By: Eric H. Milliken, San Francisco Business Attorney
Table of Contents
- What is Due Diligence?
- Why is Due Diligence Important?
- Investors Due Diligence
- Investors Due Diligence Checklist:
What is Due Diligence?
Due diligence is the process of gathering and analyzing information about a potential investment opportunity.
This information can include financial statements, market data, legal documents, and other relevant information.
The goal of due diligence is to assess the potential risks and rewards of the investment and to ensure that the investment is a good fit for the investor.
Why is Due Diligence Important?
Due diligence is important for several reasons.
1- First, it helps investors make informed decisions.
By gathering and analyzing information about a potential investment opportunity, investors can assess the potential risks and rewards of the investment.
This information can help investors make a more informed decision about whether to invest in the opportunity or not.
2- Second, due diligence can help investors avoid costly mistakes.
By conducting due diligence, investors can identify potential red flags or warning signs that may indicate that the investment is not a good fit.
For example, if an investor discovers that a company has a history of financial mismanagement or legal issues, they may choose to avoid investing in that company.
3- Third, due diligence can help investors negotiate better terms.
By gathering information about a potential investment opportunity, investors can identify areas where they may be able to negotiate better terms or conditions.
For example, if an investor discovers that a company has a high level of debt, they may be able to negotiate a lower purchase price or better financing terms.
Investors Due Diligence
Business is going well, it’s going really well.
Your clever idea is building into a workable business model.
Now that you have proven yourself with actual revenue, you have the attention of investors. After winning and dining, an investor gives you an offer and a list of requirements long enough to make the average person’s head spin.
An investor is going to do their due diligence.
They are not going to give you a check without making sure YOU and your Company are a good investment.
An investor is going to want to see your financials, proof of corporate compliance, and corporate structure.
This can be quite daunting for a larger established corporation; however, if you are just starting out, things may be simple. Here is a list of some of the due diligence an investor may want to see
Investors Due Diligence Checklist:
- Corporate documentation of good standing from the state you incorporated in
- Proof of license to do business in every state in which you have risk exposure
- Copies of any commercial leases or mortgages
- Company’s articles or certificate of incorporation
- Bylaws or operating agreement
- Any equity holders’ agreements
- Voting agreements
- Voting trust agreements
- Joint venture agreements
- Registration rights agreements
- Agreements or documents relating to the organization
- Management structural chart
- Intellectual Property Rights (IE that the company owns the IP)
- Any other debts or obligations that would affect the company’s value
These are just a few of the corporate documents that investors will want to see before handing over a check.
So many start-ups think they can ignore their quarterly and yearly meetings—but keeping your corporate books in order is an ongoing process.
The last thing you want is to ask the person with a check to wait while you get your corporate books up to date.
If you have any questions you should contact a San Francisco Business Attorney for assistance.
Contact Sutter Law Business Legal firm for a free consultation
