Due diligence for private investors

What is happening

A friend invites you into his company: the money is needed for expansion, and the stake will be put in your name "later, once it all takes off". For now, you are asked simply to transfer the sum to the company's account or to him personally.

A private investor is choosing between several projects that came through acquaintances and investor clubs. The decks show revenue and plans; the register shows a company with minimal share capital, tax arrears and a director who changed a month ago.

An entrepreneur is selling a stake in a going business and shows accounts with healthy profits. The buyer, who has no legal team of their own, wants to understand what lies behind that figure, which liabilities stay in the company, and how decisions will be made alongside the seller.

What the law says

• You become a participant in an LLC by buying an interest or by contributing to an increase in share capital. Under Federal Law No. 14-FZ of 8 February 1998 "On Limited Liability Companies" (the LLC Law), these transactions and resolutions generally involve a notary, and money handed over without that does not make you a participant.
• Relations between participants can be set out in a shareholders' agreement under the Civil Code: voting, exit with a buy-out, a ban on selling without consent, profit distribution. The company's charter is available to third parties, whereas the content of a shareholders' agreement need not be disclosed.
• If money is lent with a right to take a stake later, that right has to be documented, for example as an option to conclude a contract under the Civil Code with clear terms and a deadline. An oral promise of a future stake is almost impossible to enforce.
• When buying an interest from an individual, we check for their spouse's consent: an interest acquired during marriage is, as a rule, joint property under the Family Code, and a sale without notarised spousal consent can be challenged by the spouse.
• Where the investment is abroad or the seller is non-resident, we take into account Federal Law No. 173-FZ of 10 December 2003 "On Currency Regulation and Currency Control" and the restrictions on transactions with persons from unfriendly states.
• Offers promising a high fixed return are checked against the Bank of Russia's public warnings about companies showing signs of illegal activity on the financial market: here the risk of a pyramid scheme outweighs the risk of an ordinary business failure.

What we do

• We check the company and the people behind it: registration data, history of participants, debts, litigation, insolvencies and related companies.
• We test the founder's or seller's account against the documents: who owns the premises, the trade mark, the website and the contracts with key clients.
• We read the accounts with common sense: where the revenue comes from, what the debts are, and whether the business hangs on one contract or one person.
• We propose a form of participation (buying an interest, a capital increase, a loan with an option, a separate joint company) and explain the pros and risks of each.
• We prepare or review the transaction documents and shareholders' agreement and attend the signing at the notary.
• We write a closing memo in plain language: what we checked, what we found and what still rests on trust.

What we will need from you

• The pitch deck or project description and the amount you plan to invest.
• The company's name and tax number, and details of the founders or seller.
• Everything you have already been given: accounts, contracts, a draft agreement, messages containing promises.
• Your expectations: size of stake, role in management, investment horizon and exit route.
• The seller's marital status, if you are buying an interest from an individual.