Due Diligence Preparation for Investment: Getting Investor-Ready

Preparing for Investment Due Diligence

Getting investor-ready and accelerating the funding process. **Due diligence overview** Definition: - Process where investors thoroughly review company before investing - Scope: Financial, legal, commercial, operational - Duration: 4-12 weeks typical - Cost to company: Management time, legal/accounting prep Why investors do due diligence: - Validate numbers (revenue, growth, unit economics accurate?) - Assess risk (legal issues? IP problems? Customer concentration?) - Understand team (capable of executing plan?) - Plan integration (post-investment planning) Impact on timeline: - Well-prepared company: 4-6 weeks due diligence - Poorly prepared: 12+ weeks (request documents, delays) - Difference: 6-8 weeks (can miss fundraising window) **Due diligence areas and documents** Area 1: Financial Required documents: - Audited/reviewed financial statements (last 2 years) - Tax returns (last 3 years) - Monthly management accounts (last 12 months) - Revenue schedule (by customer, shows concentration) - Cap table (who owns what %) - Capitalization history (funding rounds, terms) - Cash flow projections (3-5 year plan) Questions investors ask: - Revenue: How much? Growing? Recurring or one-time? - Unit economics: Gross margin? CAC? LTV? Payback? - Burn rate: How long is runway? Any profitability path? - Cash: How much in bank? Any debt? Debt covenants? Area 2: Legal Required documents: - Articles of incorporation (founding docs) - Cap table (shareholders, shares held, vesting) - Equity agreements (all stock option plans, awards) - Customer contracts (sample, major contracts, terms) - Vendor contracts (key suppliers, commitments) - Employment agreements (key employees, restrictions) - IP assignment agreements (employees assigned IP to company) - Litigation history (any lawsuits? Any potential issues?) - Regulatory compliance (licenses, permits required) Questions: - IP: Do we own all technology? (or licensed?) - Contracts: Any unfavorable terms? Termination rights? - Employment: Any non-competes? Confidentiality agreements? - Litigation: Any lawsuits? Employment claims? Patent disputes? Area 3: Commercial Required documents: - Customer list (names, contract values, signing dates) - Customer contracts (top 10-20, representative of terms) - Pricing model (how do we charge? What's the contract length?) - Product roadmap (what's next? How long to build?) - Competitive analysis (who are competitors? How do we win?) - Market analysis (TAM, SAM, SOM estimates) - Marketing materials (website, pitch deck, collateral) Questions: - Customers: Who are they? Are they sticky (low churn)? - Competition: Who else is doing this? How do we win? - Market: Is it big enough for venture investment? - Product: Is it differentiated? Defensible? Area 4: Operational Required documents: - Org chart (who reports to whom? Key roles filled?) - Employee agreements (all employees have signed agreements) - Equity grants (who has stock options? Vesting schedule?) - Board minutes (governance, decisions made) - Insurance (D&O insurance, general liability, etc.) - Internal controls (financial controls, approval processes) - Technology stack (what tools do we use? Licenses?) Questions: - Team: Can they execute? Do they stay (vesting locks people in)? - Governance: Is board independent? Any issues? - Controls: Is financial reporting reliable? **Data room setup** What is a data room? - Central repository (cloud-based, encrypted) - All company documents organized - Controlled access (investors can view, tracked) - Indexed (easy to find things) Setup process: Phase 1: Gather documents (weeks 1-4) - Assign ownership (who is responsible for each section?) - Create templates (for any missing docs) - Collect from departments (legal, finance, ops) - Scan paper documents - Organize into folders Phase 2: Organize (week 4-6) - Create folder structure (Financial, Legal, Commercial, Operational) - Index (list of all documents, descriptions) - Quality check (no sensitive info, accurate) - Test access (can investors find things easily?) Phase 3: Monitor (weeks 6+) - Track access (who viewed what? How long did they look?) - Answer questions (when investors request clarification) - Update documents (if anything changes, update) - Provide additional docs (if requested by investors) Typical data room structure: ``` Financial - Audited financial statements - Tax returns - Monthly P&Ls - Revenue schedules - Cap table - Debt documents Legal - Articles of incorporation - Equity agreements - Customer contracts - Vendor contracts - Employment agreements - IP assignments Commercial - Customer list - Market research - Product roadmap - Competitive analysis Operational - Org chart - Board minutes - Insurance policies - Employee list ``` **Due diligence timeline** 6 months before funding close Actions: - Meet with legal counsel (what documents needed?) - Audit prep (if doing first audit, start now) - Financial review (clean up books, reconcile accounts) - Customer contracts (collect from sales, scan) - Create cap table (if don't have, create now) Deliverables by month end: - Due diligence checklist (what needs to happen) - Timeline (when will each doc be ready?) - Ownership (who is responsible?) 3 months before Actions: - Finalize cap table (all equity documented, all grants) - Gather all contracts (customer, vendor, employment) - Complete audit (if required) - Prepare revenue schedule (by customer, shows concentration) - Create management team bios (investors want to know who you are) Deliverables: - Preliminary data room set up (80% of docs ready) - Investor presentation deck (pitch materials) - Financial summary (highlights of numbers) 1 month before Actions: - Final data room review (all docs in, quality check) - Prepare for initial questions (pre-answer FAQs) - Legal review (any issues to address?) - Management availability (block calendar for investor meetings/calls) Deliverables: - Complete data room - Executive summary (business overview) - Financial fact sheet (key numbers, trends) During due diligence Actions: - Investor calls (answer financial questions) - Reference calls (customers, partners willing to speak) - Site visit (investors may want to visit) - Technical demo (product walkthrough) - Rapid response (answer document requests same day if possible) Typical questions: - Revenue: "Can you show contract with Customer X?" - Growth: "What changed month-to-month?" - Unit economics: "What's your CAC and LTV?" - Churn: "Why did customers leave?" - Burn: "When will you be profitable?" **Common due diligence issues** Issue 1: Disorganized cap table Problem: - No clear record of who owns what - Different cap table versions (old ones floating around) - Equity grants not documented Impact: - Investors unsure of ownership - Potential legal issues (e.g., employee claims equity) - Delays closing (need to clarify ownership) Fix: - Create single cap table (source of truth) - Update with all equity transactions (grants, buybacks, vesting) - Legal review (ensure all properly documented) - Communicate to team (everyone knows their equity) Issue 2: Revenue concentration Problem: - 50%+ of revenue from 1-2 customers - Big customers may not renew (high risk) Impact: - Investor concern (loss of one customer = major problem) - Valuation discount (less stable = lower valuation) - May need to improve before fund closes Fix: - Diversify (focus on new customer acquisition) - Long-term contracts (lock in customers) - Expand existing (grow revenue from each customer) Issue 3: Missing IP assignments Problem: - Employees developed IP, but not assigned to company - Company doesn't own technology Impact: - Critical (can't sell product legally) - Deal-breaker for investors - Must be fixed before closing Fix: - Get IP assignment agreements (from all past employees) - Establish process (all future employees assign IP) - Document (prove company ownership) Issue 4: Unprofitable unit economics Problem: - CAC > LTV (losing money on each customer) - Unsustainable growth model Impact: - Investor concern (business not viable?) - May require explaining path to profitability Fix: - Calculate correct CAC and LTV (make sure metrics right) - Explain plan (how will you improve?) - Show progression (unit economics improving over time?) **Timeline and resource planning** Preparation phases: Phase 1 (Months 1-2): Foundation - Assign due diligence lead (someone owns the process) - Create checklist (all documents needed) - Assess gaps (what's missing?) - Assign responsibility (who will collect each doc?) Phase 2 (Months 3-4): Collection - Gather documents (from all departments) - Create missing docs (policies, org charts, etc.) - Scan/digitize (all documents in one place) - Quality check (clean, accurate, complete) Phase 3 (Months 5-6): Organization - Set up data room (folder structure, indexing) - Practice access (can you find documents easily?) - Create navigation guide (help investors understand structure) - Prepare FAQs (common investor questions, pre-answered) Phase 4 (Months 7+): Response - Investor access (data room live) - Answer questions (rapid turnaround) - Provide additional docs (as requested) - Manage timelines (keep things moving) **Key success factors** Factor 1: Start early - 6 months before is not too early - Last-minute scramble loses deals - Early start = confident investors Factor 2: Be organized - Single source of truth (cap table, contracts, financials) - Easy to navigate - Nothing surprising (investors have all info upfront) Factor 3: Be responsive - Answer questions quickly (same day if possible) - Proactive communication (update investors on progress) - Address issues head-on (don't hide problems) Factor 4: Be honest - Acknowledge weaknesses (customer concentration, burn rate, etc.) - Have plans to address (not just problems, but solutions) - Transparency builds trust (better outcomes)