A new supervisor asked a great question.
“What process do we (the DIF) use to decide to invest”
I answered this question, however I feel like I could do a better job answering this question.
First off, meetings are governed by Robert’s rules. This means that naively all an investment takes is a motion to invest, a second, and four of six to vote yes. Then the supervisors would ask the directors to carry out the investment. Practically, motions to invest need to have more details than just an off the cuff motion.
The process of deciding to invest or not needs to have some flexibility. Each proposed deal could have aspects that are unique to that deal. However, we could break investment decisions into several stages. At any stage, supervisors may decide not to go forward.
1) Introduction
2) Meeting
3) Identify possible partnership
4) Due diligence
5) Negotiation
6) Motion to invest OR motion to decline investment
1) Introduction
Someone contacts a supervisor and pitches an investment. If the supervisor would like to spend meeting time on the pitch, they could email me and I’ll add them to the agenda. Lately, I have have started including “item from the floor” as an item on the agenda. This means that anyone can introduce a new topic in the meeting.
2) Meeting
Generally, we will invite a representative from the investment to a full board meeting. Sometimes, in the interest of time, a few supervisors will meet with a partner and the recording is shared with all supervisors. Meetings with investment representatives usually involve lots of questions that go both ways. We explain what the DIF is and look for what the DIF brings to the table as much as we look at what the investment brings to the table.
3) Identify possible partnership
At this stage we usually identify what amount of investment is appropriate. We ask questions like:
* Does this deal have an appeal specific to Dash, or Dash users?
* How does this deal compare to other options, and unknown options that may come by in the future?
* What benefits does this investment have?
* How likely is it that this business will be successful?
4) Due diligence
At this stage we are looking for anything that is wrong with this investment. This will involve any combination of:
* Reviewing a data room provided by the company
* Putting together “due diligence questions” which are specific to the given company/investment.
* Interviewing key management in the company
* Research on key management of the company
* Evaluating the company’s internal communication
* Reviewing the investment’s valuation in context
* Reviewing competitors to this investments
I have a crass way of viewing this process. It’s like sniffing assholes. Find the worst part of the company, take a sniff, and then convince yourself that "it’s not that bad."
5) Negotiation
This step is skipped when companies are further along. However, for early seed round investment, usually the DIF can negotiate the details of a deal. Supervisors will nominate one person to carry out the negotiation on their behalf. The nominated person is always empowered to come back and say negotiations failed. If things go well, the negotiation ends with a contract for the DIF to sign.
6) Usually after a contract is drafted supervisors will vote to invest. Supervisors then ask the directors to sign the contract as the DIF, and carry out the investment.
At any point of this process supervisors can motion to not continue with this process and the perspective partner is informed the DIF won’t invest if the motion passes.