COMPANY DUE DILIGENCE FOR STARTUPS : A STEP BY STEP GUIDE

It is not for the faint of heart to start a business. However, if you are ready to transform your idea into a reality, entrepreneurship is a thrilling journey that will alter your life for the better. From overcoming obstacles to finding your first client and actively managing risk, we’ve got you covered. Starting a business and being an entrepreneur are both exhilarating and terrifying experiences. After you leave your full-time job, you will confront some typical challenges that all entrepreneurs face, the most prominent of which are insecurity, stress, and isolation. The capacity to handle risk is one of the most critical lessons a successful entrepreneur has learnt. The capacity to handle risk is what distinguishes an entrepreneur with an idea from one who really turns it into a business.The greatest danger that each company faces is running out of funds or available financing. Entrepreneurs must persistently focus on cost control and risk management.

There is one more barrier before the money is in the bank for the best start-ups and entrepreneurs who manage to lure the investor of their dreams and survive the term sheet negotiation. This is the enigmatic and dreaded due diligence procedure, which has the potential to derail the entire transaction. In reality, it is nothing more than a last integrity check on the entire organisation and team.

What is due diligence?

The term “due diligence” simply refers to the study process that is carried out before to making an investment. It usually entails looking into a person or persons, a company, or a market.

Some entrepreneurs prepare very little for due diligence, assuming that all of the talking has already been done and that the company plan and results to date tell the correct storey. Others plan intensive training sessions for the squad. The investment process will most likely be stopped if there are conflicts within the team, differing perspectives on the plan, or indications of lacking processes and tools. Full disclosure and no surprises before or after the commitment are the main themes for a successful due diligence.

Startup equity investments suggest a long-term commercial engagement that typically lasts five years. Because there is no public market for the shares at that time, it is extremely difficult for either party to get out of the arrangement, and company divorces almost always result in bankruptcy. It’s worth your time to put in a little more effort here to make this phase a win-win situation for both parties.

Why due diligence is done?

As an investor, you want to know that the money you put into a business will be used to carry out the plan outlined in the company’s business plan, investor presentation, and so on. Some start-up, early-stage, and even existing businesses fail for causes beyond the control of the business owners. These terrible events are frequently the result of a sector crash or a broader economic downturn.

This is why due diligence is performed. So that you, the investor, can obtain all of the facts and information you need to assess whether or not the product, service, or endeavour in which you are investing is a good investment before you part with your money.

Although investing online through an equity crowdfunding platform is still a relatively new procedure, investors of all types, from new business angels to experienced angels, as well as those in networks, have discovered methods to use the web to do their own due diligence.

The guide to online due diligence investigations:

There are several ways to do this. Due diligence, like financing, is crowdsourced on an equity crowdfunding platform.

The director double-checks Prior to listing, the proprietors of a business seeking equity financing must undergo a director check. This is a background check on the individuals rather than the company. The main reason for this is that in many situations, the company isn’t up and running yet, or if it is, it hasn’t been active for very long.

Then you can get a business overview: meet the team and download documents like their business strategy, investor presentation, and financial outlook.

Do it in person. Contact the business owner, or organise a Skype or phone call, or send an email to the business owner. If you’re making a substantial investment, you might want to set up a face-to-face meeting.

Due Diligence Process :

• Description: For your convenience, here is a concise description of the major factors that most investors consider during the due diligence process
• Competitive landscape: They compile a list of local and worldwide firms in the same or similar industry and gather as much information as feasible.
• Exit potential: There is also a list of potential acquirers and a description of why they might buy a company like this.
• Founder’s pre-nuptial: The parameters of co-working arrangements should be documented by the founders. Verbal agreements or improper drafting of these arrangements can cause a great deal of disruption for the firm. If at all possible, ask the founders to sign non-disclosure and non-compete agreements in the event of a break-up.

• Employee contracts: Employment, non-disclosure, and non-compete agreements must be signed by all part-time and full-time employees. If there are any non-local employees, their legal employment status must be signed.
• Existing obligations: Founders must identify all existing liabilities, including options granted and/or notes issued to third parties. Get them to sign a contract.
• Licensing contracts: If the entire technology or a portion of the technology is licenced from a third party, the terms and restrictions of use should be adequately recorded.

Checklists for due diligence:

• The Memorandum and Articles of Association should be kept up to date to reflect all modifications made during previous investment rounds.
• All previous board and shareholder meetings’ minutes should be current.
• All existing/previous/threatened legal issues, litigation, arbitration, or judgment/s should be listed (certified copy). A declaration/guarantee from the founders that the information presented is correct to the best of their knowledge is also useful.
• Information on all patent, trademark, and copyright applications (pending and/or granted).

What does due diligence mean in financial performance?

• The Memorandum and Articles of Association should be kept up to date to reflect all modifications made during previous investment rounds.

• All previous board and shareholder meetings’ minutes should be current.
• All existing/previous/threatened legal issues, litigation, arbitration, or judgment/s should be listed (certified copy). A declaration/guarantee from the founders that the information presented is correct to the best of their knowledge is also useful.
• Information on all patent, trademark, and copyright applications (pending and/or granted). Ensure that the company has filed all its tax and annual returns with relevant authorities. Get copies of tax assessment notices.
• Carefully look for related party transactions and ensure that they were conducted at arms.
• Go through the list of fixed assets and verify material items. If there are huge intangible assets capitalized in the balance sheet, make sure that they are valued realistically.