Preparing Due Diligence for a Series A Financing as the Economy Reopens
While the primary strategy for startups remains survival during the coronavirus pandemic, startups can prepare for a Series A financing now to access the funds more quickly as the economy begins to reopen.
Startups have rightly focused on survival in these challenging times, particularly as liquidations of startups have picked up pace in Silicon Valley. Many useful articles have been published on survival strategies for startups during the coronavirus outbreak, often centered on making their services and products relevant to their customers, cutting expenses, and pursuing customer collections and revenue aggressively.
At the same time, the evidence suggests that startup funding has slowed during the coronavirus outbreak. While there is likely to be more success in raising funds with existing investor relationships, it is more difficult to establish new investor relationships at present, and then for these investors to be able to complete the required due diligence for a Series A during the pandemic.
Therefore, as the economy reopens, there should be pent-up demand from startups for Series A funds. Startups that have made it through the shutdown of the economy will need those funds as quickly as possible. To the extent that startups can allocate resources to prepare for the Series A now, they should be able to save valuable time on due diligence later and accordingly shorten the time to funding. For an example of YC’s Series A due diligence list, see here.
- Data Room. Collect all of the due diligence materials in a secure data room ready to share with potential investors
- Financials. Ensure that the financials are up to date and complete and that the assumptions behind the financial statements are supportable.
- Charter Documents. Assemble the charter documents (Certificate of Incorporation, Byalws etc.) and ensure that all state qualifications to conduct business are in place
- Corporate Governance. Ensure that shareholder and board approvals are up to date and complete. In particular, ensure that the board has authorized all of the stock and equity grants and that the federal and state (blue sky) securities exemptions have been filed. Note that in Delaware, defective corporate acts, such as failure of the board to approve stock options, can be fixed by using the procedures specified in Delaware General Corporation Law Section 204. See our earlier post on fixing corporate mistakes in Delaware companies here.
- Contracts. Ensure that there are up-to-date and signed contracts in place with key vendors, customers, and partners
- Intellectual Property. Be prepared for a deep dive on intellectual property from the investors’ counsel, particularly if it is central to your business. You will need to be able to show ownership of the company’s IP, which will include demonstrating that the people/companies that developed the IP assigned their rights in it to the company
- Human Resources. Ensure that employee files are current and that all employees have executed Inventions Assignment Agreements.
If you require any further information about Series A due diligence, please contact Edward Grenville, Managing Shareholder, Inspire Business Law Group, PC (egrenville@inspirelawgroup.com; +415 279 0779; www.inspirelawgroup.com).
This article is provided for educational and informational purposes only and is not intended to be, and should not be construed as, legal advice.