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Falling in Love

Published in Globes' Journey Magazine 
By: Moshe Kahn


Investors weigh many issues and spend a great deal of time assessing a variety of considerations prior to investing in a company. They are inundated with presentations and proposals but only a limited number of companies are liable to receive, an initial request for additional information. Moreover, even an investor, who was initially curious in a company, may lose interest at a relatively early stage of deliberation.

But what could persuade an investor to invest in your company once they've shown initial interest? Clearly having your company's products and business goals match the investment policy of a potential investor is
a prerequisite. However, there are a number of additional steps you can take which may sway investors to choose to invest specifically in your company.

1. Transparency: Be as transparent as you can with your potential investors; be forthright regarding the relevant particulars and circumstances concerning your company. If during the due diligence process or shortly thereafter, investors discover that you have not performed full disclosure they will withhold their investment; if they should discover this after having already invested - you will be exposed to potential legal action.

2. Be Realistic:  Investors rely heavily on the business plan you present to them. They project their potential investment returns from it. Ensure that your business plan projections are grounded in reality.

3. Plan an Exit Strategy: Already, in the early stages of negotiations, you are expected  to present a strategic plan according to which investors will be able to realize their investment all the while maximizing their profits. This is their main expectation and primary interest. Your products' success and other business achievements are of secondary consequence to them. "Walk in the shoes" of your investor to better understand their position upon commencement of negotiations regarding investment in your company.

4. Employees: Employees are usually a company's most important asset. Customarily, investors inquire into inter-company dynamics and employee status, particularly insofar as key management personnel are concerned. Adhere to your legal and contractual requirements regarding your employees and be prepared to share with the investor any data, records, agreements, legal documentation as well as any oral agreements relating to your employees.

5. Participation in Decision Making: During negotiations regarding the company's future management methods bear in mind that upon investment, investors have the right to influence the company's future operations. Wariness regarding an expected loss of autonomy is understandable, but at the same time it is probable that your investors' experience and their contacts could enhance your ability to manage your company and promote its growth.

6. The Right to Information: It is an investor's basic right to obtain current and ongoing information regarding your company. Do not engage in pointless arguments regarding an investor's demand to receive such ongoing information and periodic reports, upon investment.

7. Dilution: Before reaching an impasse with investors regarding the future dilution of your holdings in the company, it is essential to remember that dilution is justified when coupled with an increase of your company's valuation. It is preferable to retain minor holdings in a high net worth company than the contrary. Bear in mind that an investment is intended to raise your company's worth -- while it is vital to retain maximum holdings, the value of your holdings is far more important.

8. Avoid Legal Disputes: Investors prefer investing in companies with 'clean' legal records.  In this regard, at times it is preferable to be smart rather than be correct, particularly when a disagreement between you and a third party may escalate into a lawsuit. Obviously, this is not a suggestion to surrender to unreasonable demands. Nevertheless, it is always best to attempt mediation or arbitration and settle disagreements at as early a stage as feasible.

9. Prepare for Due Diligence: Be organized and prepared for the due diligence process. The results of this process are critical for investors and will undoubtedly influence their final investment decision. Ascertain that statutory reports filed with authorities are up to date, that internal registries are per regulation, and that copies of all essential documentation and agreements are easily accessible so they may be presented without delay to investors' representatives.

Obtain all necessary licenses for the company's operations, take care to adhere to them and conduct all corporate activities in abidance with the law.

Insofar as the company is involved in any legal action or any threatened litigation, make certain to obtain
a legal counsel's opinion regarding the status of said legal actions to provide to your investors.

It is suggested to periodically conduct an internal due diligence on your own company in order to ensure the success of an investor's due diligence.

 


Advocate Moshe Kahn is an Israeli lawyer specializing in Business Law. He is licensed to practice law both in Israel and in the U.S. and is the senior partner of Moshe Kahn, Advocates, located in Tel Aviv.

 http://www.kahn.co.il/

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Moshe Kahn, Advocates,
Beit Amot Hashkaot, 7th Fl. 2 Weizmann St. Tel Aviv, 6423902.
Phone: +972-3-6914775

Israeli Business Law משפט עסקי