Getting Due Diligence Ready
We’re getting into that time of the year where VCs stereotypically head for their yachts. From where I stand, there’s still a ton of deal activity, but late July and definitely August are still not great times to begin new funding discussions. So, now’s the perfect time to get your ship in order so you can start fundraising hard come Labour Day.
I’ve said this before, and I’ll say it again: the decision to give an entrepreneur cold hard cash is all about trust. I trust you to take my $1 and make it $5 or $10. One important datapoint in forming my trust thesis as an investor is how organized you and your company are. No matter what your company size, your key documents should be organized and readily available. And you should know what’s in them.
So, if you have not done so already, I recommend picking up a Neat scanner and getting yourself due diligence ready.
Getting Due Diligence Ready
There are two types of due diligence: business and legal.
Investors will perform business diligence before they issue a term sheet. This can take many forms but usually involves lots of reference calls to industry experts, founder references, etc. It also often involves digging deep into your grasp of the opportunity and the depth of your thinking around it.
Once investors pull the trigger and make you an offer (which you agree to) then the lawyers kick in. They will deliver a nice thick list of document requests. The faster you deliver them what they need, the faster the deal closes (and the lower the legal costs).
To get business diligence ready, make sure you have the following before approaching potential investors:
- Standard investor documents: Investor presentation, Executive Summary, financial forecast or pro formas.
- Deep dive documents: Product roadmap, team bios, summary of customer development/ validation work done.
- Padding the file documents: market size calculation, competitive analysis.
In this link you will find a list from a leading US venture law firm. It covers a wide range of matters all of which you will need to have organized and ready. The most important ones by far:
Intellectual property and IP assignment: make sure every current and former employee and subcontractor / consultant has signed a document assigning all IP rights to the company. The last thing you want is to become a wild success and then have someone who used to work with your company claim they own part of the technology.
Open source exposure: Everything is built on top of open source technologies today. It is important to keep an ongoing list of open source software used and what license you are using. As investors, we want to avoid GPL exposure forcing us to contribute source code back in a way that compromises the IP value of the company.
Liabilities: This is particularly important for me as a seed investor. Founders can be very creative in bootstrapping their way to a first financing. I want to make sure I have a very clear picture of who is owed what so I know how much cash will actually be available to grow the business.
So use this downtime to get yourself ready and start fundraising hard come September. Times are good now (too good?) so if you’re thinking about fundraising soon, get due dil ready and get funded faster!