Fundraising · Entrepreneurship

What to do if an investor signs fundraising offering docs and goes dark on you?

swati gupta QA at Virtual Employee Pvt. Ltd.

November 4th, 2016

Not sure if any of you has encountered this scenario. Basically I advise this company that is in the middle of doing a financing round and came across this hurdle. They were engaging this investor for the past months exchanging a ton of information for the due diligence which was a real pain in the neck. Finally he was excited, wanted to move forward with closing the deal, and signed the offering documents. This was a convertible note structure and it is a high networth individual (or at least that is the assumption).

With the above in mind, what are the best options? I would assume there is a contractual obligation to fund the investment but is this perhaps throwing good money after bad if we lawyer up? Thanks in advance for the thoughtful comments.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

November 4th, 2016

In the US you would not assume that the person is a high net worth individual, you are required to verify it, so you would have a pretty good idea of his assets. Also in the US, a person who subscribes to an offering usually puts the funds into an escrow until the financing is complete. The larger issue is that an investor who you think lied about their intentions might also steal the proprietary information that they obtained during the due diligence process.  The fact that you did not"lawyer up" to guide you through the process is the reason that you are having problems now. 

Paul Tabet Chief Operating Officer at GlockStore.com & San Diego Sewing Co.

November 4th, 2016

Unfortuately this happens more time than one would think.  Not much fir you to do, but find another investor.  However, I would send a letter taking the deal off the table so that he can't come back later and says he was ready to go.  

Michael Leeds CEO & Founder

November 4th, 2016

Not sure what you would be suing for - I doubt the signature obligated him to write a check - and that sounds like a very bad idea. I would get the investor on the phone and ask what has to be done to complete the process.

Alan Petzold ECC / Evolving Coal Corp

November 5th, 2016

Ian Shearer Yes I agree with you. OK please contact me at SHIPsource@ymail.com  I have a question for you. I have an Angel investor that got sick but is turning over to two other colleges that she has done business with. My questions relates to this new scenario. Thanks Alan Petzold All my contact info is on LinkedIn.  Thanks for you help on this Alan Petzold infoSeeker007 ShipSource (@) ymail (.com) just in case. 

Peter Weiss President at American Outlook, Inc.

November 5th, 2016

I've never seen a properly drafted term sheet that doesn't make investment contingent on review and acceptance of the formal documents, solely at the option of the investor.  I've never seen a VC or institutional term sheet which didn't have a long list of conditions precedent to close such that completing the deal is effectively at the option of the investor.

If you are dealing with angels, remember that lots of things happen and there may be good reasons someone can't or chooses not to move forward.  

More to the point, think about what you are asking.  Why would you want to force someone to make an investment they no longer wish to complete?  If you do, you better make sure your investor documents are properly drafted and that you've done full and complete disclosure.  You should be prepared for continuing demands that you comply scrupulously with all of your ongoing legal and contractual obligations to your investors, minimal cooperation any time you need their assistance or consent and, most damaging, an unhappy shareholder who may let the investor community know how you've behaved.  Leave the legalities aside, I don't understand why you think there is upside in pursuing this course.  At a practical level you are likely to be poisoning the well from which you drink.

Alan Petzold ECC / Evolving Coal Corp

November 4th, 2016

Yes I agree with. Irwin. But you can find a friendly attorney or a friendly accountants.  But they have to like Deal making.  it's is in there blood.  Setting up the deal for funding is a passion.  In the end always have the investor place some funds into an Escrow accout. Then you really truly know You have an investor.  All talk is just all talk. But once the pretending is placed into an Escrow accout make sure You have YOUR documents in order. Have You done the BiZ Plan that spells out what you intend on doing. You have to invest TIME into this. As this is YOUR map for your Business.  Also one I f the MOST important elements is Your Valuation of you and your business.  To learn more on this look up Erica Drake.  or go to Maverick Entrepreneurs. com She is wonderful at teaching you this and it's FREE. Erica is for the Entrepreneur and not for the Investors.  But she makes you think like an investor thinks therefore You can get funding. Good luck . Alan infoSeeker007

Alf Poor Chief Operating Officer at Global Data Sentinel

November 4th, 2016

I was going to write a longer response, but I suspect the legal outcome would not be advantageous even if successful. Assuming you cannot reach the investor to discuss their assumed commitment, move on is probably the best advice.

Hambirrao Patil

November 6th, 2016

You didn't get an investor without showing benefit to them, you're playing a dangerous game. LLC does not necessarily shield you if investor declines fund. Best way make slabs of funds stay strict time bound with achievements to achieve. So after reaching the goal you can ask about the fund and law is also will going to help you. Best see past examples of bigger organizations.

Thank You.

Ian Shearer Executive Chairman at Parakeetplay

November 7th, 2016

just realized those emails might get blocked so try ishearerdublinatgmaildotcom or iansheareratatlantaintdotcom Regards Ian Obviously needing to adjust for at and dot

Jerome Peloquin President, Family Fish Farms Network, Inc.

November 4th, 2016

Well, i'm not a lawyer but there is such a thing as, "...detrimental reliance.' Still it's a civil matter and as you say ...who wants to lawyer up? I suspect there is no money .. or, he got cold feet after talking to an adviser (or him mother) As in all things financial a pound of due diligance is worth a ton of lawyers. My guess is that he non longer has the funds, or he never did and was playing a game in his/her mind. In any event, you may never know. Just get proof of funds before you plan the budget. jj Jerome Peloquin President The Family Fish Farms Network, Inc. 717 Lawrence Street, NE Washington, DC, 20017 cell: (410) 227-0498 (Skype) fishfarms1 LinkedIn Profile email: aquaponikus@gmail.com website: www.thefamilyfishfarmsnetwork.com We grow healthy local food ... save fresh clean water ... create decent paying jobs.