Startup due diligence is one of the most important components of the funding process for any new business.
The process enables and investor make a more informed decision concerning the investment potential and related level of interest since the process covers the entire life of the startup
This also enables an investor to obtain an in-depth understanding of the company, business model, culture and ultimately investing in the company.
A due diligence checklist is an organized, comprehensive method Angel Investors and VC firms use to fully analyze and understand the inner workings of a business. As part of the due diligence process, investors will request access to important information about the business they want to invest in, such as its inventory, financial numbers, assets, contracts, intellectual property, and outstanding legal issues, if any.
In the recent past we had a workshop on investor readiness, hosted by O&M Law and here are the key areas highlighted as part of the due diligence checklist that most investors would be looking at:
From General Legal Compliance to sector-based legal compliance, legal due diligence gives investors a better opportunity to understand the target company and its operations before getting involved.
Investors also want to know any pending or potential litigation, discussions with regulatory and other government agencies and licenses, permits and consents.
Legal due diligence process also helps identify the possible problems that can act as impediments to closing the deal. When both parties know the possible impediments, they can take steps to address the same to ensure the smooth completion of the agreement.
Ensure that you have the following documents in place:
Financial Due Diligence usually covers three to five years and the focus is on: Earnings, Cashflows, Net Assets and forecasts which would include the underlying assumptions and historical trends of your businesses.
Taxation due diligence usually covers five years and it covers the applicable taxes and status of a Company’s Itax Ledger
The purpose of risk and opportunity reviews is to evaluate existing exposures and identify possible errors, inefficiencies or potential risk areas
The scope can include all taxes or certain types of taxes.
The list could go on and on and would mostly depend on factors such as size location and nature of business. Other key areas that Investors would also look into could include employees and benefits, licenses and permits, Intellectual property that includes all documents related to Patents and know-how, Trademarks, Copyrights, and Logos.
The only way to address the due diligence needs of investors is to accomplish them over time as you negotiate through your startup journey. Those entrepreneurs not recognizing the need for this due diligence decrease their chances of obtaining funding from Angel and VC investors.
Want to join our growing business network? Book a tour today at any of our branches and check out our amazing packages!