Before VCs invest in companies, they often conduct due diligence. They hunt for major red flags before pouring in lots of money, which makes sense.But where’s the line between due diligence and invasion of privacy?
One entrepreneur wrote about an investor’s aggressive due diligence request on Quora.
“I’ve just been asked by the lawyers, carrying out the due-diligence for an investor who wants to invest in my company, to give them full access to our email accounts,” this person said.
According to Mark Suster, an early stage investor in Los Angeles, email access is far outside the bounds of due diligence. He says any entrepreneur who is asked this should tell an investor, “NFW.”
“This request sounds more intrusive than a proctology exam,” he says.
So what is acceptable for investors to request during the due diligence phase?
Suster says entrepreneurs should expect VCs to ask for financial statements over the past 12 months as well as a future revenue forecast.
Some may ask to see things like legal documents, full financial models and cap tables. Suster thinks that’s a little much. But here are three things you should expect to be asked and ready to answer:
• How much of the company do the founders own?
• Have you invested money directly?
• What was the post money on the last round and how much did you raise?
As the term sheet nears, expect a final round due diligence.
“Here you need to line up customers calls, discuss all future strategic plans, redo the financial model if they felt it wasn’t complete and so forth,” Suster writes on his blog. “Make sure to disclose anything major that you believe would seem disingenuous to tell the after the term sheet.”
But asking for complete access to every email? That’s too much.
“The fact that they asked tells me ‘run’ unless they’re your only option,” Suster tells the entrepreneur on Quora. “This sounds like a relationship disaster waiting to happen.”