Human Capital Due Diligence

The facts to act

Human Capital Due Diligence

Investor Education Program

February 16th 2012

Due Diligence • Financial • Legal • Statutory • Market

• Human Capital

Human Capital: Should I Invest In This Team Or Not ?

1. What has been disclosed? Is it accurate or not ?(Misrepresentation)

2. What have you not been told? Relevant to the investment criteria (Non-disclosure)

You Don’t Know What you Don’t Know

Angel Group Investment Criteria

Trustworthiness : A Critical Investment Criteria

V.C.’s : • Honesty & Trust • Adequate due diligence resources • Balanced opportunity evaluation • 79% Human capital DD

Angels : • Honesty & Trust • Scarce due diligence resources • Angel’s skill-set drives DD focus • 8% Human capital DD

Southern California Angels (The Journal of Small Business Strategy)

The Background on ‘Background Investigations’…

The Old $$ Adage Is Still True Today……

Today…. • Public information proliferation • Abundance of on-line data • Poor resolution / quality • ‘Cost’ conscious mentality • D.I.Y tendency

10+ Years Ago • Small number of Service Providers • Little to Zero On-line resources • Labor & Time intensive • Long Cycle : 6 ~ 8 weeks • Comprehensive Report: $25,000 ~ $50,000

Investigative Research & Due Diligence in 2012

Online Data Is Very Deep, But Large Offline Repositories Still Exist

• Public Records • Proprietary Databases

• Social Media • Web 2.0 Resources

The Anatomy of a

Background Investigation

PERSONAL INFORMATION • Where has the subject resided over the past 15+ years? • What is the subject's marital status? • Are there any family ties with respect to business and personal endeavors?

PROFESSIONAL HISTORY • What is the subject's employment history and what are the identities of their prior employers? • Is the information that they publicize accurate? • Is there any relevant information omitted from their resume or social profile? • Do they have covenants with a prior employer? • Were there any controversies at a prior employer which could explain a misrepresentation? • Did they accurately disclose their education history?

FINANCIAL STATUS • Has the subject been a party to any civil judgments, state or federal tax liens? • Has the subject previously filed for bankruptcy protection or been party to a tax grievance with the U.S. Tax Court? • Are there any noteworthy issues or potential red flags in the subject's credit report?

NEWS MEDIA/INTERNET SOURCES • Has the subject been the focus of / or been referenced in any mainstream domestic or international news media? • Does the subject maintain any personal blogs, web sites or social networks? • What is the subject matter for the information which they are posting? • What are followers saying about them?

ASSETS • Does the subject personally own any Real Property or other tangible assets such as Motor Vehicles, Aircraft or Watercraft? • Does the individual own any assets through entities which they may control? • Has the subject previously pledged any assets as collateral in state Uniform Commercial Code filings? • Has the subject ever been a significant shareholder in a publicly-traded company? • Has the subject ever served as an Officer or Board Member

in any corporations or limited liability companies?

HUMAN INTELLIGENCE • Do former colleagues, employers, business partners or opponents in litigation have any relevant information regarding the subject's character or additional facts which may not have been reported in the public domain?

REGULATORY ISSUES • Has the subject (or their business affiliates) ever been involved in any state or federal regulatory complaints? • Does the subject hold any professional business licensees or professional designations? • Has there ever been any complaints or disciplinary actions taken against him/her? • Has the subject ever been sanctioned by a State or Federal regulatory agency?

BUSINESS INTERESTS • Is the subject connected with any domestic or foreign-based corporations, nonprofit organizations, charitable foundations, or political action committees? • Have any of these affiliated entities been the subject of prior controversy, bankruptcy, litigation or sanctions?

CRIMINAL / CIVIL CASES • Has the subject ever been convicted of a local, state or federal crime? • Has the subject ever been involved in any state or federal civil litigation? • Do the details of the litigation filings provide any other relevant information? • Is the subject a litigious person?

Public and Proprietary Information Resources

Typical data includes: • Litigation History • Media History • Business & Personal Affiliations • SEC filings • Corporate Records • Regulatory Records • Property Records • Employment History

• Academic Records • Intellectual Property • Financial Records • Vendor & Supplier relationships • Board Appointments • Liens, Judgments & UCC’s • Subsidiaries and Franchises • Physical Assets • Political and Charitable causes

Specialized tools include: • Employment Locate • Source of Income • Personal Bank Locate – State & US • Business Bank Locate – State & US • Bank Balance Check – State & US • Brokerage Search

• Credit Card Transactions • Corporate Affiliations • Real Estate & Reverse Real Estate • Property Insurance Locate • Vehicle Insurance Locate • Hospital Visits

Vast Amounts of Data & Complementary Tools Available

Regulations and Restricted Lines of Investigation

Investigate - But Stay Legal At All Times!

Legislation and Regulations

• Gramm-Leach-Bliley Act (1999) – Prohibits pre-texting to obtain information from financial institutions

– Limited exemptions for law enforcement, financial institutions and insurance companies conducting claims investigations

• The Fair Credit and Reporting Act (1968)

• The Fair and Accurate Credit Transactions Act (2003)

• State laws

Investigations requiring a written release: • Generally - Credit History & Score • Driving / Motor Vehicle Records (GA)

Prohibited Investigations: • Tax Returns • EEOC settlements, mediation / conciliation • NCIC Database • GPS vehicle tracking • Wire tapping • Accessing email accounts

Investigation Complexities

You Don’t Know - What you Don’t Know

Limitations Include:

• Frequently requires a license to gain access

• Type of records vary widely from state to state

• Searches are limited by geography / jurisdiction

• Online records maybe abstracts of originals

• Online records may be historically limited

• Data must be verified: Correct, Complete, & Current

Simple Online “Checks” Can’t Overcome These Hurdles

Correctly Identifying The Subject

A Data Minefield = A Significant Error Opportunity

Common Names : James / John / Mary / Patricia ~ Smith, Johnson, Williams, Jones.

Change of Name: Adoption, Marriage, Divorce or Court Order. Challenges:

• Errors, omissions and out-of-date information • Active management of a +ve / -ve public presence • Dates of birth: only 365 days per year • Identity theft : SSN, DoB +

Presence in multiple jurisdictions ? : Federal / State / County / Municipal • Domestic residence • Vacation / 2nd homes • Place of employment • Business entity ownership

Investment Footprint and Jurisdiction Landscape

Data Is Constantly Migrating : Hard Copy >> Electronic >> Online

• The Southeast Federal Courts : 16 Districts Governments : 6 States Counties : 532

• The State of Georgia Federal Courts : 3 Districts Government : 9 Executive Agencies Counties : 159 Municipalities : 535

A Broad Approach To Investigative Research

Investigations Cover Debt & Equity - Through To Hostile Exit & Recovery

CSI

Financial Investigations

Pre-Investment

DD

Fraud

Theft

Repayment & Delinquency

Bankruptcy

Asset Investigations

Financial Investigations

Debt & Equity – Due Diligence • Bankers / Lenders • Angel, VC’s & PEC’s • In-House Counsel • M&A Attorney’s

Litigation & Recovery • Bankers / Creditors • Bankruptcy Attorney’s • Civil Litigators • Real Estate Investors

Professional Investigative Due Diligence Is Necessary

A Professional Investigation Protects You & Your Investment

Summary

A Professional Private Investigator will: • Understand the context of the investigation

relative to the other areas of DD • Corroborate & validate multiple sources to

ensure the veracity of the resulting report • Understand your investment criteria • Be a resource to be used surgically • Bring multiple perspectives to bear • Ensure quality & consistency through policy and

procedure • Provide actionable facts with veracity

The Facts to Act

Thank You

Duncan Harding – Managing Director CSI Atlanta 235 Peachtree ST NE, Suite 400 Atlanta, GA 30303 Tel : 404-829-2690 Mail : [email protected] Web : www.CSIinvestigators.com