If your startup is successful in securing a term sheet from a VC (congrats!), you must keep in mind that there is still some way to go before money is in the bank. After signing the term sheet, the due diligence process will run in parallel with the preparation of the final legal docs (articles of association, shareholders agreement and employment agreement for the founders). The full process can last from two to four weeks, depending on the availability of the information and response times.
Due diligence has the reputation of a time consuming process but can actually run smoothly when the team is well prepared. More importantly, a due diligence process done right can set the foundations of a long-term partnership on the basis of transparency and trust while the experience can prove useful in future rounds.
So how much preparation is required? The investors will look at the financial / accounting and legal good standing of the company as well as the technical aspects relevant to the product, technology and business model. The list provided in this document is an attempt to gauge the scope of the accounting / finance and legal due diligence by outlining the main requirements for seed stage investments and providing the investor’s rationale behind each request.
The set of docs required might seem extensive, but the process is not as complex as it looks. At a high level, the investor primarily wants to ensure they are not getting involved in any type of legal or accounting issues that may hinder the company’s development in the future. Keep in mind that some of the requirements might not apply depending on the company stage. In some cases, the due diligence process can serve as an opportunity to level up your corporate governance practice.
Here at Marathon Venture Capital we treat due diligence as an opportunity to help founders build a better company. We perform the process trying to address any issues early enough, while respecting a startup’s ultimate asset, i.e. founders time. We hope that these guidelines will help founders get a better understanding of the process and its underlying rationale, towards the efficient completion of an investment.