2 min read The Due Diligence Box: What Is It and How to Prepare One.
After an investor expresses interest in funding your deal, the first question to ask is:
“What is your diligence process?”
Having a due diligence box with the standard documents helps a great deal. It shows you are prepared and typically only requires minor additions for each investor.
The Due Diligence Process
While most diligence processes follow the same format of document review and analysis with a round of follow-up questions, each investor has their own start time, timeframe of work, and specific documents they look for. It’s best to ask for their process, and then follow along with it.
If the investor does not have a specific process, then presenting the due diligence box should be enough. For new investors who are not sure what to do, you can offer to walk them through the diligence document by showing them all the relevant information.
It can be helpful to contact the associate or analyst who will be doing the detailed work and open a direct line of communication with them. By building a rapport you may gain the option of contacting them directly for progress status and updates. You can also position your calls as opportunities to answer questions and to help the associate find specific pieces of information.
Investors are busy and can get drawn away by other deals, so it’s important to be timely with your follow-up. Having a due diligence box with the standard documents helps a great deal with this. It shows you are prepared, and typically only requires minor additions for each investor.
The Due Diligence Box
In preparing a due diligence box, also called a data room, there are basic documents to include. These documents consist of:
- Income Statement and Balance Sheet
- 3-5-year Financial Forecast
- Cap Table- including shares outstanding
- Entity Filings including Articles of Incorporation
- Intellectual Property Filings- including patents, trademarks, etc.
- C-level Team Resumes
There may be other documents you may need to add based on your situation.
Reps and Warranties Contract
One document that is helpful but not required to include in the due diligence box is a reps and warranties contract.
Information taken in by investors about a startup’s product, team, financials, revenue and more can change rapidly during the startup phase of the business. One method of assuring the investor the information provided is true and accurate is for the startup to sign a Reps and Warranties contract. This is often tied to the diligence provided.
This contract states that everything provided in the diligence is true and accurate and that no material has been omitted. If it later turns out that there’s a material difference between the business and the diligence, then the Reps and Warranties contract provides legal recourse to the investor for recovering any damages.
For example, if the financial statements indicate there’s no debt in the business, then the investor assumes the business is debt-free. If the startup does in fact have debt, then the investor can take legal action against them.
Some investors demand such a contract to be signed to ensure they have the full picture of the business. Signing a Reps and Warranties Contract can strengthen a startup’s case on the diligence provided.
Read more in the TEN Capital eGuide: https://tencapital.group/due-diligence-and-leading-the-deal/
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: email@example.com