Warning About Money Questions
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M$1
January 04, 2009 08:39 PM
What would happen to your startup company if your venture capital or angel investor is charged with fraud?
I know this sounds like a bad situation, but I'm interested in knowing more about this as I'm an entrepreneur who has been talking to various VCs and angel investors. It could be fraud, insider trading, or something like this that causes your investor to get into trouble (and you know nothing about it until you are told by another source). You have put a lot of effort into a startup, and you never knew of the fraudulent activity a venture capitalist or an angel investor was involved with, but they happen to get charged with fraud. Do you also get in trouble? Does your company have to shut down? Do you know of any situations when this happened to a startup? Has this ever happened to a startup that was successful? As an entrepreneur, what would you recommend to prevent dealing with a bad investor?
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| January 04, 2009 09:08 PM |
If your investor is using your company as a front for fraudulent activities, whether you know about them or not, your company will be involved in the legal proceedings. You will probably join in the flurry of law suits to protect your company. You will sue your investor and counter sue anyone who has sued you.
However, if you are CEO you are expected to know what is happening in your company. If it is being used as a front, you may well have liability.
If you have any doubts about your investors, make sure you contact an attorney or private investigator to do a thorough check.
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easyeboy
January 04, 2009 09:40 PM
Very good thoughts.
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Other Answers (1)
January 04, 2009 08:50 PM
It depends on the legal ties between the investor and the company. If the investor does not legally own a stake in the company, I doubt you have much to worry about.
If the investor has a legal stake in the company, it can be frozen as an asset of the individual and disposed of as needed to pay off debt.
There have been plenty of "successful companies" that have been funded by fraud.
For instance, take the casinos of Nevada. My understanding is that once upon a time, many of the casinos were owned by mobsters. But as time went on and these businesses became more successful, they outgrew their mob roots.
Some of these guys surely went to prison for their deeds, but their businesses live on.
If you own the business and you knew nothing of the wrong doing, you probably have nothing to worry about. (So long as everyone else believes you.) If you are a legally separate entity, your biggest problem may be finding a new source of funding.
If you are trying to prevent this kind of thing from ever happening, well, first of all good luck. The feds have been trying to figure that one out for years. The best thing you can do is to make sure that you don't get yourself too closely in bed with anyone legally. Make sure whatever contracts you sign keep you and the other party separate. Don't merge bank accounts, companies, or anything else, without doing a LOT of investigation into the person you are considering doing this with.
But is that any different from getting married?
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