Got a green signal from a Venture Capitalist? Here is the list of startup due diligence checklist for raising venture capital funding during startup due diligence process. This is also the same as angel investor due diligence checklist. Due Diligence Checklist is the extensive amount of information that venture capital firms are going to require in order to “just consider” funding your capital request. Until all the due diligence documents are proper, you cannot expect money in your bank.
Startup Due Diligence Checklist :
[Note: “Startup Due Diligence Checklist” is also referred as “VC Due Diligence Checklist” ]:
Startup Due Diligence Checklist #1.
- Articles of Incorporation
- Bylaws and operating agreements
- Shareholder agreements
- Minutes of Board of Directors and Shareholder meetings
- All documents furnished to shareholders and directors
- Certificates from all states and jurisdictions where the company does business
Startup Due Diligence Checklist #2.
Previous Securities Issuance:
- Copies of stock certificates, warrants and option agreements
- Complete Stockholder contact information
- Number of outstanding shares, dates of issuance, and percent ownership
- All outstanding preferred stock, including covenants
- All outstanding options, warrants or convertible securities
- Employee stock benefit programs; stock options, stock purchases or others
Startup Due Diligence Checklist #3.
- Audited financial statements since inception
- Income statements, balance sheets, cash flow statements
- Records of all changes in equity position
- Accounting methods and practices
- Company prepared monthly or quarterly statements
- A three-year budget and financial projections
- A complete and current business plan
- Accounts receivable aging and accounts payable aging
- Product or service pricing plans and policies
- Revenue and gross margins by product or service
- Extraordinary income or expense details
- Explanation of any material write-downs or write-offs
- A summary of all bad debt experiences
- Details of any outstanding contingent liabilities
- Accountant report on the company’s financial condition
Startup Due Diligence Checklist #4.
- Federal and state income tax returns for the last three years
- Detail of any tax audits
Startup Due Diligence Checklist #5.
Contracts and Agreements:
- List of Bank and non-Bank lenders
- Joint venture and partnership agreements
- License agreements
- Purchase agreements
- Liens, equipment leases, mortgages or any other outstanding loans
- Insurance contracts and agreements
- Contracts with suppliers, vendors and customers
- Any additional agreements or contracts relevant to the business of the company
Startup Due Diligence Checklist #6.
- Copies of all permits and licenses
- Copies of reports made to government agencies
- Detail of any inquiries made by any local, state or federal agencies
Startup Due Diligence Checklist #7.
- Description of any current litigation including potential damages
- Description of any potential litigation including potential damages
- Settlement documentation
Startup Due Diligence Checklist #8.
Products and Services:
- Detail of product offering including market share by product line
- Inventory analysis including turnover, obsolescence and valuation policies
- Backlog analysis by product line including analysis of seasonal issues
- List of all major suppliers including dollar amount purchased per year
Startup Due Diligence Checklist #9.
- List of competitors and detail of market share
- List of major clients
- Analysis of pricing strategy
- Current brochures and marketing materials
- Sales commission structure
- Sales projections by product line
- Any pertinent marketing studies conducted by outside parties
Startup Due Diligence Checklist #10.
Management and Personnel:
- Management organizational chart and bios of senior personnel
- Detail of any labor disputes
- Employee compensation plans including pension, options, profit sharing, deferred compensation and retirement
- Management incentive plans including pension, option, profit sharing, deferred compensation, retirement and any non-cash compensation
- Employee confidentiality Agreements
- Listing of any consulting Agreements
- Number of employees, turnover, absentee problems and hiring projections
- Employee HR, benefits, and insurance manuals
- List of Company’s Directors
- Investigation report on all principals, managers, and directors
- Credit history report on all principals, managers, and directors
- Resume verification on all principals, managers, and directors
Startup Due Diligence Checklist #11.
Property and Equipment:
- An appraisal of all equipment and fixed assets
- List of all real property owned by the company
- Copies of titles, mortgages, and deeds of trust
- Detail of any easements or other encumbrances
- Leases and sub-leases
- Company space expansion plans
- Patents, trademarks and other intangible assets
Startup Due Diligence Checklist #12.
Research & Development:
- Detail all research and development in progress
- Commercial analysis of R&D efforts
- Documentation policies including examples
Startup Due Diligence Checklist #13.
Other Company Information:
- Copies of all past and planned company press releases
- Existing articles relating to the company and its industry
- Company newsletters and any investor relations material
Startup Due Diligence Checklist #14.
The Kitchen Sink:
- Any other information that might be pertinent to full disclosure of all company issues
The above ones are the startup due diligence checklist for VC funding.
The investment process begins with the venture capitalist conducting an initial review of the proposal to determine if it fits with the firm’s investment criteria. If so, a meeting will be arranged with the entrepreneur/management team to discuss the business plan. Then the startup due diligence process begins.
Preliminary Screening – In the initial meeting both venture capitalist and entrepreneur(s) along with key members of the management team sit together to review the business plan and conduct initial due diligence on the project. It is an important time for the management team to demonstrate their understanding of their business and ability to achieve the strategies outlined in the plan. The venture capitalist will look carefully at the team’s functional skills and backgrounds.
Negotiating Investment – This involves an agreement between the venture capitalist and management of the terms of the term sheet, often called memorandum of understanding (MoU). The venture capitalist will then proceed to learn and understand the viability of the market to estimate its potential. Often they use market forecasts which have been independently prepared by industry experts who specialise in estimating the size and growth rates of markets and market segments.
During the due diligence process, the venture capitalist takes time to study your industry vertical carefully to get clear information about your competitors, entry barriers, future potential to exploit substantial niches, product life cycles, and distribution channels. The due diligence process may continue with reports from other consultants too.
Approvals and Investment Completed – The process involves due diligence and disclosure of all relevant business information. Final terms can then be negotiated and an investment proposal is typically submitted to the venture capital fund’s board of directors. If approved, legal documents are prepared.
The investment process can take up to two months, and sometimes longer. It is important therefore not to expect a speedy response.