What not to say to an investor. . .
January 31, 2008
This morning I got an email from a company we are looking at acquiring that really bothered me. I had to bite my tongue to stop myself from immediately calling ‘bullsh*t’. Understanding the risk that the company might read my blog I decided that it was worth sharing with you so that you don’t make a similar mistake when trying to raise money or sell your company.
Specifically, I saw a press release from a competitor in which they indicated that the company’s technology violated a patent they held. Evidently the competitor sent notice to the company’s primary vendors and clients. We asked for a copy of the notice and any other correspondence regarding the matter. The company responded to our request as follows: “We have completed a review of the ***** claim. There is nothing in writing that we can provide, due to attorney client privilege.”
The privilege the company referred to was THEIR privilege (i.e. the company’s privilege) which they could simply waive. It isn’t reasonable to suggest that some sort of attorney client privilege exists as a response to a diligence request. How can we value a business that may or may not have a significant contingent liability (e.g. a patent infringement case)?
The sad truth is that by offering a tenuous privilege claims one of two things might happen a) most investors would walk away or b) your investor may simply call the other party. I of course called the other party and they were happy to share their notice to me. In fact we discussed possible solutions to potential infringement such as licensing. With this information I can better value the business in light of potential litigation and/or licensing. Potential lawsuits, especially when notice has been provided, are MATERIAL to any discussion related to fund raising, mergers or acquisitions. You MUST disclose them. My advice is to quickly and completely disclose everything you know. There are often very simple solutions to problems that may seem insurmountable to you and your team. At the end of the day most investors would have walked away, I of course, smell an opportunity here.
