Venture Capital Due Diligence Checklist – Part I

By Drew Stevens - March 7, 2019 - Startups + VC

If you’re a startup and you’ve just successfully negotiated your term sheet with a venture capital firm, congrats. You’ve spent months pitching to angels, VC firms, and just about anybody who will listen, and now you’ve finally locked down a commitment for funding.

Now that you have a signed term sheet, the next step is due diligence. If you don’t have your own Columbus business startup attorney to guide you through due diligence, here we’ll walk through some of the major aspects. In this post, we’ll cover organizational documents, intellectual property, your cap table, and employment issues.

Startup Organizational Documents, Legal Documents, and Company Records

Starting at a high level, your VC firm is going to want to see you’ve done everything required to properly form and maintain your company. If you’re a limited liability company, the venture capital analysts will want copies of your articles of organization, EIN, and operating agreement.

If you formed a corporation, expect to turn over copies of your articles of incorporation, your code of regulations or bylaws (depending on your state), your EIN, and all of your corporate records, including records of the actions taken by both shareholders and directors. Additionally, the venture capital firm may request a certificate of good standing from the secretary of state in which your company is domiciled.

Before turning over your corporate minute book, take the time to give yourself a corporate audit. Check to make sure that you have records of all meetings and actions that are required to be documented according to both your code of regulations or bylaws and your state of domicile’s corporate regulations. For the VC firm, nothing says red flag quite like disorganized, sloppy, or incomplete corporate records.

Intellectual Property Portfolio and Protection

Good venture capital due diligence will involve a thorough review of all aspects of your company’s intellectual property. This may include reviewing whether the company has required the founders, employees, and contractors to sign IP assignment agreements.

VC firms want to ensure that the IP upon which the company is based is owned by the company and not by individuals. A VC firm may also look at what other steps you have taken to protect the company’s IP, including assessing your confidentiality, non-disclosure, non-compete, and non-solicitation agreements or applicable provisions.

Intellectual property due diligence will also include the venture capital firm reviewing any and all of your intellectual property registrations – your trademarks, copyrights, and patents. Even if you have yet to be approved for any of these, the VC firm will want to review your application(s) and the status of your application(s) and any correspondence with the United States Patent and Trademark Office or the United States Copyright Office.

Capitalization Table and Startup Ownership

Another area where VC analysts look for red flags is your documentation of ownership in your company. Clean, clear, and coherent Excel capitalization tables are great.

Ensure though, that you have stock purchase agreements, unit purchases agreements, or an operating agreement that speak to the exact assignment or purchase of every individual’s stock or units. Having an Excel capitalization table that says your key coder owns five percent can create a red flag if there isn’t an actual legal document to show said ownership.

All Things Employment

Venture capital due diligence will also include assessing all employment policies and documents. Most importantly, this include reviewing whether the founders and key employees have sufficient employment agreements.

The venture capital firm may also want to see any consulting agreements or independent contract agreements you have. Analysts will also want to get a snapshot of your company and will want to see a roster of all employees and contractors, their compensation, and any benefits.

Venture Capital Lawyer Columbus, Ohio

Bringing on venture capital will likely be one of the most important moments in your startup’s early life. It can be critical to thoroughly prepare for due diligence, and if you feel that you have any questions at all, do not hesitate to contact our startup company lawyer in Columbus, Ohio.