Getting Your House In Order for Series A
O4 October 2019
Your Series A round is probably going to be the first time you and your business comes under the scrutiny of an institutional investor. It’s therefore important to get your house in order before the due diligence process starts. You’ll want to ensure you’ve crossed the ‘t’s and dotted those ‘i’s – so you can demonstrate that your business is an investible proposition, avoid embarrassing conversations and, ultimately, save yourself time and money.
So, what’s the purpose of due diligence and why does your investor need to do it? It comes down to verifying that the vision sold during your pitch is accurate and making sure there’s no skeletons in the closet that could put their investment at risk. The level of detail required varies from investor to investor and the process will usually be led by the investor’s lawyer. It typically takes 2-6 weeks to complete due diligence, depending on its complexity, and the negotiation of the legal documents will usually take place simultaneously.
Before you’ve got a term sheet on the table, we advise our clients to get a head start and think about the following:
– Get your team together. Due diligence is a time-consuming process even when everything runs smoothly, but if it identifies issues that need fixing it can quickly become a nightmare to deal with. Ensure you have a solid team in place to support the process, including a financial advisor and a lawyer who is experienced in VC transactions.
– Set up your data room. Whilst shared drives like Dropbox and Google can do the job, you’re going to be storing a lot of commercially sensitive information and there are more secure solutions out there. Chat to your lawyer about the options, as they should be able to help with this.
– Collate your documents. You don’t need to wait for the questionnaire to land to start collating the documents your investor is going to want to see and populating your data room. Instead, your lawyer should be able to give you an example questionnaire to help kick-start this part of the process.
Getting a head start on your due diligence will mean that you may be able to fix any issues that arise before due diligence starts. Examples of issues we’ve seen include not having employment contracts signed by everyone, the share register not being up to date and the ownership of your IP not being clearly documented. In some cases, a resolution might be more complex and a difficult conversation with your investor may be required. As a result, it’s going to be much better if you can disclose the issue along with your proposal to rectify it.
Don’t underestimate due diligence. Whilst, on the face of it, it may look like a tedious admin task, it’s an extremely important part of the investment process which directly feeds into the warranties you are giving your investor. A failure to properly disclose something could lead to serious consequences further down the line. You will have been planning your Series A for some time, so you’ve got no excuses not to have your house in order for your due diligence.
Stephenson Law works with tech scaleups to support them with their due diligence, including setting up data rooms, reviewing and collating documents, identifying issues and proposing solutions. We’re experienced at supporting management teams as their external general counsel and co-ordinating due diligence across the business to ensure it’s completed as quickly and painlessly as possible. If you’d like to discuss due diligence with a member of our team, please contact us at firstname.lastname@example.org.