2. Due Diligence: Agenda
• Due Diligence Process
• Be prepared
• Critical documents
• Management team
• Marketing plans
• Revenue
• Yes/No questions
• Deal Breakers
• Additional topics
• Due Diligence Checklist
• Due Diligence Tips
3. Due Diligence Process
• Primary objectives
• Mitigate risk
• Understand the company and its business
• Determine the suitability of the investment
• Uses the same information used to build the
business plan
• An opportunity to develop mutual trust
• Beneficial and time-consuming
4. Due Diligence Process: Be Prepared
• Create organized information gathering and storing
processes from Day 1 of the firm
Digitize all critical documents
Develop a secure, organized system for filing paper copies
Create an electronic “due diligence room”
Develop a backup and disaster recovery plan
• Start due diligence process long before you talk to the
first investor
• Ask local angel groups for their due diligence checklist
and documents
• Seek advice
Ask local angels what they expect from due diligence
Go to a business incubator and ask for help
Talk to your attorney, accountant, or CPA
5. Due Diligence Process: Critical Documents
• All legal documents
• Articles of incorporation
• Contracts
• Employment contracts
• NDA
• Non-competes
• Stock Option Plan
• SEC documents
• Leases—PP&E
• Financial Documents
• Historical/YTD actual and Plan
• Payables
• Cap Table
• Current, projected to exit
• Match capital requirements to critical milestones
• Technology and IP Protection
• Patents—applications/granted
• Licenses
6. Due Diligence Process: Management Team
• Management CVs
• Management Compensation Structure
• Personal, professional, financial references
• Bosses/peers/subordinates
• Investors will collect information from names you don’t
supply
• Education/degree verification
• Perform an Internet search on every manager
• Review Facebook, LinkedIn, any other social media
sites
• Expect background checks
7. Due Diligence Process: Marketing Plans
• Fully developed go-to-market strategy and
marketing plan
• Business Partners Assessment
• Strategy importance
• Contact information
• Competition
• Communications/PR/advertising plans and
commitments
8. Due Diligence Process: Revenue
• Growth assumptions
• Customer information—Dive deep!
• #/time period
• Customer list/pipeline report
• Sales funnel analysis
• Distribution channels
Internal/external
Training
Degree of readiness
Lead generation, prioritization
9. Due Diligence Process: Revenue (cont.)
• How do you and your investors make money?
• Cost of acquiring a customer
• Pricing strategy
• Exit strategy
10. Due Diligence Process: Yes/No
Questions
• Do you have past, pending or foreseeable legal
action?
• Have any principals been involved in personal or
business bankruptcy?
• Are there hostile relationships with any
shareholder?
• Do you have professional liability insurance?
• Have any employees been involuntarily
terminated?
• Have any employees left the company on any basis
other than amicably?
11. Due Diligence: Deal Breakers
• Concerns of ethics or character
• Receiving conflicting information from the entrepreneur
• Prior bankruptcy
• Prior arrests or convictions
• Naïve or inexperienced entrepreneur
• Negotiating style
• Not coachable
• Reluctant to hire missing expertise
• Issues with intellectual property—patents, licenses,
ownership
• Harmful pre-existing agreements with employees,
vendors, partners, or shareholders
12. Due Diligence: Deal Breakers (contd.)
• Entrepreneur unwilling to invest his/her own money
or accept below market salary
• Using new capital to pay off current liabilities
• Valuation that is beyond norms
• Unacceptable terms
• Insisting on a non-disclosure agreement—investors
don’t sign them
• Complex shareholder agreements
• A business plan that doesn’t scale
• Competition that is too far out in front
• Something about the deal “doesn’t feel right”
13. Due Diligence: Additional Topics
• Board of Directors—background and contact
information
• Technology and IP assessment
14. Due Diligence Checklist
1. Table of Contents
2. Executive Summary
3. Corporate Documents
1. Form of Incorporation and where registered
2. Articles
3. Bylaws
4. Operating Agreement (if relevant)
4. Management: Founders, Officers, and Key
Employees
1. Resumes and references with full contact
information
2. Employment agreements
3. Board members
4. Advisory board members
5. Legal counsel, accounting firm, etc.
5. Technology/Product
1. Intellectual Property documents
1. Patents or Filings and status
2. Copyrights
3. Trade Marks
4. Trade Secrets
5. Technology/Product-Intellectual Property
Documents (cont.)
1. License Agreement
2. Prototype/Product
3. Basic description/drawings/schematics
4. Bill of materials
5. Supplier/vendor/partner agreements
6. Development timeline/schedule/milestones
6. Market
1. Market analysis (North America and Global)
2. Segment analysis
3. Channels
4. Competitor analysis
7. Customer
1. Existing or potential customer contacts
2. Customer contracts/software licensing
agreements
3. Customer comments
4. Product literature
8. Financials
5. Income statement, P&L by month for 24
months b.
6. Quarterly for next 3 years
7. Balance sheet
8. Capitalization Table
9. Subscription Agreements
10. Principal assumptions
9. Full business plan/Offering Memorandum
10. Investor Presentaiton
15. Due Diligence: Tips
• Anticipate and prepare for due diligence process from
Day 1
• People get funded, not business plans
• Follow the intent and letter of the law
• Be open and honest
• Increase the level of trust between entrepreneur and
investor with each interaction
• Keep assumptions in line with typical industry standards
• Be up front about risks and weaknesses
• Don’t put off the term sheet until the end; why do all the
diligence if there’s a deal-breaker in the terms?
• When an investor asks, be ready and move quickly to
respond before they lose interest