Preparing for Legal, Financial & Corporate Due Diligence
Online Learning + Due Diligence Checklist & Sample Report
The most lengthy and possibly the most cumbersome part of the fundraising process is due diligence. Due diligence is the process wherein an investor appoints an entity to conduct a detailed study of all aspects of your business. This includes study of finances, legal documents, compliance checks and corporate affairs. The output of due diligence is a report. To ensure no red flags in this report one must start preparing early. This FundEnable course explains the process of due diligence in detail and provides pointers on how to prepare for it. Additionally, find a due diligence checklist and a sample report as a part of this resource.
A collection of business fundraising essential resources. It contains 12 online courses providing a 360º understanding of the fundraising process along with 8 templates that are 100% customizable according to business needs.
Typically, the company bears the cost of due-diligence. The cost depends on the investment round. Due-diligence for Seed / Angel round is not exhaustive and hence not expensive. A small legal firm or an accounting firm executes the DD exercise. In case of a larger round such as Series A / B etc., one of the Big 4 Accounting firm is preferred by the investor for doing the financial due-diligence and a top legal firm does the legal due-diligence.
Do trademarks have to be in the name of the company or can it be owned by the founder for charging royalty to the company?
Investors expect the intellectual property to be owned by the company and not by the founder. In case they are owned by the founder, the DD agency suggests transferring of the intellectual property from the founder to the company.
What are the chances of a deal not going through after due-diligence?
In the case of a major non-compliance that might lead to a huge liability for the company or in case of fraud, the deal falls off-post DD. In case of minor red flags, corrective actions are suggested as a part of Conditions Precedent (CPs) or Conditions Subsequent (CSs) to the transaction. FundEnable suggests founders focus on compliance from day 1. The aim should be to become DD ready.
How much time does it generally take to finish the DD exercise?
It depends on the preparedness of the company. For large transactions upwards of a million dollars, it takes 6-8 weeks to complete the DD exercise. For seed/angel transactions, the aim should be to finish the DD exercise within 3 weeks as the data points are far lesser as compared to a VC fund round.
Is it possible that DD never happens?
Rarely. At times when individual investors invest in a startup at a very early stage, DD is not done. A savvy angel or an institutional investor like VC fund never invests without undergoing DD.
What if company does not have a particular information item from the DD checklist or what if there is a non-compliance related to one point in the list due to lack of awareness on the part of the founder?
Disclose. Do not hide anything. Transparency plays a critical role. If you don’t have it, you don’t have it – simple.
If the a company fails in Due-Diligence and the investor decides to not invest, do Co-founders still have to pay the DD Agency?
Yes. The DD agency has done their job and hence payment has to be done to them irrespective of the final decision of the investor.
As a founder, where do we get a list of all compliances that are applicable to my company? How do I know if we are fully compliant?
Talk to your CA and your CS on a regular basis. Check with them. Get a list of all the compliances that are applicable to your company – State level, company size level, city level, etc. Just the way you have weekly sales meetings, make it a point to talk to your CA and your CS once in 2 weeks.
Can a company do a due-diligence of the investor?
You can take the reference route. Request the investor to share the contact details of a few founders of investee companies. Talk to them – get a sense of how much value the investor adds post-investment, does the investor interfere a lot in day to day operations, etc. Reference check needs to be done for sure in the case of individuals. You don’t want a person with a terrible track record to be a shareholder in your company.
Terms & Conditions
Kindly download the entire T&C document by clicking here T&C.pdf
It is strongly recommended that users read the T&C document while purchasing the FundEnable Toolkit.
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