#7 from 10 – The FREE course for raising capital from VC firms and angel investors

Due diligence

All you efforts of finding certified investors will eventually come to a positive end. You have a verbal agreement and you probably have submitted the business plan or the private placement memorandum to the angel investor. This is a good moment to know a few things about due diligence. If you are not familiar with the term, due diligence is the process in which a venture capital firm or an angel investor will analyze the potential of a venture and all the aspects of a future deal.

They will analyze the market data, licensing agreement and a complete series of other important documents. For the due diligence, you have to prepare documents like the business plan, the company and management background, all the company financials, the list of equity holders, any leases the company might have, employment contracts, and letters of intent.

Do not let the due diligence phase catch you unprepared. Make sure you have all these documents ready even before you start looking for an investor. The complete process of being funded can last up to six months but the time between your presentation and due diligence may be very short and you may not have the time to get everything ready.

Before the due diligence, you will have to signs a term sheet, which will speed up the process. Usually you will want to keep any trade secrets just for yourself at least until the term sheet is signed.

Another important and smart move would be to contact several investors at the same time and have several offers or possibilities at the moment of signing the term sheet. This will help you tremendously in negotiating the valuation of you company. Hire an attorney to help in this stage. Most firms will accept payment even after you get the funding. Discuss with the investor the pre-money and post-money valuation that is how much your company is worth before and after the investment. Get on the same page with your investor about the liquidation preference, the board control, the timing of the investment and vesting of founder’s stock.

Establish if the Management team will be changed or not and negotiate and anti-dilution protection. Talk about the company proprietary rights, the registration rights and the drag along rights. There are also the rights of first refusal, the preemptive rights and the option pool refresh. The venture capitalist will know a lot about this subject so legal help is a must and you also have to get familiar with their meaning. Have everything ready and provide all the support they need.

Your main goal should be to determine the VC to conduct as much due diligence as they can before signing the term sheet in order for you to be able to speed things up and negotiate better terms.

In the next newsletter, we will talk about the different stages of funding and why are these important to you.