Due Diligence for Startups Raising Venture Capital
Due Diligence for Startups Raising Venture Capital
By C. Worrall
You have presented your plan to the venture capital partners. It was well received and they have to offer you a term-sheet. You have negotiated your major deal points and are ready for the investment. Now the VC wants to commence with due diligence.
Wait a minute… what was all that presenting and talking to partners and scientific specialists? Wasn’t that due diligence? Well, yes, sort of. That was due diligence to make sure that the business model and technology were worthy of investment. Now they want to make sure your company is.
Post-term-sheet due diligence reviews your corporation at a detailed level to make sure that you do not have any skeletons in the corporate closet. The venture capital firm wants to make sure that they are not opening themselves up to patent infringement litigation, employee disputes, or tax scandals.
The VC will usually want some form of the following information:
Corporate organization and history — basically your minute book plus any partnership agreements or joint ventures.
Management and employee relations — resumes of management, descriptions of key personnel, organizational charts, any changes or planned changes in management
Intellectual property — lists of any patents, pending patents, trademarks, copyrights, etc. as well as all claims and litigation by or against the Company regarding patents and patent infringement.
Financial and accounting matters — Financial statements, preferably audited, over the past three to five years, and copies of all documents from previous financings, stock purchase agreements, shareholders agreements, etc.
Legal and tax matters – all claims and litigation by or against the Company including any issues with income or employment taxes.
Acquisition, divestiture, or reorganization – any documentation surrounding any acquisition, divestiture, or reorganization in recent years.
Each venture capital firm will have its own list of due diligence needs. Even early in the process, you might ask the firm for its due diligence list so you can get a jump on what the firm might want. Often the list will include additional sections on product and sales plans, competitions, public relations, and R&D.
From the date you receive the term-sheet to the funding date will be six to eight weeks, possibly more. Once you have committed to receiving funding from a VC, you do not want to get held up because you are trying to locate documents or make copies.
Ms. Worrall is the President of Worrall Consulting, LLC. Worrall Consulting is a finance and business strategy consultancy providing professional services to high growth, early-stage companies.
We hope you found this article about “Due Diligence for Startups Raising Venture Capital” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
To receive our free newsletter, contact us here.
Subscribe to our YouTube Channel for more updates.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
GROCO.com is a proud sponsor of The American Dreams Show.
The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.
Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.
They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.
Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
Seven Signs Your Noncompliance Will Be Considered Willful
Seven Signs Your Noncompliance Will Be Considered Willful There are many ways taxpayers can get the attention of the IRS. Although a lot of people make innocent mistakes when they file their tax returns, there are others who willfully look for ways to skip out on the taxes they owe. The IRS does treat those…
Make Sure Your Heirs Inherit What You Want
Make Sure Your Heirs Inherit What You Want. The saying goes that their only two things that are certain in life: death and taxes. While people can generate endless amounts of money when they’re alive, they can’t live forever and they can’t take that wealth with them when they die. However, they can have a…
Will Taxing the Rich Even More Improve Inequality?
Will Taxing the Rich Even More Improve Inequality? It’s been the cry of democratic lawmakers and many of the less fortunate for years: “We need to tax the wealthy even more.” “The rich have to pay their fair share of taxes, too.” The problem is the rich already pay a huge portion of the country’s…
It Pays to Be Rich for These Five Tax Breaks
It Pays to Be Rich for These Five Tax Breaks Although it’s true that the ultra-wealthy are heavily taxed, and in many cases unfairly, there are also some tax break advantages that favor the upper class more than those in the middle. Let’s take a look at some of these breaks. Most common and first…