9 ms·

Is there any kind of diligence for seed investments? I know there is the obvious YC application process, with an interview or two. After that, are there backgro

by heynk 9y ago

Is there any kind of diligence for seed investments? I know there is the obvious YC application process, with an interview or two. After that, are there background checks? References? Anything like that? I know there isn't much to do diligence on with companies that are often just an idea.

apsec112 9y ago
Just one experience, but the CEO of a startup I used to work for faked his college degree and had previously been sued by the FTC. (We found out only after he blew up the company.) None of the investors we talked to noticed anything.
- tptacek 9y ago
  The kind of diligence we're talking about here wouldn't catch that. We're talking about the nuts-and-bolts business documentation required for an investor to take a stake in your company, not founder background checks.
  - jacquesm 9y ago
    A proper due diligence will definitely include founder background checks, as well as background checks for other key personnel or executives. For a seed round or small investment (<$2M or so) such things are usually not done.
    - tptacek 9y ago
      Clients routinely background checked us at Matasano; I know because every time it happened, I had to sign a release to allow it to happen (as did any other team member who was checked). When a public company acquired us, in a process very similar to this one that also involved a 6-figure legal review bill, I did not sign a background check release, or even a credit check. I would be surprised to learn that A round investors routinely do stricter checking than a public company doing a full acquisition.
      - jacquesm 9y ago
        > When a public company acquired us, in a process very similar to this one that also involved a 6-figure legal review bill, I did not sign a background check release, or even a credit check. > I would be surprised to learn that A round investors routinely do stricter checking than a public company doing a full acquisition. That's easily explained: when doing an acquisition the company is the focus, not the executives. When doing an investment the team that you are effectively partnering with is a very important part of the deal. Post acquisition a player with a troublesome past that was not disclosed could be easily discarded especially since this would be considered a lack of disclosure, but in an investment scenario where that player (and/or their buddies) holds the majority of the stock that is not so easy.
        tptacek 9y ago
        Is this something new? I haven't managed or been a direct party to a funding round, but I've been a founder during one A round and key staff at another and never signed background checks for those. What kind of investor was this that required background checks? A public company that acquires a company managed by a felon might have to restate financials or write down part of an acquisition's value, which leaves me wondering about the supposed disparity.
        jacquesm 9y ago
        I've been in this for a decade, so no, it's not new, but it could very well be a European thing. Even so, I find it hard to believe US investors would cut 7 figure or higher checks without wanting to know who they're getting in bed with. > What kind of investor was this that required background checks? A fairly large portion of them, with an accent on financial services and health care related affairs as well as two sided marketplaces because of the potential for fraud and money laundering. > A public company that acquires a company managed by a felon might have to restate financials or write down part of an acquisition's value, which leaves me wondering about the supposed disparity. Well, whether or not they are a felon isn't as important as whether or not they are currently up to something that is not proper. And that's the first thing a DD tries to find out and a background check could help to flag potentially problematic cases. If I came across a financial services company run by someone who has already had a fraud charge stick that would definitely result in a mention to the investors and could very well result in a deal not going through.
mbesto 9y ago
Not really - full details on my take here: https://medium.com/startup-grind/technology-due-diligence-or-lack-thereof-fbeb46687bec https://medium.com/startup-grind/technology-due-diligence-or...
matte_black 9y ago
There are little to no diligence checks for seed investments. There are plenty of people who have straight up lied about their history to get seed funding.
siegel 9y ago
If it's a formal equity seed round, there is very likely to be diligence. The requests are often not that different than the Series A list in original post. But, generally speaking, a seed stage company has significantly less documentation to provide. So, most of the categories of diligence items end up being inapplicable. In a note/SAFE round, it is much less likely that there will be diligence.

by heynk 9y ago

apsec112 9y ago

Just one experience, but the CEO of a startup I used to work for faked his college degree and had previously been sued by the FTC. (We found out only after he blew up the company.) None of the investors we talked to noticed anything.

tptacek 9y ago
The kind of diligence we're talking about here wouldn't catch that. We're talking about the nuts-and-bolts business documentation required for an investor to take a stake in your company, not founder background checks.
- jacquesm 9y ago
  A proper due diligence will definitely include founder background checks, as well as background checks for other key personnel or executives. For a seed round or small investment (<$2M or so) such things are usually not done.
  - tptacek 9y ago
    Clients routinely background checked us at Matasano; I know because every time it happened, I had to sign a release to allow it to happen (as did any other team member who was checked). When a public company acquired us, in a process very similar to this one that also involved a 6-figure legal review bill, I did not sign a background check release, or even a credit check. I would be surprised to learn that A round investors routinely do stricter checking than a public company doing a full acquisition.
    - jacquesm 9y ago
      > When a public company acquired us, in a process very similar to this one that also involved a 6-figure legal review bill, I did not sign a background check release, or even a credit check. > I would be surprised to learn that A round investors routinely do stricter checking than a public company doing a full acquisition. That's easily explained: when doing an acquisition the company is the focus, not the executives. When doing an investment the team that you are effectively partnering with is a very important part of the deal. Post acquisition a player with a troublesome past that was not disclosed could be easily discarded especially since this would be considered a lack of disclosure, but in an investment scenario where that player (and/or their buddies) holds the majority of the stock that is not so easy.
      - tptacek 9y ago
        Is this something new? I haven't managed or been a direct party to a funding round, but I've been a founder during one A round and key staff at another and never signed background checks for those. What kind of investor was this that required background checks? A public company that acquires a company managed by a felon might have to restate financials or write down part of an acquisition's value, which leaves me wondering about the supposed disparity.
        jacquesm 9y ago
        I've been in this for a decade, so no, it's not new, but it could very well be a European thing. Even so, I find it hard to believe US investors would cut 7 figure or higher checks without wanting to know who they're getting in bed with. > What kind of investor was this that required background checks? A fairly large portion of them, with an accent on financial services and health care related affairs as well as two sided marketplaces because of the potential for fraud and money laundering. > A public company that acquires a company managed by a felon might have to restate financials or write down part of an acquisition's value, which leaves me wondering about the supposed disparity. Well, whether or not they are a felon isn't as important as whether or not they are currently up to something that is not proper. And that's the first thing a DD tries to find out and a background check could help to flag potentially problematic cases. If I came across a financial services company run by someone who has already had a fraud charge stick that would definitely result in a mention to the investors and could very well result in a deal not going through.

mbesto 9y ago

Not really - full details on my take here: https://medium.com/startup-grind/technology-due-diligence-or-lack-thereof-fbeb46687bec https://medium.com/startup-grind/technology-due-diligence-or...

matte_black 9y ago

There are little to no diligence checks for seed investments. There are plenty of people who have straight up lied about their history to get seed funding.

siegel 9y ago

If it's a formal equity seed round, there is very likely to be diligence. The requests are often not that different than the Series A list in original post. But, generally speaking, a seed stage company has significantly less documentation to provide. So, most of the categories of diligence items end up being inapplicable. In a note/SAFE round, it is much less likely that there will be diligence.