Do you think having a good pitch and an innovative product are all that you need to attract investors? If yes, then you might be wrong!
Knowing what to do is great, but what is more important is knowing how to start. Begin by preparing your due diligence before you even think of fundraising. No prospective investor would invest in a company without conducting due diligence on the same. However, a startup which has thought ahead and already has a due diligence report in their hands, ready to present it to the investor, is the one which has an edge over others.
We recently conducted a workshop on how a startup can raise funds. Our Co- founder and legal expert Ms. Anisha Patnaik, delivered some critical points regarding fundraising. One of the key points which we are going to discuss in this blog post are: how to prepare a due diligence checklist? You know you need to conduct due diligence before you approach an investor, but what are the key focus areas or conditions precedents which you need to fulfill before you can approach an investor? Read ahead to know!
What is Due Diligence?
Due diligence is a general health check-up of a startup. The way insurance companies, before giving you an insurance, ensure that you are healthy, the same way, investors before funding a startup need to make sure that all the basic compliances and requirements of the startup are in place.
When is a Due Diligence Conducted?
Typically, when you approach an investor, there are some conditions on which the investor makes the investment contingent. These are called conditions precedent. The investors need to be sure that these conditions precedent are met before they decide to invest. Hence, after you pitch your proposal to an investor, they would conduct due diligence on the startup, to assess if the conditions precedents are being fulfilled or not.
Due Diligence Checklist/Conditions Precedent
The next logical question, every startup founder will have is: What are these conditions precedent? How do we ensure that our house is in order when the investor conducts due diligence on us? Do not worry, we have you covered! Below are the few typical conditions precedents which you should ensure that you have met, before you approach the investor:
Has your entity been properly set up or incorporated?
You need to assess if all the regulatory requirements and compliances related to setting up of your entity have been met.
Are all your filings up to date?
Ensure that all your statutory filings are up to date and you have the fundraising documents in order.
HR related diligence
You should ensure that you are compliant with all the labour laws and have all the HR documentation in place.
IP related diligence
Do you own the product you are selling? Do you have the IPR for the same? If not, get that in order, because investors would ideally want an IP protection in place.
These are some of the key conditions precedent, which you should ensure that you have fulfilled. For a more exhaustive list, contact us at firstname.lastname@example.org and we would send across a due diligence checklist for free!
To summarize, if you want to raise funds, you need to put your affairs in order. It is preferable that you get a prior due diligence conducted on your startup, before you even approach an investor. This would help you understand the loopholes and you can be better prepared when you start the fundraising process. It is advisable that you seek legal help and engage a lawyer to guide you through the process of due diligence and fundraising.