Founders Should Do Background Checks on Their Investors
It’s common practice for investors to background-check founders. Why isn’t the reverse as popular?
One of the interesting things about getting into venture via your own fund versus coming up through a larger firm is that when “this is always the way it’s been done” comes up as a rationale, you get to shrug and say, “Well, not anymore.”
For example, the practice of VC funds charging their legal fees back to the startup. We don’t do this at my fund, because we want the money we give to companies to go toward hiring, marketing, operations, etc.
We also try to neutralize aspects of the founder-investor relationship that utilize asymmetrical power to make it difficult for a founder to build their values into their company. The horror of Jeffrey Epstein’s money being tied into so many institutions amid his scandals brought to mind the background checks that our LPs (limited partners) performed on us as part of making their investments. And how venture funds will often perform similar checks on founders as a condition of investment. The basic background checks are really only about surfacing adult criminal convictions, verifying employment history, and so on.
But when I recently asked a few venture GPs whether a founder ever requested to do a background check on them as a condition of investment and joining their company board, it turned out they had never been asked. Did it not occur to any founders? Did they assume their partners had already vetted their VC for these issues? Or is this request perceived as a friction to getting the deal done, one that might offend the venture investor?
Even more complicated is figuring out what to do with that information once you have it. What if you discover that a potential investor has a criminal conviction? Maybe it can be explained in a way that doesn’t cause the founders to question the investor’s ethics and morality — there are certainly types of criminal convictions that wouldn’t phase me. Or what if the background check turns up something notable and disturbing — do you have a responsibility to share this information with other founders? It’s not an easy scenario.