Due Diligence for Startups Raising Venture Capital
By C. Worrall
You have presented your plan to the venture capital partners. It was well
received and they have offer you a term-sheet. You have negotiated your major
deal points and are ready for the investment. Now the VC wants to commence with
Wait a minute... what was all that presenting and talking to partners and
scientific specialists? Wasn't that due diligence? Well, yes, sort of. That was
due diligence to make sure that the business model and technology were worthy of
investment. Now they want to make sure your company is.
Post term-sheet due diligence reviews your corporation at a detailed level to
make sure that you do not have any skeletons in the corporate closet. The
venture capital firm wants to make sure that they are not opening themselves up
to patent infringement litigation, employee disputes, or tax scandals.
The VC will usually want some form of the following information:
Corporate organization and history -- basically your minute book plus any
partnership agreements or joint ventures.
Management and employee relations -- resumes of management, descriptions
of key personnel, organizational charts, any changes or planned changes in
Intellectual property -- lists of any patents, pending patents,
trademarks, copyrights, etc. as well as all claims and litigation by or against
the Company regarding patents and patent infringement.
Financial and accounting matters -- Financial statements, preferably
audited, over the past three to five years, and copies of all documents from
previous financings, stock purchase agreements, shareholders agreements, etc.
Legal and tax matters - all claims and litigation by or against the
Company including any issues with income or employment taxes.
Acquisition, divestiture, or reorganization - any documentation
surrounding any acquisition, divestiture, or reorganization in recent years.
Each venture capital firm will have its own list of due diligence needs. Even
early in the process, you might ask the firm for its due diligence list so you
can get a jump on what the firm might want. Often the list will include
additional sections on product and sales plans, competitions, public relations,
From the date you receive the term-sheet to the funding date will be six to
eight weeks, possibly more. Once you have committed to receiving funding from a
VC, you do not want to get held up because you are trying to locate documents or
Ms. Worrall is the President of Worrall Consulting, LLC. Worrall Consulting is a
finance and business strategy consultancy providing professional services to
high growth, early stage companies.