Due diligence: two words that are at the heart of virtually every business dealing. In a capital-raising phase for your company, potential investors no doubt want to have a pretty clear picture of your company’s assets and liabilities, both financial and otherwise. The due diligence performed by a venture capitalist (VC) is a vital step along the road to receiving outside investment, as it will spell out the valuation of your company, and that, along with other factors, will give the VC an accurate picture of the risk they’re taking on with their investment.
Any company that wishes to provide outside investment is well advised to draft a due diligence checklist as one of the requirements to begin funding. And because the entire due diligence phase undoubtedly takes up more time than any of the other components of a business transaction, it often seems like an overwhelming task, so having a checklist can help in prioritizing and breaking one enormous process into smaller, easier-to-handle bits. It is extremely important to use a checklist to confirm you haven’t overlooked anything when investing in a company. It gives clarity on all the financial matters, obligations, outstanding contracts and any litigation that may be pending. Having access to this data allows you to analyze it and determine whether it’s a good investment.
How the Venture Capital Due Diligence Process is Unique
A due diligence checklist is a comprehensive, organized tool used by VC firms to accurately analyze and interpret all facets of your company. This data includes financial, tax, legal, asset, intellectual property and other data that is on the books in your company. While similar checklists are used in virtually every other type of M&A transaction, the due diligence checklist for VCs is unique to their investment transactions. It should be an organized, comprehensive list for a potential buyer to be able to analyze virtually every aspect of the business, including finances, assets, outstanding litigation and inventory, all very important factors to consider when planning to invest in a company.
What Items Should Be Included on a Due Diligence Checklist for a VC?
The due diligence checklist for venture capitalists should obviously contain the necessary points to ensure that the vital items — the ones most closely associated with success — are on it. Although each different transaction could have different bullet points, here are some of the most important ones, the items that would most likely be on every VC’s due diligence checklist.
This is probably the largest and most complex of the items on the list. The finances of a company are the most heavily weighted section on this list, as it contains multiple items, including:
- Financial projections
- Historic financials
- Outstanding contracts (materials, etc.)
- Capital stock
- Tax information
- Customer information
Legal and Regulatory
All of the legal issues surrounding the company.
- Antitrust and Regulatory Issues
- Compliance With Statutes and Regulations
- Environmental Issues
- Insurance Coverage
- Licenses and Permits
- Pending Litigation
Products and Services
The actual products and services that the company provides and how the revenue streams tie into the other checklist matters, such as financial and legal.
- Products and Services Currently Offered
- Products and Services in Development
- Discontinued Products and Services
- Regulatory Documents Related to Products and Services
- Market Share of Products and Services
- Profitability of Products and Services
Employees and Benefits
The current makeup of the company as far as management structure, employees and benefits are concerned.
- Management Structure
- Current Employees
- Current Contractors
- Outsourced Professionals
- Benefits Packages
- Workers Comp and Unemployment Claims History
- Resumes of Employees
- Nondisclosure Agreements
Intellectual Property (IP)
The intangible assets that are the product of original, creative thought.
- Trade Secrets
- Industrial Designs
- Geographical Indications
Physical (or Tangible) Assets
Namely properties, equipment and inventory.
- Real Estate
- Equipment (Both Owned and Leased)
- General Overview of All Other Assets
- Schedule of Fixed Assets With Location
Analyzing and evaluating all IT systems, hardware and software, along with any contracts and licensing obligations.
- Software Used By The Company
- Software Licences
- Outsourcing Agreements With Outside IT Companies
- Overall Analysis of IT System
- Disaster Recovery Plan Documentation
Organization and Good Standing of Company
A list of internal company documents and proof that all these obligations are up-to-date.
- Organizational Chart
- Articles of Incorporations
- Bylaws and Amendments
- Annual Reports
- Listing of Shareholders (Including Percentages Owned)
A good venture capital due diligence checklist should cover all of these points, plus any that may be relevant to the specific situation. The entire idea of a checklist is to make sure you don’t overlook any of the important elements when working on investing in a company; it will allow you to avoid overlooking any financial or legal issues that could be red flags, as well as other items, such as IP, assets and any pending litigation.
Securing a trusted partner, such as Caplinked, for your VDR needs when navigating through VC due diligence is a mandatory step in the process. Start your free trial today and see how a first-rate VDR can help streamline the due diligence process.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Entrepreneur – https://www.entrepreneur.com/article/344248