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.