|
In
the past, we have
discussed due diligence
as one of the
cornerstones to an Angel
making sound business
decisions regarding a
particular investment.
We emphasized
making sure they knew
the backgrounds of the
owners, previous jobs,
financial background,
etc. We have focused on
helping the Investor
understand the
importance of this step
in the process.
But
entrepreneurs need to do
their homework in
selecting investors.
A
short while ago, Ace-Net
was in the position to
introduce one its
entrepreneurial clients
to a potential investor
who had shown an
interest in the company.
While Ace-Net is not
chartered to run
background checks on
accredited investors,
and all investors
certify they meet the
requirements of the MAIE,
we do observe.
This
investor had an
impeccable resume, was
knowledgeable in the
business matters
concerning this company
and was very interested
in assisting the
company.
Something
just wasn’t right.
In meeting with
the investor we began to
develop an uneasy
feeling about the way in
which topics were
discussed and his casual
approach to a
substantial investment.
After
much agonizing, we
decided to pursue our
suspicions further.
We called a
company specializing in
business due diligence,
Intelex Ltd in Greenwich
Connecticut, explained
the situation and asked
if they could
substantiate or refute
our thoughts.
Within
six hours, we received a
telephone call from
Intelex advising us not
to have any further
dealings with this
individual.
Through their
detailed inquiry process
they had quickly
determined the
individual was not what
he claimed to be.
Indeed,
the SEC was looking into
his activities as it
related to a $20 million
investment fraud scheme
and were watching him
closely as he could
become a potential
flight risk with
additional funds.
We
ended the ongoing
discussions between the
Entrepreneur and the
potential investor and
the matter was dropped.
In subsequent
conversations with
experts in the area of
fraud the likely plan
was to secure the
business plan and term
sheet, act as a lead
investor and seek out
legitimate investors to
fill out the offering
then take the money and
run.
Unfortunately,
in today’s world you
must be aware of all
your business contacts
and especially investors
who are new to you.
In
this environment of
tight capital, the
tendency to accept the
first investment that
comes along could lead
to disaster, so do your
homework.
Check out
investors as they check
you out.
Due Diligence is
a Two-Way Street
What
about Directors?
This
requirement to know your
investors also carries
over to the individuals
you select as members of
your board of directors.
Unknowingly
you could be in
violation of the
requirements for board
members simply by not
asking the questions and
checking out potential
candidates.
You really need
to know who they are and
what they have done.
Directors
tend to be hard to find
and/or expensive, here
are some tips on how to
find the right members
for your board.
|
|
First,
forget about
friends or
relatives. Outside
directors are
exactly that,
outside the
influence of
company
management.
|
|
|
|
Next,
it is helpful, but
not necessary, to
find a candidate
who has knowledge
of your business
and industry. Most
experienced
business people
can get up to
speed quickly.
|
|
|
Lastly,
it is always
advantageous to
have at least one
“signature
director” whose
background, career
and reputation is
well known and who
can both provide
advice and consul
as well as help
you attract other
first class
directors.
Signature
directors are very
hard to find,
usually expensive
but invaluable to
the make-up of an
outside board.
|
WHAT MAKES A SUCCESSFUL
BOARD MEMBER?
A
board member's success
is determined not only
by his/her business
skills and experience,
but by their personality
traits, or character. In
the book "Welcome
to the Board,"
Jossey-Bass Inc.
Publishers] author
Fisher Howe identifies
several characteristics
of successful, happy
board members:
They are honest.
They are enthusiastic.
They keep an open mind.
They are team players.
They tackle complex
problems with relish.
They take an orderly
approach to decision
making.
They are competent.
They have a sense of
humor.
Personality
traits in
"problem"
board members may
include:
Obsession with a single
issue.
Always taking the "contrarian"
view--just for show.
Expounding on strongly
held opinions that are
rarely backed up by fact
or research.
"Board hopping"
- or sitting on many
boards, but serving none
well.
Based
on our experience
helping companies
structure their
organizations, here are
some tips on putting
together a board of
directors:
Create
a board that complements
existing management:
Look for people who
bring new areas of
expertise to your
company. For example, if
you own a small
technology company but
don't have any marketing
background, search for
board members who can
provide the marketing
experience you need.
Chart
your management needs:
Create a chart to
determine the kind of
talent needed to move
your company ahead. List
the skills your
management possesses.
You can then make a list
of the skills sets you
need to acquire and the
people who possess those
skills.
Use
your network of
colleagues and friends:
A well-rounded board of
directors can be formed
from your former
schoolmates, vendors,
professional service
providers and social
acquaintances. Make a
list of candidates from
this field and then
vigorously scrutinize
the list to ensure you
are choosing the right
talent for your company,
not just people you
like.
Keep
board size manageable:
The smaller your board,
the more efficiently it
is likely to operate.
Unlike large companies
that recruit
high-profile board
members to enhance
corporate image, the
board of a small company
is usually a working
board.
The
exception to this rule
is if your small company
is going public and
needs a larger board to
guide you through the
process.
Make
sure the CEO contacts
board prospects: Once
you have identified
board member prospects,
the CEO should call
those individuals. If
you are the CEO, you
should explain who you
are, provide details of
the corporation, how the
individual's name came
to your attention, and
state that you would
like to have an
appointment to talk
about possible
participation on the
board.
Look
for people who know how
to raise capital: Even
if your company does not
need to raise capital
now, it most likely will
at some stage. Board
members who have a
strong financial
background and knowledge
of how to raise money
are always an asset.
With
regard to the ethical
issues involved in
selecting board members
or in dealing with
directors, the simplest
rule is to do your
homework, if necessary
call a due diligence
firm to help you out.
Above
all spend as much time
selecting these people
as you would a Senior
executive in your
company. With a strong
Board of Directors you
will get to where you
are going faster and
with fewer bumps so
spend the time.
Dan
Mitchell is the
executive director of
ACE-Net, an online
clearinghouse for angel
investors and
entrepreneurs. He can be
reached at Mitchell_d@scsu.ctstateu.edu.
|
