Diligence in Due Diligence

What is Due Diligence?

Due diligence refers to the investigation process that venture capitalists and angel investors go through when evaluating a potential investment opportunity. Just like with the planning and research that goes into your vacation, due diligence is about making sure you evaluate situations and make sure you’re not missing out on opportunities. 

The process is designed to help them identify risks associated with a potential investment. It’s the investor’s opportunity to develop a clear picture of the business, including any legal risks that may be associated.

If raising capital is part of your company’s long-term growth plan, we should be proactively thinking about being ready for due diligence from the very beginning. 

We want to hand investors a clean due diligence binder that will streamline the investment process and make them feel confident that you are focused on mitigating their risk.

Fortunately, we can anticipate the questions that are likely to come up in legal due diligence and have all of the documents and answers prepared for your investors. We need to make sure each of the following matters is in good shape for investors.
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Proper Formation

You’ll need to make sure you’ve set up the optimal entity structure and that it’s all documented properly. Just like with your vacation, you’ll need to make sure everything is in order before you get going.
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Clearly documented equity positions

Each stock or unit holder needs to have a stock purchase agreement and we need to build out a capitalization table so that the investors can see the current ownership of the company and what it will look like after the financing.

Think of it like with your vacation. Who all is going? Is it just you? Or does your dream vacation involve friends or family? If so, you’ll need to make sure you have everything prepared for them as well.
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Comprehensive Corporate Governance

The laws of the state of formation will require documentation and approval of certain corporate actions that we need to record and maintain in a corporate book of minutes.

When you go on vacation, there’s usually certain documents (tickets, passports, etc.) that are necessary for your trip. Just like with your travels, you’ll need to make sure everything is in order and organized.
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Intellectual Property Agreements

With a lot of companies, the intellectual property is what the investor is actually investing in, so we need to make sure you have filed appropriate registrations, documented ownership to the company, and assigned all employee inventions and intellectual property to the company.

Have you ever heard of hotel horror stories about people showing up to what they thought was going to be a nice hotel and it’s actually super sketchy? Just like with this aspect of due diligence, that could be avoided by researching the hotel in more detail and finding out what you’re getting yourself into.
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Employee Agreement

Each employee should have appropriate documentation governing the terms of his or her employment. Are your fellow travelers taking responsibility for any aspects of the trip? Who is paying for what? This is making sure everyone understands who is doing what and how everything is being taken care of for your ventures.
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Adequate Insurance Coverage

When you buy a car, you need car insurance. When you buy a house, you get home insurance. Why would you compromise your business by inadequately protecting it? Whether you're traveling, starting a business, or just living your life, make sure you’re protecting yourself against unforeseen issues before it’s too late.
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Proper Licenses and Permits 

Nothing is worse than finding out the day before your trip that your passport is expired. Make sure that everything is up-to-date and ready to go before you need it.
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Conclusion 

If we work on each of these as your company grows it’s quite painless. If we wait until you’re ready to bring on investors it gets more expensive, slows down the investment process, and can deter investors.

Just like with your dream vacation, you need to make plans in advance and know what kinds of planning will benefit you down the road. That’s the power of due diligence. It makes sure you see a potential investment from every angle.