Startup Funding 101: Preparing for the Due Diligence Process

Once a potential investor is convinced about your team and business plan, they will want to perform a due diligence of your startup. Startups seeking funding must be fully prepared with all the necessary documentation related to taxes and statutory compliance, governance, regulatory compliances, Intellectual Property (IP), and other business & financial information to ensure there are no last-minute surprises in the due diligence process. In our experience, we have seen multiple transactions being called off due to misleading or incorrect disclosures by the startup founder(s)/management to the investor.

Below is a checklist of all the necessary documentation that you, the startup founder(s) must have in place to ease the due diligence process.

  1. Taxes and Statutory Compliance: Your startup must ensure that all tax declarations and statutory compliances are in order, and copies of all the policies and procedures are readily available.
  2. Governance: You must also ensure that all documents related to its formation and history are readily available to the investor. This includes Articles of Incorporation, annual reports, contracts and commitments, an organizational chart, shareholder structure, and minutes of important meetings of the shareholders or board of directors.
  3. Regulatory Aspects: Startup work and operations cannot be endangered by any regulatory compliance issues. Any pending legal issues must be assessed to ensure it will not pause or stop operations. This is important at all times, but more so during due-diligence as the investor needs to assess the potential liability (risk) due to non-compliances while making an investment in the startup.
  4. Financial Information: The startup must ensure a well-kept book of accounts as potential investors will require financial statements, balance sheets, and a detailed list of customer agreements, vendor agreements and any contingent liabilities.
  5. Intellectual Property: This is a critical requirement in the due diligence process, and we have seen cases of IP breaches that have resulted in cancellation of transactions with potential investors. The startup must ensure that all trademarks, patents and digital domains are registered, and that is it not infringing on any third-party IP.

Getting the investment you need with the right conditions can mean the difference between success and failure for your startup. As a startup founder, it is important to have a clear vision for your business in the short and long term, and a very good handle on the target market. Besides this, it is always a good practice to organize your startup with the required procedures and documentation that will be required while seeking investment opportunities.

FinAKS has worked extensively with investors and VC funds to perform due diligence of target companies, and we understand what it takes to ensure a well-executed due diligence process. Talk to us for more information on startup funding.

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