If you ever want to raise money from a venture capital firm, or even a savvy angel investor, you will want to make sure that your company is organized and ready to undergo a due diligence process. In order to help you prepare for this, we have compiled a brief checklist of a few essential documents that you should have handy in order to help investors have the utmost confidence in you!

What is Due Diligence?

A due diligence exercise or process is a form of assessment in which your potential investors will analyze the risks associated with investing in your company, as well as your company’s strengths. This is a great opportunity for you to demonstrate your business’ potential value—if your ‘ducks are in a row’ you have the added bonus of proving to your investors that you are an organized and detail-oriented leader. For any startup that wants to raise money at some point, having materials prepared for this kind of review will ensure that you are prepared for the first round of funding.

What is Included in Due Diligence?

The diligence process we describe here is what is commonly termed "legal diligence". It happens after your potential investor(s) have conducted business diligence (the analysis of your company's potential) and, if applicable, technology diligence (the review of the inner workings of your product). Legal diligence comes after your investor(s) have proposed investing a certain amount at certain terms, and is typically handled by lawyers for your company and the investor(s). 

The legal diligence process allows investors to identify any risks that might make their estimated value of your company incorrect (the "pre-money valuation" you see in your Term Sheet), or which make it less likely that they will see a return on their investment. These processes usually include information about assets, financial projections, contracts, intellectual property ownership, equity holdings, information about your team, and/or outstanding legal issues. Note that, in addition to providing the documents listed below, you will likely also have to answer questions about the documents and/or your business that the documents might not offer. This is also a good time to review your business plan, identify potential barriers, and evaluate your competitors.

An Example of a Due Diligence Checklist:

Corporate Structure:

• All Board’s, Stockholder’s, or Director’s Meeting Minutes and written consents
• Certificate of Incorporation, Corporate Bylaws, Consent in Lieu of Sole Incorporator, Certificate of Good Standing, etc.
• Company organization chart, including any parent or subsidiary companies

Taxes:

• Any and all tax documents including annual Franchise Taxes, Form 5500 for 401(k) plans, Form 3921s, audit reports, general accounting principles and any undisclosed tax liabilities
• Any state related or foreign country related tax compliance documentation

Financial Transactions:

• Any plan or company financial projections
• Most recent financial statements
• Company books and ledgers
• Capitalization Table

Securities Issuances:

• A list of all company stockholders including issuance dates and original issuance price
• A list of all company options holders including grant dates and exercise prices
• All warrants, outstanding options, agreements for the purchase of company securities, and any agreements relating to stock issuance
• A summary of the vesting schedule for any options issued
• Voting and restrictive share transfer agreements
• Documentation evidencing compliance with blue sky laws
• A list of any pending or promised equity grants (you do not want a backlog of these and it is important to stay on top of your granted shares)
• All 409A valuations provided for your company

Intellectual Property:

• All trademarks, patents, intellectual property assignments, copyrights, domain names, or filing of registrations with government entities

Material Assets:

• A stock of your company’s inventory
• Any real estate, equipment, technology or assets owned

Contracts:

• Any consumer or supplier contracts
• Any accounts receivable or payable
• Loans, credits, partnerships, or settlement agreements
• Non-compete or exclusivity agreements
• License agreements
• Any distribution or franchising agreements

Human Resources:

• A list of all company consultants, employees, and contractors including title, salary, bonuses, commissions, state of registration, and classification (exempt, non-exempt)
• A standard offer letter template
• Agreements between officers, directors or affiliates with benefits or acceleration provisions
• Any plans that enact a change in corporate control
• Employee benefit plans
• Stock option plans
• Employee handbook
• All foreign employee listings and their respective benefits

Litigation:

• A list of any/all litigation and any threatened litigation.
• Any insurance policies that protect against litigation claims and any history of such claims.
• A list of unsatisfied judgments or any documentation of settlements or injunctions.

What to Think About After Organizing Your Company’s Documents

Once you have all of your information organized, you should be prepared to answer your investors’ questions. These questions include, but are not limited to:

• Do you have an organizational chart?
• Do you have an online data room?
• What is in your disclosure schedule?

How Fidelity Makes Storing and Sharing Information Easy

If you have been a conscientious Fidelity-er, due diligence processes are easy and—dare we say—downright fun! All that you have to do is invite your third party entity, or your investor, to your Fidelity account and set their account to “Diligence Mode.” Then, you can regulate what permissions you grant them, to make sure that you are sharing all of the appropriate documents (and nothing else) in Fidelity. To read more about the advantages of having an organized Data Room, check out this blog post.

Please note that this article is NOT a comprehensive list of all documents required in a due diligence process. Before making any business decision, you should consult a professional who can advise you based on your individual situation.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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