Due Diligence and Negotiation
The question an investor asks before investing in a start-up is simple: is what I am buying really as described? We carry out due diligence for angel and venture capital (VC) investments, turn the findings into a report that supports the investment decision, and negotiate the investment terms. On the start-up side, we prepare the company for due diligence.
What is due diligence?
Due diligence is a systematic review of the legal position of a target company before an investment or acquisition. It covers the company’s incorporation and shareholding documents, share structure (cap table), material contracts, intellectual property rights, employee and adviser relationships, personal data protection compliance, litigation and regulatory licences.
The result is a report ranking the risks identified by significance. These findings are reflected in the investment agreement as conditions precedent to closing, representations and warranties, or valuation adjustments.
What are the most common risks for start-ups?
The most common problems in early-stage start-ups are failing to obtain intellectual property assignments from freelancers who developed the software or design, the absence of a written agreement between founders, a cap table that does not match the trade registry records, employee share options that remain verbal promises, and gaps in personal data protection.
Scope
- Conducting due diligence, negotiation and reporting for angel and VC investments
- Preparing a red flag report or a full due diligence report
- Legal preparation of the start-up before investment and organising the data room
- Reflecting the findings in the investment agreement
How We Work
- Agreeing the scope of the review and the materiality threshold with the investor
- Preparing the document request list and reviewing the documents in the data room
- Interviews with founders and managers
- Reporting the findings by significance
- Negotiating representations and warranties, closing conditions and indemnity provisions
Team
Frequently Asked Questions
Is a full due diligence necessary for an early-stage start-up?
Not always. Seed investments usually involve a red flag review focusing only on critical issues: company and share structure, intellectual property, founder relationships and key contracts. As the amount invested and the complexity of the company increase, so does the scope of the review.
How should we prepare for due diligence as a start-up?
Company records, general assembly and board resolutions, the cap table, employee and adviser agreements and intellectual property assignments must be complete and up to date. Gathering these documents in an organised data room in advance directly affects the speed of the round and the investor's confidence.
What are representations and warranties?
Representations and warranties are assurances given by the company and the founders in the investment agreement about the state of the company; for example, that the company has no hidden debts or litigation. If a representation proves untrue, the investor can rely on the indemnity provisions in the agreement.
How long does due diligence take?
Depending on the scope and how ready the documents are, it usually takes a few weeks for an early-stage start-up. Documents arriving late or incomplete is the most common cause of delay.
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