C HAPTER 2: D UE D ILIGENCE
LEGAL The existence of proper incorporation and the shareholders agreement will tell you a great deal about the sophistication of the people involved. One element that can consume inordinate time is trying to understand the dynamic between the participants in the venture. Shareholder agreements will not, by themselves, adequately protect the investor in the case of ill will. However, the process of negotiating an agreement or reviewing the terms of the existing agreement may yield insight into the ethics and values of the individuals. In assessing the feasibility of the enterprise, investors should examine the level of fairness within the existing structure. A failure to recognize the contribution of essential participants may be a signal that the enterprise does not have the necessary cohesiveness to succeed. Investors should also be aware that an excessively complicated share structure may become a substantial distraction from the operations of the business. The enterprise is best served when shareholders have a unity of interest. MARKETING This often proves the weakest link in a new venture. How realistic are the proposals in the business plan for moving the product into the marketplace? In fact, do the principals even have a business plan? Are they familiar with the channels in their industry and do they have a plan for accessing them? Who, if anyone, among the principals has a track record in marketing – and is that track record in the same industry as the current venture? WARNING FLAGS Sometimes, angels are wise to walk away from a potential investment. Here are a few signs that trouble may lie ahead:
1. To the extent that there are inconsistencies in values, or trust is not present, then no investment should be made.
2. If there is resistance to due diligence and if people are defensive in their response, than there are probably buried issues. 3. If the deal has been shopped around, one must ask why others have refused to invest and what negatives are present. 4. Excessive passion for the technology may demonstrate an unwillingness to be flexible in meeting the needs of the marketplace. 5. Evasive responses and lack of market knowledge about competitive technologies and alternate solutions probably indicate that the entrepreneur does not have the requisite competence to justify an angel’s participation. 6. And finally, one should be realistic with respect to the likelihood of working productively with the people leading this venture.
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