Your Startup’s Due Diligence Checklist for Series A Funding

What does due diligence mean company meeting

If your startup is looking towards its Series A fundraising round, that means that you have already proven that your company has real market potential. In most cases, startups working on Series A business startup funding round have a minimum viable product ready. They have also been able to demonstrate sufficient market interest in their product. In short, when you’ve reached this point of your startup’s growth cycle, you have objectively verifiable potential to realize considerable long-term profits in the future.


This is the stage where business startup funding becomes substantial: Series A funding rounds typically range from about $2 million to about $15 million. Along with the increased funds comes increased scrutiny. That is where Series A due diligence comes in.


What Does Due Diligence Mean?

Due diligence is the process through which investors confirm that your company is indeed the promising investment you told them it is. It is an especially crucial part of Series A fundraising.


As a rule, Series A funding is used to optimize the startup’s product and user base. It represents the business startup funding that will be used to expand across markets and build a client base so that the long-term profit forecasts become viable. You are asking investors to give their money so that you can move from the idea-centered phase of your startup to the stage where you start monetizing those ideas.


And this is why Series A due diligence is so important: investors want to know that they are investing in real potential, and they want to know the risks associated with their investment. If you have been offered a term sheet by an investor, that means that your startup as you represented it does have real potential and sufficiently low risk. Due diligence is the investor’s way of confirming whether or not that is true. Although each due diligence process is unique, this due diligence checklist provides a general overview of what to expect from Series A due diligence.


The Series A Due Diligence Checklist

Financial Due Diligence

The financial due diligence part of the process will be focussed on scrutinizing the assumptions behind your income statements and revenue forecasts. Investors will also want to confirm that your startup’s taxation practices are up to standard, and (depending on the age of your startup) check the validity of your reported historic financial performance. As a rule, this is the part of the due diligence process where you can expect the most questions from, and interaction with, investors.


Some of the documents you should have ready include:

  1. Your most recent financial statements
  2. Your business plan and financial projections
  3. Past financial statements
  4. Proof of tax compliance


Team Due Diligence

Especially in the early business startup funding rounds, the largest part of your company’s value resides in your team. After all, you are not profitable yet, and you rely on your talent to get you there. For this reason, many investors place special emphasis on ensuring the expertise and trustworthiness of your team in Series A funding. In some cases you might even have to provide references for your senior management – former employers or colleagues might be asked about your startup’s leadership.


Standard documents usually requested in this regard include:

  1. A list of employees and an organizational chart
  2. A copy of your employee handbook
  3. A copy of your standard offer letter
  4. Proof of your team’s expertise and education (if that was part of your pitch)
  5. A list of foreign employees and their immigration status


Legal Due Diligence

Investors will want to discover any potential legal risks or vulnerabilities before investing. Their lawyers will also expect to verify your material contractual arrangements. The exact due diligence checklist in this regard will depend on your contractual arrangements. Be prepared to present any and all contractual arrangements relating to leases, loans, management, encumbrances, terms of service agreements, mortgages, insurance policies, and joint venture or partnership agreements.


Technical Due Diligence

Investors usually require an overview of your product, your development process, samples of your code, your architecture, as well as the processes employed by your development team. In addition, expect investors and their lawyers to scrutinize your intellectual property portfolio. You will almost certainly be required to provide proof of all trademarks, patents, copyrighted materials, as well as any documentation relating to possible disputes about IP.

Corporate Structure and Equity

Finally, you will have to provide all documentation pertinent to your corporate structure and equity distribution. The following documents are usually required:


  1. Certificate of incorporation
  2. Minutes of directors’ and stockholders’ meetings
  3. Bylaws
  4. A list of stockholders (including issuance dates and prices)
  5. A list of option holders (including grant dates and exercise prices)
  6. Vesting schedules
  7. Any agreements relating to voting on securities and/or restrictive share transfers


Tips and Best Practices for a Seamless Series A Due Diligence Process

Although your due diligence process will depend on your company, your market, and your investors, there are a few general pieces of advice that could help simplify this stage of your business startup funding:


  1. Ensure that there is not a backlog of promised or pending equity grants when you go into Series A funding. Many people believe that, once you have a term sheet, you can no longer use your 409A valuation for stock/option grants because a material event has occurred that affects company valuation.
  2. Set up an internal file directory as soon as possible – ideally, as soon as you start doing business.
  3. Request the results of the due diligence. You are likely able to learn and improve from studying it.


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