Look in any finance primer – you’ll see how highly structured and proscribed the public securities process is.  Not so for private company securities.  That’s why we spend so much time and effort up front on a deal doing our due diligence if for no other reason than to help our investors succeed.

Some red flags are self-evident.  Here’s an example that nearly derailed a deal entirely.

We were asked to raise capital, helping a store expand into more locations.  But, in early discussions, a board member and soon to be CFO disclosed that he had been indicted 35 years before on a felony charge.

After some discussions, we agreed to meet with the gentleman to learn more about the charge.  He had been the owner and CEO of a company in an unrelated industry.  An employee was charged with fraud and, because our proposed client was the principal of the Company, he was included.  If you’ve never been around this kind of situation, defending yourself can be very expensive.  Without the personal means to fight the charge (it would have bankrupted him), he accepted a guilty judgment which barred him from the industry forever.

Based upon that explanation (and review of supporting materials), we told him that we would consider moving forward if 1) he could no longer have any say on the Board – his board rights would be non-voting, and 2) the Company would remove him as an officer and find another CFO.

This was not an easy discussion.  But, ultimately, the Board agreed, and we successfully raised the capital.

Due diligence in private securities is an art form upon which we are constantly striving to improve.  Stand by for other, real-life examples of surprising twists and turns in this opaque world of private investing.