Is the gun loaded?

When you first meet with potential investors, rest assured they are trying to ascertain critical facts about you as an executive: what makes you tick, how honest you are, how ethical you are, and how committed you are to your company. They will test your mettle by asking a few loaded questions. Some may be asked as casual comments, so you need to be prepared.

If you are the right kind of executive, you'll know the right answers. If you don't, the smoking gun could explode in your face. Here are some examples:

* "Jim, I am truly impressed with the background and experience of your management team. Individuals of your caliber would have no problem securing excellent positions in industry, would they?"

If you agree, investors will perceive you lack a sense of commitment to your company (that's why they expect you to invest money along with them -- money that you would lose if you throw in the towel later).

* "Sharon, you have an excellent track record as a business manager. I have a unique proposition for you. I have another company we have already funded that is starting to grow and really needs a top-notch CEO. If we aren't able to put your deal together, would you be interested in this challenge? It comes with a package including annual compensation of $120,000 plus a performance bonus, hefty stock options, an executive car and country club membership."

Again your commitment is being tested. If you would sell out to the highest bidder, then why should any equity financier risk an investment in you?

* "Rob, in our study of your plan, we see that you have budgeted starting salaries for the two top officers of $80,000 annually. Yet your resumes indicate you are both currently earning around $55,000. It seems to me you are trying to use our deal to give yourself a significant raise."

Oops!

Something this obvious could blow your whole deal. Besides, would you really be foolish enough to give the investors additional stock in your company just to finance your salary? Additional fringe benefits and perks should come out of profits, not investment capital. If you really believe in what you are doing, you should sacrifice a significant salary until there are profits to cover it.

* "Kathy, in our investigation thus far we are very impressed, with the exception of one of the members of your management team. We believe your company is seriously weak in the marketing area. Before we could agree to provide funds for the company, you need to replace this person with a strong marketing executive. How do you feel about this?"

This can be a tough one, because frequently the investors aren't trying to trick you; they may have a very real concern of a weakness in a key management area. Unless you correct this perceived deficiency, they are not about to invest in your company (they may even have some candidates lined up for you to interview).

However, if you are positive that you have an extremely qualified person in this position, then this is probably a trick question. After all, if you don't have confidence in your own team, then why should they?

* "Larry, what do you plan to do when you retire?"

Strange as it may seem, some entrepreneurs lead their companies energetically through the tough start-up phase, only to become complacent and flounder when they start to make money. Investors will test your sensitivity to this tendency by asking if you are thinking about retirement. If you are, equity financiers probably won't be interested in you.

* "Jerry, before our meeting on your company's proposal, I have a small favor to ask: I have a cousin who is a supplier to your industry, and I'd appreciate it if you could see that he gets at least a small part of your business. If his quotes are a little high, just tell me what the others are bidding, and I'll see that he matches it. That way we can help him out without it costing you anything extra. OK?"

Investors must believe you are ethical. At some time during your discussions, they will devise a test for your ethical standards. This test can take many forms, some subtle and some not so subtle, such as this question above. No amount of coaching will help you with this one; either you are ethical or you aren't.

It boils down to this. If you are the right kind of executive, you'll know the right answers.

If you don't, the smoking gun could explode in your face.

Scott A. Clark welcomes your comments and contributions. You may send him your ideas for column topics by e-mail at mail

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