You have successfully secured seed and angel rounds and passed through the Idea and POC stage of your startup. Now the company is growing quickly and you will be approaching investors for Series A funding very soon. Larger the fund size, the deeper the due diligence process.
Fundraising for Series A and beyond requires meticulous planning and often the senior leadership of growth-stage companies has to leave the day-to-day business and focus only on preparation for a fundraiser. The due diligence process for larger fund raises can extend up to 6 months depending upon the complexity and you will lose critical time and value of your company if you don’t prepare for it well.
We have compiled an extensive due diligence list across various categories to enable the company to prepare for the next fundraiser. The list has been prepared based on our experience of working with more than 20 transactions and supporting entrepreneurs during their journey.
The list is extensive but not exhaustive and there will be additional requirements based on the industry.
You can download a ready to use excel template using the link https://spiceroutefinance.com/insight/due-diligence-checklist/
The leadership team should consider preparing and organizing themselves with the below to make the fundraising process as smooth as possible.
PART I
1. Basic Company Documents and History
Board Resolutions and Reports – All signed resolutions (including written consents) of or reports prepared for the Board of Directors or any comparable governing body of the Company, as applicable, and any of their respective committees, including copies of any written notices or waivers thereof.
Shareholder Minutes – Minutes of all meetings and all signed resolutions (including written consents) of the shareholders, members, or partners of the Company, as applicable, including copies of any written notices or waivers thereof.
Press Releases – For the past three years, all news or press releases issued by or concerning the Company.
Officers and Directors – List of current directors and officers of the Company (including name, age, position, and length of service), together with current salaries and bonuses
Organizational Charts – Internal operational manuals and organization charts.
Affiliations – Summary of business and personal relationships and affiliations among directors, officers, shareholders, creditors, customers, suppliers, and other business affiliates.
Communications with Shareholders – All reports and any other communications to stockholders.
2. Share Capital
Stockholders or Members – List of current stockholders or members of the Company, as applicable.
Books and Ledgers – Stock books and/or ledgers of the Company.
Options – Schedule of outstanding options, warrants, or any other contracts, commitments, agreements, or promises, oral or written, with respect to the issuance of, subscription for, purchase of, or sale or transfer of, any securities of the Company (including, where applicable, grantee, dates of issuance, exercise price, vesting term, duration, etc.
Capitalization Table – List of authorized, issued, and outstanding securities of the Company (by type of security and on an as-converted basis, including stockholder names, stockholder tax identification numbers, dates of issuances, consideration received, number of vested and unvested shares and vesting schedules). Indicate if the vesting of any such securities will accelerate a merger or change in control of the Company.
Other Securities – Copies of all other convertible securities of the Company.
Encumbrances – Details of any charges or other encumbrances or claims relating to any securities of the Company.
Certain Agreements – Voting agreements, voting trusts, redemption agreements, stockholder agreements, registration rights agreements, restrictive agreements, stock purchase, and repurchase agreements, stock restriction agreements, and other similar agreements, contracts, or commitments to which the Company or any of its directors, officers and/or stockholders is a party.
3. Loans & Borrowings
Borrowings Documents and agreements evidencing borrowings, whether secured or unsecured or other indebtedness (long-term or short-term), including indentures, credit or loan agreements, debentures, commitment letters, letters of credit, etc., relating to any outstanding or available long-term or short-term debt, including amendments thereto and any related instruments granting security interests.
Debt Schedule Debt schedule identifying all short-term and long-term debt and capital lease obligations with principal amounts, interest rates, balances outstanding, and maturity dates.
Financing Arrangements Documents and agreements evidencing other material financing arrangements, installment purchases, etc.
Investor Financing All documents relating to financings with investors, including any accredited investor questionnaires, if applicable.
Financing Statements List and copies of all financing statements currently in effect.
Liens and Encumbrances Schedule of liens and encumbrances against any of the Company’s assets or stock (whether or not of public record).
Sureties Documents and agreements evidencing surety and other bond arrangements.
Company Loans List and documentation of all loans made by the Company, including loans to officers, directors, and employees.
Correspondence with Lenders Correspondence with the Company’s lenders regarding any default or alleged default.
4. Contracts & Litigations
a. Contracts
Copies and details (and to the extent oral, written summaries) of all material contracts and all capital commitments of the Company, including without limitation:
Customer Contracts – All agreements with customers currently in effect or under consideration and a schedule of major customers for each product line, giving annual dollar amounts sold (indicate if any are requirements contracts).
Distributor Agreements – All agreements with distributors or sales representatives regarding the sale of the Company’s products or services.
Operational Contracts – All agreements with dealers, suppliers, and service providers.
Development Contracts and Joint Venture Agreements – All agreements entered into out of the ordinary course of business, including consulting, development, capital commitments, technology sharing, cooperation, joint research, and joint venture agreements.
Affiliates – All contracts, arrangements, plans, and understandings to which any director, officer, shareholder, partner, or other affiliates of the Company, or any affiliate of the foregoing, on the one hand, and the Company, on the other hand, are parties, including loans and guarantees.
Employee Agreements – All employment contracts with management and other employees; deferred compensation agreements, severance agreements, settlement agreements, consulting agreements, or any other agreements with any independent contractor or consultant (including information as to whether the consultant was previously an employee), and similar agreements; all non-competition agreements, non-solicitation agreements, non-piracy agreements, non-disclosure agreements, agreements containing restrictive covenants and similar agreements addressing the Company’s rights to inventions or other intellectual property; all indemnification agreements with employees, former employees or consultants, and similar agreements; all employee or supervisor handbooks or manuals and similar agreements; and all conflicts of interest or ethics codes or policies and similar materials.
Non-Competition and Confidentiality Agreements – Copies of all non-competition agreements, non-solicitation agreements, non-piracy agreements, secrecy agreements, non-disclosure agreements, and standstill agreements to which the Company is a party.
Service Agreements – Copies of all services agreements
Standard Forms – Standard forms of customer agreements, distributor agreements, sales representative agreements, employment agreements, licensing agreements, leases, reseller agreements, dealer agreements, purchase orders, and sales orders used in connection with purchases, licensing, sales, and leases.
Government Contracts – All government contracts, samples of subcontracting forms, affirmative action plans, and supporting data.
Guarantees or Indemnifications – All guarantees of, and all indemnifications relating to, the Company’s obligations and all guarantees or indemnifications by the Company, any predecessor entity, or its officers, directors, or partners of the obligations of any other person or entity.
Consultants – List of all current consultants and independent contractors of the Company (including name, age, position, and length of service), together with current compensation.
b. Litigations
Current Litigation – Summaries of all litigation and dispute resolution; memoranda of all outstanding litigation and disputes and of all litigation or disputes settled or otherwise terminated, containing the following information: parties, venue, nature of the proceeding, date commenced, and amount of damages or other relief sought; and access to all pleadings on file regarding such litigation and relevant insurance coverage.
Contingent Liabilities – Summary of nature and amount of all unrecorded and contingent liabilities (including threatened claims and causes of action), warranty experience, product liability exposure, environmental contamination, employee problems, and material disputes with third parties; and copies of all relevant correspondence.
Legal Opinions – All opinions by counsel as to any pending litigation against the Company (including letters to auditors).
5. Fixed Assets
a. Tangible Properties
Real Property – Listing of all real estate owned, leased, subleased, or used:
State whether the property is owned or leased (whether as lessor or lessee) and list the entity or individual which holds the title or lease and describe the property, liens thereon, structures, lease provisions, use, and location.
Copies of all deeds, leases, mortgages, sales contracts, surveys, sublease contracts, appraisals, environmental studies, and with respect to leased properties, all notices of default under such leases and estoppel letters executed by the Company.
Leases – Copy of all leases, licenses, and similar agreements relating to real property, with all schedules and amendments thereto.
Reports and Policies – All title and appraisal reports and title insurance policies with respect to any properties or assets of the Company.
Other Leases – Copies of all leases to moveable property and personal property.
Asset Lists – Copies of all asset lists, including a list of all assets not located on real property owned or leased by the Company.
b. Intangible Properties
Trademarks – schedule of all foreign and domestic trademarks, service marks, logos, corporate names, trade names, and all applications to register (including intent-to-use applications), registrations, oppositions, cancellations, or other proceedings challenging the ownership or validity of the marks used by the Company.
Patents – schedule of all foreign and domestic patents, patent applications, inventions disclosures, and reexaminations, reissues, oppositions, or other proceedings challenging the ownership or validity in connection therewith.
Copyrights – schedule of all registered copyrights and applications for copyright registration, material unregistered copyrights (including rights in software and databases), and all proceedings challenging ownership or validity in connection therewith.
Relation of Patents to Products/Services – schedule showing the relationship of each identified patent right to the company’s products and services (e.g., which company products are covered by which company patents)
License Agreements – all agreements involving the transfer or right to use intellectual property rights to which the Company is a party, whether as licensor, sublicensor, licensee, or sublicensee, including research, product development, software (including open source code), distribution and/or marketing.
Company Policy for Registered IP – Company’s written policy and procedures for selecting, clearing, using, and protecting trademarks; for selecting patent disclosures for patent protection; for preparing and prosecuting patent applications; enforcing patent rights and avoiding infringement of the rights of others; and protecting copyrighted materials.
Confidentiality Agreements – confidentiality/non-disclosure agreements (or other agreements with non-disclosure terms) with employees and with any other persons, such as actual or potential consultants, developers, vendors, or customers, with respect to proprietary information.
Company Policy for Proprietary Information – The company’s written policy and procedures for protecting company confidential and trade secret information.
PART II
1. Financial Statements
a. Income Statement
Detailed historical monthly balance sheets, income statements, and cash flows for the last 3 years and the current YTD period (Please confirm that interim financial statements are prepared on the same basis as that used for the most recent audited statement. If not, what are the adjustments recorded or accounts reconciled only at year-end?).
Audited financial statements (if available) and management letters issued by auditors in respect of the audits.
Copy of the most recent business plan and/or budget.
Analysis of operating and general and administration expenses (and as a percentage of revenues) by significant category for the last three years and the current YTD period.
Monthly financial reporting packages distributed to senior management.
b. Related Party Transactions
Summary of sales or purchases, sales, and service arrangements to or from related parties including principal terms and whether at arm’s length (including inter-company receivables and payables balances). Include a description of services provided by/to related parties
2. Revenue & Customer Information
Orders, sales (in both INR & units), and gross margin by major product group, customer type, and by geographic region for the last three years and the current YTD period.
Description of non-recurring revenue (including large one-time orders), non-product revenue (royalty, licensing, trademark, or patent revenues), and unusual and extraordinary items for the last three years and the current YTD period.
Schedule showing firm order backlog, by product line as of the most current date and as of the comparable date in the preceding year (include estimated gross margin and expected sales timing of orders in backlog).
Top 10 customers ranked by sales for each of the last three years and current YTD period.
Listing of significant new customers and lost customers in the last three years.
3. Balance Sheet
For the last three years and the current YTD period, provide the following:
a. Cash
Bank reconciliations including bank statements for the current YTD period and previous three-year end periods.
Provide a listing of any restrictions on cash.
Accounts receivable
Accounts receivable aging analysis and trends for the last three years and the most recent available month.
History of allowance for doubtful accounts balance, bad debt expense and write-offs, and reserves for sales returns, discounts, rebates, refunds, and credit memos in the last three years and the current available month.
b. Inventory
Inventory balances by location, major product group, and type (raw materials, work in process, finished goods).
Summary of inventory write-offs and basis used to develop obsolete and slow-moving inventory reserves, including any history of sales and write-offs of obsolete/overstock inventory.
c. Manufacturing and Purchasing
Summary of locations and descriptions of subcontracted manufacturing facilities.
List of top 10 significant suppliers by purchase and detail of purchased supplies from each.
List of any production/sales made under license or royalty agreements.
d. Prepaid Expenses and Other Assets
Schedule of prepaid expenses and other long and short-term assets (including goodwill and intangibles and amortization criteria) including assessment of potential recovery.
e. Property & Equipment
Schedule of fixed assets including date acquired, original cost, accumulated depreciation, net book value, and recent appraised value.
List of capital expenditures (historical, current, planned for the next 3 years) separated by major category (e.g. machinery, MIS, buildings, etc.)
f. Accounts Payable and Accrued Liabilities
Accounts payable aging schedule and significant accrued expense accounts for the last three years and the most recent available month.
Details of customer deposits and any deferred revenues by type and customer for the last three years and the current YTD period.
Warranty expense and sales returns history (expense and reserves) for the last three years and a description of how the warranty and sales returns reserves were developed.
g. Contingencies and Litigation
Summary of pending, threatened, or asserted litigation claims and any legal accruals including contingent liabilities, product liability claims, and outstanding supplier claims.
h. Agreements
Joint venture, partnership, or trust agreements with respect to which the Company is a party.
4. Sales
Detailed sales organizational views by resources, territories, and accounts.
Orders and sales by a customer in each of the last 3 years.
Orders and sales by product in each of the last 3 years.
Orders and sales by geographical region in each of the last 3 years.
Orders and sales by vertical industry segment in each of the last 3 years.
Orders and sales in each of the last 3 years by incumbent customers versus new customers.
Orders and sales in each of the last 3 years for existing products versus new products.
Top 20 customers in each of the past 3 years, indicating per year sales and what products and services are composed.
Most current sales operations report, inclusive of activities, forecasts, and performance metrics.
Most current sales funnel and composition, today and 1 year ago by product, region, and industry segment.
Past 12-month won/loss analysis by region, product, and customer.
Discounting trend over past 3 years.
Currently pending POs.
Currently, open bids.
Top 10 forecasted opportunities for the next 12 months.
A detailed explanation of the sales compensation plan.
5. Outbound Marketing & Corporate Communications
Outbound marketing budget and expenditures for the past 3 years.
Most current marketing operations report, inclusive of activities, forecasts, and performance metrics.
PART III
1. R&D
a. Proprietary Technology
A detailed list of all patents, applications, trademarks, and copyrights.
List all previous/current legal and/or patent infringement situations (outbound and inbound).
List of all contractors and their contractual rights to IP ownership.
List of geographical patent protection issues.
All trademarks and proof of registration along with any history of infringement disputes/actions.
b. Existing and Former Products
Provide detailed product documentation that includes feature descriptions, architecture and design, technical performance specifications, and other relevant detail. Where applicable, give specific attention to the demonstrated capability of the product(s) or solution(s) – describe the characteristics of the largest product deployment.
List all current products and explain how long they have been available and what the evolution of features and timeline has been.
List all products that have been de-emphasized or discontinued in each of the past 3 years and explain the rationale for the action. Indicate if the former product was replaced by a newer product.
Provide a strengths/weaknesses table for each product from a technology and competitive viewpoint and indicate plans and timelines to address shortcomings where appropriate.
List all 3rd party and open-source dependencies and indicate IP right-to-use status.
c. Product Quality
Provide the previous 12 months of product defect and trouble ticket history by product, including arrival rate, closure rate, backlog 1 year ago, and current backlog.
d. Future Products and Features
Provide a current product development roadmap that also identifies in-process versus future efforts.
Provide a view of current development status versus planned status, identify delayed efforts, and provide explanations and countermeasures.
Indicate if any product development effort has been capitalized and if so what is the resulting P&L impact.
2. Human Resources
a. Executives
Copies of executive employment agreements, severance agreements, change in control agreements
Executive-only health benefits with a list of participants
Executives only disability benefits; list of participants
Executives’ special perquisites; list of participants
Deferred compensation summary plan document
List of participants and the amount deferred by each participant
b. Organization
Organizational charts for each department and function
Employee handbook and/or human resource policies/new hire orientation documents
List of all locations and number of employees
c. Workforce
List of all employees which includes ID number, name, job title, manager, annual base salary, annual bonus percentage, job function, department, date of hire, location, full-time/part-time status
List of contractors which includes ID number, name, job title, manager, annual base salary, annual bonus percentage, job function, department, date of hire, date assignment to complete, location, country, currency, and name of the agency.
d. Compensation
Copy of salary structures, compensation philosophy, methodology, and implementation of structures.
Policy and practice on general wage or salary increases and administration of the program.
Special retention plans; list of participants with details of payouts
e. Equity Programs
Summary plan document for stock option programs including non-qualified stock options, incentive stock options, restricted stock options, Employee Stock Ownership Plan (ESOP), and Employee Stock Purchase Plan (ESSP)
List of employees who have received stock options or RSUs which includes name, department, job title, strike price, stock amount, stock value, vesting date, country