This article provides a checklist for Angel Investors prior to investing in a company. It’s a list of documents you’ll need and things you’ll need to check before buying shares in a private company.
- Business Plan – This should include a SWOT analysis, Risk Analysis with mitigation if possible, forecast (with solid justification for the numbers), information about any planned future capital raises, and a plan for how they’re going to spend the money. There are some good Business Plan templates on the internet for this.
- Exit plan – which should be a conversation about each directors intentions.
- Evidence of the things in the Information Memorandum (IM) or business plan, such as a copy of contracts to prove ongoing sales.
- Financials for the past few years (which you’ll need for the valuation).
- Financial Models – I like to see that a company has done some financial modelling to show that they’ve can justify their decision to seek funding from an investor. They should have modelled the projection of the business without investment, with other types of investment, etc. It should be obvious to you why they’re willing to give up part of their precious business rather than just take a bank loan.
- A Company Constitution – You’ll want to have a commercial lawyer check this after you’ve checked it. Getting a good lawyer is very important. All lawyers say that they do commercial law, but the fact is most are only good at family law. It’s very important that you get a lawyer that specializes in commercial law – which usually means hiring a big law firm.
- A Shareholders Agreement – Again, you’ll want to have a commercial lawyer check this after you’ve checked it.
- Valuation – The company will likely have their own idea of the value of the company. You’ll need to do your own valuation to ensure that you can see value (and the right ROI) of your investment in the company. You’ll need to be able to justify this to the entrepreneur if you want to negotiate on the price.
- Check the Companies Register for existing ownership structure, company history, and search each director and shareholder to ensure that they don’t have a conflict of interest.
- Check the Insolvency and DRO Register to see if any of the directors have a history there. You may wish to give the director a change to talk about the reason they are listed on the register before walking away from the investment.
- Check the LINZ database to ensure that the addresses of the directors matches that of the NZ companies database and also get clues about their financial position from dates of mortgages registered against the property title. I recommend using Prover for this, as property data in NZ is complicated, and I believe that this company does the best job of assembling this data into a useful tool.
- Check the ID (Drivers License / Passport) of the person that you are dealing with to ensure that they are who they say they are, and are listed on the Companies Register as a director.
- View the Directors Resolution.
- Search for the directors, shareholders and company on Google and social media websites and read up as much as you can.
- Ensure that the Shareholders Agreement or other legal document ensures that IP is owned by the company, and new IP that is relevant to the business, which is created by the directors of the company is owned by the company. This stuff should all be in the Shareholders Agreement.
- Get a list of assets owned by the company.
Get the following Warrants from the company, if they are relevant:
- There is no outstanding debt, shareholder loans, GST & PAYE is all paid.
- There are no undeclared convertible notes or other unlisted shareholdings, etc.
- There is no contractual restraint of trade to another company (such as a former employer) and have no such arrangement pending would also be good (they might be selling a large business that has a restraint of trade term which makes them unable to work in the business in which you are buying shares).
Your lawyer can help with a list here, as they are likely to have a boiler plate template with a list of warranties – though it’s your responsibility to check these off before the contract stage.