[apsec112]

Just one experience, but the CEO of a startup I used to work for faked his college degree and had previously been sued by the FTC. (We found out only after he blew up the company.) None of the investors we talked to noticed anything.

[tptacek]

The kind of diligence we're talking about here wouldn't catch that. We're talking about the nuts-and-bolts business documentation required for an investor to take a stake in your company, not founder background checks.

[jacquesm]

A proper due diligence will definitely include founder background checks, as well as background checks for other key personnel or executives. For a seed round or small investment (<$2M or so) such things are usually not done.

[tptacek]

Clients routinely background checked us at Matasano; I know because every time it happened, I had to sign a release to allow it to happen (as did any other team member who was checked).

When a public company acquired us, in a process very similar to this one that also involved a 6-figure legal review bill, I did not sign a background check release, or even a credit check.

I would be surprised to learn that A round investors routinely do stricter checking than a public company doing a full acquisition.

[jacquesm]

> When a public company acquired us, in a process very similar to this one that also involved a 6-figure legal review bill, I did not sign a background check release, or even a credit check.

> I would be surprised to learn that A round investors routinely do stricter checking than a public company doing a full acquisition.

That's easily explained: when doing an acquisition the company is the focus, not the executives. When doing an investment the team that you are effectively partnering with is a very important part of the deal.

Post acquisition a player with a troublesome past that was not disclosed could be easily discarded especially since this would be considered a lack of disclosure, but in an investment scenario where that player (and/or their buddies) holds the majority of the stock that is not so easy.

[tptacek]

Is this something new? I haven't managed or been a direct party to a funding round, but I've been a founder during one A round and key staff at another and never signed background checks for those. What kind of investor was this that required background checks?

A public company that acquires a company managed by a felon might have to restate financials or write down part of an acquisition's value, which leaves me wondering about the supposed disparity.

[jacquesm]

I've been in this for a decade, so no, it's not new, but it could very well be a European thing. Even so, I find it hard to believe US investors would cut 7 figure or higher checks without wanting to know who they're getting in bed with.

> What kind of investor was this that required background checks?

A fairly large portion of them, with an accent on financial services and health care related affairs as well as two sided marketplaces because of the potential for fraud and money laundering.

> A public company that acquires a company managed by a felon might have to restate financials or write down part of an acquisition's value, which leaves me wondering about the supposed disparity.

Well, whether or not they are a felon isn't as important as whether or not they are currently up to something that is not proper. And that's the first thing a DD tries to find out and a background check could help to flag potentially problematic cases.

If I came across a financial services company run by someone who has already had a fraud charge stick that would definitely result in a mention to the investors and could very well result in a deal not going through.

[adventured]

The last A round I did a few years ago, funded by a top tier investor, had no background check. It involved basic, fairly routine, due diligence and several conversations.

I'd be surprised to hear of a background check on an A round in the US, unless it involved a particularly unusual investment size or where something very specific threw up a bad red flag. And usually if you can command a massive A round, you're already a known quantity.