23 P.M. Eastern Daylight Time, [removed to protect privacy] writes: FD:Discuss _New Discussion on _ (http://mail.founderdating.com/wf/click?upn=VRkJVp6SEp-2BgJ9c6K7LU-2FyqPvewFeE-2FrZFMCa8b5Jkipl7W63WD-2Fmr-2BUon7t-2FaU8GT2vzzK3vy gYxBtYMkkS3nKcQvPONFaqS5j5QpAjj2k-3D_Pjh2G0qJYEYwVy-2F7SLihZ4iIfvRuJB45F-2Fq 6O7OYHh7tyGLd06WC5AsvO396BFtbsZmkz9A8zdNiVwNtxehXUlY-2F4zkY7X9RpetAdy0aS6DDA PYBmgmiPPBuPFVAGfBRXWcKkkiwmCjdKCs2DYLZP3k4hY-2Bx5Lhp6SiT47ev2v4t80KhEIsCVne q-2B4U0LFRnxqlbw-2Bddv1SFSrZ0hOhlVH4O2UGLnE23AK9LqJd2HazePiQRsFzwKWB1wHKv7jF i) _Vetting a startup prior to investment _ (http://mail.founderdating.com/wf/click?upn=VRkJVp6SEp-2BgJ9c6K7LU-2FyqPvewFeE-2FrZFMCa8b5Jkipl7W63WD-2Fmr- 2BUon7t-2FaU8GT2vzzK3vygYxBtYMkkS3nKcQvPONFaqS5j5QpAjj2k-3D_Pjh2G0qJYEYwVy-2 F7SLihZ4iIfvRuJB45F-2Fq6O7OYHh7tyGLd06WC5AsvO396BFtbDR9FeeS7D9IP8Ld6T81iQIok 01DjkSar9EJXOIINe-2BtJKgW8yjP5XAsFUeTh7hNLwJNhbdu0gXEoiMNn6-2F7vdQzmt7sCy72a Kf6pC-2FNxcyCb8WNArnylcGihtdXQmpTHs4DCYHEk4RZUaGX559OYL9zHB1-2FTCp3ImWMvXtbK YkkWhb-2BsfKsT0gNapj2F9V3b) Started by Terrill C. Founder, TVC Group, LLC. I am considering investing in a retail product startup that is currently wholly owned by the founder. He is interested in bringing in investment/partner to build inventory and take the business to the next level. The business is practically pre-revenue. I plan on making an office site visit, looking through bank statements, e-mails with attorneys, review of patents along with proof of filing and correspondence, face to face with attorneys that set the company up, verification of payments made to vendors/manufacturers, review of company formation/filing, etc. 1. If I am doing my due diligence prior to investing, is there anything that is off limits? 2. Does anyone have a list of things I should look into or ask? Just a little background - him and I met at a startup event two years ago and we have become friends since then. We tend to bounce business ideas and such off each other and I have attended many of his product events. I still want to comb through everything efficiently and not let that cloud my judgement or cause me look past things. (http://mail.founderdating.com/wf/click?upn=VRkJVp6SEp-2BgJ9c6K7LU-2FyqPvewFeE-2FrZFMCa8b5Jkipl7W63WD-2Fmr-2BUon7t-2FaU8GT2vzzK3vygYxBtYMkkS3m3uNpGZPdO SUmrMCsVbi30-3D_Pjh2G0qJYEYwVy-2F7SLihZ4iIfvRuJB45F-2Fq6O7OYHh7tyGLd06WC5Asv O396BFtb9jRQ6md2ARC8RRiAPQXcrFaf7iajlIBrR-2BL5zxV5ewgnf8r4rNMpvEwte6AG2licaT XXPzl5pVMSP-2FWi1n5mZef73iHnjVsTwH2g76cHPCD9pwQ5olX4DzIhLiOb4rt4nvWmjxZnrfE- 2FYSWVM91qMltlGbv1LkL7gVlykuD9jAmUDYReca8n3ZDgQiUtfaDV) ____________________________________ _FOLLOW DISCUSSION_ (http://mail.founderdating.com/wf/click?upn=VRkJVp6SEp-2BgJ9c6K7LU-2FyqPvewFeE-2FrZFMCa8b5Jkipl7W63WD-2Fmr-2BUon7t-2FaU8GT2vzzK3vyg YxBtYMkkS3o-2FKYAjGJ91iHNzij5Lyzj4-3D_Pjh2G0qJYEYwVy-2F7SLihZ4iIfvRuJB45F-2F q6O7OYHh7tyGLd06WC5AsvO396BFtbxUxkJocOGb9-2FTmtGzG3GZk8Nf19Vjoev-2BokTHBaQPv dl2oBF6v41YSB6r0cVUnIacaWFWMXrGLWd67l0N20g2vnVBWpA7eXnIG4eJI55SgLvgS6Mjfmrd1 90ZQoTgieG3lWRCC4H5lYQQFvA-2FzDiAK9KZnUvdLJnN86xZz0mBRM8yu4DLFcsIPsFRtsd81AI ) or Reply Directly to this email to participate in the discussion _Manage your email notifications_ (http://mail.founderdating.com/wf/click?upn=VRkJVp6SEp-2BgJ9c6K7LU-2FyqPvewFeE-2FrZFMCa8b5JkiCYIrQZNKuBohKfEU7KsEJzrb tsmtAYZg-2BQmdSu-2Bog2e1-2BI0a-2BHJ7V6d2AzkJ-2FkNdwivRkF5jGcdoNmeolqBFrG4spb 1wQ8yhNokD1 vAlmlCLPzYfHh9X0NotV4GBaDzsFSGuLtk48cv-2F6flhZ-2F-2BlyHaJZ6WYvQ8r-2BLODjbtx5P-2BXVGa7qiqRbQ4sWz15ixiM-3D_Pjh2G0qJYEYwVy-2F7SLihZ4iIfvRuJB45F- 2Fq6O7OYHh7tyGLd06WC5AsvO396BFtbeaXKJIdr4iz7UU6orUbiZBEKh1RtOMJh2D8XHsh2xXGf u-2FOz17dRpcisGJlPE2z-2FJgrvpgV26GzAw9OqMzppf7qv6w3P9xGRo0KmQmPn8q6ptxc6R8F- 2BI6WP5hTtymt-2FBwMrJM-2BJlTJ8LYTF0XA1LaA5uUMm-2F7n3dSTS5BFiSvzrEyxl9MnhI6Km 71JrwSxL)
Martin Omansky
0
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
We do this all the time. Briefly, here are some suggestions: (1) hire an experience lawyer to conduct a full due diligence review. If this is a true start-up, the time, effort, and $ spent should not be extensive. Same goes for an independent CPA. (2) there are many due diligence checklists on the Internet and in local law libraries. If you want to consult them yourself, they are readily available and you shouldn't have to pay for them. (3) I would pay careful attention to any intellectual property issues. If you are not comfortable with the patent laws, consult a patent attorney and enlist his/her help and services. (4) try to get a grasp on the realistic potential growth of the company and the markets it is addressing. Entrepreneurs tend to be overly optimistic. (5) don't let your friendship color your decision-making. (6) get an independent evaluation on the enterprise by someone who knows the business and the market. (7) understand the cash needs of the enterprise, both short and long term. Do not invest unless all the required short-term funds are legally committed. (8) purchase preferred stock and write a preferred stock agreement that protects your interests (9) apps Kate the fact that doing. Technical start-up is a major intellectual challenge, and therefor make sure the start-up team has the chops and the proper advisers to launch and operate the business. Contact me at crucibleadvisorsatgmaildotcom. We may be able to help. Sent from my iPhone
Martin Omansky
0
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
Two more items: the securities laws and decades worth of court decisions support the need for full disclosure on the part of "issuers" (the enterprise). There are no limits - however, you may be asked to sign a non-disclosure, non-circumvention agreement. Venture funds don't typically sign them, but individual investors often do. Second item: protect yourself from liability by investing in a corporation, not a partnership or proprietorship. Sent from my iPhone
priyank JAIN
0
0
priyank JAIN Entrepreneur
Business Manager at Loca Globe
Hello Terrill, I am Digital marketing consultant, I am working for new startup and help to growing at online platform. I have generated revenue for these startups via social media campaigns, google adwords campaign, SEO. So, if you want to work with me, please revert on this mail. Thanks & Regards Priyank Badjatya
Steve Owens
0
0
Steve Owens Entrepreneur • Advisor
Finish Line - A Better Way for Small Companies to Develop Products
Pay a PI to look into his background and character.

Hire a engineer to look at the design and how easy it would be to get around the patent. Also have the engineer review his production plan - including QA plan and production cost.

Hire a sale and marketing guy to vet how he will generate sales and what it will cost to sell.

You need to make some assessment of how capable he will be at leading this organization and collaborating with you in decision making.
Richard Reed
0
0
Richard Reed Entrepreneur • Advisor
Director of Marketing at Labdoor
Interesting perspectives from the other contributors who have a very systematic, institutional perspective on due diligence. Certainly with physical products the due diligence with partners is important to ensure that the product is ready for market with key relationships in place. However beyond that and your requirements for equity participation, most of the due diligence is pretty straight forward in terms of confirming the details of the incorporation, good standing, banking etc. At the end of the day you have to be comfortable with the individual and have enough confidence in the idea/product and his ability to respond to market changes in order to make a valid decision. If you can add value, then you probably have a fit, assuming the DD is satisfactory.
Paul Shustak
0
0
Paul Shustak Entrepreneur • Advisor
Entrepreneur | Advisor | Product Geek
I have experience with this from the founder side. Seems that very little is off limits. Email me off-list and I can share the due diligence checklist my company was subject to. It has over 300 items on it. Ouch.
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