Due diligence is the catchall phrase used to describe both the amorphous investigative process that prospective investors and acquirors go through before, during, and after their initial decision to proceed with a transaction with your company as well as the materials (paper, electronic, and Q&A) that they and their advisors receive in response to their questions.
You may or may not get a formal list from the other side, depending on their level of formality and the nature of their advisors. Some investors know exactly what they are looking for and will figure out what they want to do from your financial model and a series of conversations. Others assume that the only way to be sure is to review a mountain of paperwork. The real answer lies somewhere in-between for most companies.
So, to get you started or at least calm you, here is a super Short Form Due Diligence Request List for a seed round investment or low-key quasi-acquisition, such as an asset purchase or stealth acquisition.
First, keep in mind that the other party may, and probably will, ask for additional information. Our goal here is first to identify anything that might concern them so it can be defused or resolved before it’s ever disclosed. (Hint to bad lawyers: you cannot hide things; there’s always a second copy floating around; the goal is to solve the problem so you can disclose how it has already been fixed.) Our second goal is to streamline as much of your work as possible so that you are not under time pressure later. The third goal is to identify the factual support for the business plan/budget that will be a critical piece of the transaction.
Here is the list of other materials you should be gathering in the background as negotiations continue, documents are drafted, and the deal moves forward.
- Financials — Copies of all historical financials for existing operations: Income Statement, Balance Sheet, and Cashflow statements. (A backup version of a QB file is something that I regularly work with to extract these directly if necessary.)
- Material contracts — all contracts that are either above a specified dollar value ($10-25k) or are otherwise important to the continued operations of the business on a similar basis. This should usually include customer contracts, all leases, all promissory notes, and IP licenses, and anything to do with stock or securities (like a warrant agreement or agreement to trade stock for services of a consultant).
- Corporate documents — Copies of current articles/certificate of incorporation & bylaws; minute book with board/shareholder consents & minutes.
- Other risks — A description of any pending litigation, whether company is plaintiff or defendant; any audit letters from auditors if financials have been audited in last 3 years; a description of any off-balance sheet obligations or other liabilities; and a summary of any related-party transactions, individually or in the aggregate greater than $25,000.
This ThoughtStorm Due Diligence Request list is a version written from the perspective of an investor and is a little more detailed than what I have above. It’s more like a reasonably thorough list that will get you most of the way to complete for an early-stage company.
Tagged as:
deals,
details,
execution,
law,
tips,
venture capital
The Supreme Court recently decided, 7-2,that the federal government has the power to civilly commit federal prisoners on the eve of their release if they meet some level of danger of future harm. The dissent, by Justices Scalia and Thomas, argued that only the states have the power to implement this sort of punishment/power.
I guess I’ll be citing this decision to people who dismiss Scalia and Thomas as right-wing conservatives. It sounds like they have taken a principled approach to applying the laws of the land and accepted a result that might otherwise be objectionable.
Our federal system makes tradeoffs that were readjusted in 1787 after the Articles of Confederation proved a poor framework. Two follow-on shifts occurred after the Civil War and during the Civil Rights era, but the second of those was not a structural change to the system but a tweaking of where we draw bright lines inside the gray borders between state and federal domains.
I sense that there could be great lessons in here for mindless conservatives who call themselves federalists or states’ rights folks only because they think they can get the rules they want, and perhaps great examples for mindless liberals who do not want to believe that they are only looking for the rules they want too. These mindless _____’s are more alike than different, and they are equally dangerous to our collective freedoms — freedom from ___, and freedom to ____.
“[T]o secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.” Declaration of Independence.
The way that I look at these groups, which I lump together, and others who operate from a different mindset from those although toward the same ends, is that the distinction is between rules-based and outcome-based politics. This being a democracy and all, and with the fundamental protections built into our federal and state constitutions, I see myself as a systems guy, with a belief that if our systems are well-constituted, and continually subject to improvement, we should be able to consistently improve our actual results over time, with fewer disruptions from political shifts of relatively minor proportion to the grand scheme.
In such a system, it is entirely possible that we could, as a society, legitimately come to different conclusions about how we would operate in nearly every sector of public life, from the expansion or restriction of government as a participant in the economy, whether by intervention, regulation, or participation, to the relative expectations about how widespread and uniform any regulation should be (which is another way of talking about the state-federal balance).
My theory is that the contradictory view of modern “liberals” on the federal government as both king-like protector and despotic villain are grounded in the combination of Watergate, Vietnam, and the Civil Rights movement. In those three seminal interactions with the baby boomers, many saw the worst and best of the federal government all at once. (And to be clear, many people who call themselves conservatives have a similar fear of government.)
At the same time, modern “conservatives” have latched on to different memes, showing the potential tyranny of the central government and the entrepreneurial spirit of a vigorous federal system, a laboratory of 50 regulatory approaches that could lead us all to finding more efficient ways of regulating ourselves to maximize freedoms and wealth while minimizing dislocation costs, crime, and negative externalities.
I confess that I have never thought about specific elements of our history that are likely to be responsible for (or at least ideologically connected to), this description of “conservatives.” Perhaps World War II and Roosevelt’s court-packing plan, the Slaughterhouse cases, and similar depression-era changes are the genesis, but I seldom hear these types of people talk about these events. Maybe it is the failings of other governments, where tyranny has taken hold, that is the real example this group keeps learning from.
What events/movements provide the touchstones for this rule-based group? Do you think that there are inherent benefits to rules-based or outcome-based politics?
Tagged as:
culture,
law
