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Evaluating Prospective Investors

Q: What's important when evaluating prospective investors? What kind of due diligence is necessary?

Here is some advice from Jim Condon, CFO of CyberCash, about investor due diligence:

The important questions to ask are:

  1. Have you made this kind of investment before? With whom? Can I speak with their management? (you need to know how "opinionated" the investor is--not that one direction is better or worse, you just need to know).
  2. What do they bring to the table other than cash? The investor, I would presume, will demand significant Board presence, so be sure you're comfortable with that.
  3. Are all potential investors equal? Do some want straight equity? What are their preferences, rights to future participation, etc.?
  4. Can they/will they help build the management team, and if so, how?; a) through their industry-wide reputation, or b) as "retirement home" for their senior folks?

After you sort through all of the above, you can begin to negotiate. Then and only then look at numbers. It should be the last criteria, not the first.


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