Fundraising · Term sheet

How do investors verify previous investments?

Greg Lipinski Patent Examiner at USPTO

July 9th, 2016

Will they ask to see previous term sheets? Bank account statements? Will they want to talk with prior investors? What is that relationship like between disparate investors, if there is one at all? Is there anything a founder should not turn over in this situation? 

Martin Omansky Independent Venture Capital & Private Equity Professional

July 10th, 2016

The law is mostly clear on this point: you must provide full disclosure so that the potential investor can make "an informed investment decision". I suppose that is subject to certain interpretations, but, more importantly, you (the "issuer") should freely a and happily share any information that investors may want. If you don't, investors, especially risk investors, will pass on your deal and go on to the next without any regrets whatsoever. I will add here that many investors have a realistic view of the business environment, and don't expect perfection from you. It is in fact rare to find an investor who hasn't had a clunker or two in his own past. Sent from my iPhone

Laura Oliphant Business Development and Venture Capital Professional

July 9th, 2016

All of the above and much more...  We reviewed previous round docs, because there could be a lot of potential issues that could affect our investment...

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

July 9th, 2016

Yes.  People will talk to previous investors, verify bank statements etc. etc.  Generally speaking a new investor will not spend a huge amount verifying information on the principle that if you have to spend a huge amount of time verifying information then you shouldn't do the investment, so most of this involves taking basic information and checking if it is true.

Trust issues work both ways.  One thing that a project has to worry about is whether the investor is actually interested in an investment or is pulling information for other reasons (i.e. to set up a competing project or doing free market research).

One thing that I've found to be important at this stage is what I call calibrating communications.  If someone is obviously lying, then I'm not going to invest, but there are people that are extremely optimistic or tend to spin information heavily in their favour.  Conversely there are people that are extremely pessimistic and tend to spin information against their interests.  Figuring out what it means when someone says something is really important at this stage.  For example, if someone says that they have a strategic partnership with Apple, this could mean a dozen things, and it's important early in the relationship to understand what that means.

The relationship between disparate investors varies.  Here in Hong Kong, it turns out that it's a small place, so that pretty much everyone knows everyone else, so you should assume that your potential investors are talking with all of your previous investors.

Paul Garcia marketing exec & business advisor

July 10th, 2016

Most investments involve a signed, written agreement, and a bank deposit at some point (or schedule of bank deposits if you haven't started receiving funds yet). Verification is fairly simple to do. When it comes to your own money that you've put in it's not much different. If you're taking investments without precise documentation, you're a big risk. If you're loaning your own money to the company without a paper trail (co-mingling funds), this too highlights other risks. When it comes to investments in the form of partnership or non-monetary support, these two are important to document, whether it's a buying agreement, a co-marketing agreement, a purchase order, or whatever. (Precise) Documentation shows responsibility and accuracy which are two positive signs for additional investors. Have your non-disclosure agreement ready or it will also look like you haven't required it of anyone else. It's up to the potential investor what kind of verification they are seeking. Some may also want to have conversations with prior investors and may vet your story to see if you are sharing the same information and outlook with all investors, ask what persuaded them to join, and how they expect to recoup investment.

Mark Sendo Founder, CEO, Forbes Contributor, Conference Speaker, TechCrunch featured story twice

July 10th, 2016

Interesting question:  1) Potential investors asked for a Cap Table which should reflect all previous investors:  2)  You should have a competent law firm to create this Cap Table as well as maintain all books and records (which include previous investor signed agreements:  3)  I have raised money from a hand shake with paperwork to follow:  4)  DM me with further questions.