Making Diligence Your Friend

So you need some dough, dosh, cash, currency, coinage, working capital to get your startup off the ground. No better time than the present to get started since it is going to take you twice as long and be twice as hard as you think.

For this write-up, I am going to assume that you have managed to convince a few prospective investors, or maybe boutique fund to have a closer look at your company and you are heading into due diligence.  Chances are good they will have a diligence questionnaire for you to fill out.  Sometimes these are brutal, sometimes not so much.  Try your best to get ahold of this questionnaire before they send it to you.  Many times, they will be available on their website, or you could get it from a friendly within the group.

There are few things that will kick-off a diligence process better than returning a completed diligence questionnaire 48 hours or so after you “officially” receive it.  If you have a look-see at it early, you can start early on the questions and be more likely to meet that kind of objective.  Parse out specific areas to your team depending on their area of expertise.

Some of the material you keep updated before a process like this starts are (1) your Cap Table (2) your Pro-forma Operating Model, (3) a one-pager [Executive Summary] for your current round of financing and of course (4) your pitch deck.  You must make sure that if the same parameter exists in multiple places in this document set, that they match exactly.  It may seem petty, but folks just love to point out these inconsistencies.  E.g. if your Cap Table shows a founder’s ownership percentage as 35.3%, and the pitch deck or one-pager shows it as 36% it is not a good look for you or the company.

Do your best to anticipate what questions folks might have in your spreadsheeted documents and design them with appropriate variables to allow for running common scenarios, which I guarantee you any diligence team will want to do with you.  Questions like “What happens if you modify your sales team’s cash compensation from 50/50 (base/variable) to 60/40?” or “What does the Cap Table look like if we fund the option pool to 20% fully diluted before this financing?”

You are going to get requests for a lot of assembled information from any diligence team.  Buy the full Adobe Acrobat and learn how to use it to generate bookmarked PDF’s.  It can be quite handy for organizing documents into groups for easy digestion.  So rather than attaching 4 different .PDF’s that show case studies done in the industry, build a bookmarked .PDF and combine into one document.  Use this for competitive information, relevant articles, intellectual property summaries, or to combine all of the corporate formation information (Articles of Inc, Bylaws, Written Consents, Board Actions, Amendments) into one document.

You want to work pretty hard to anticipate questions that will be coming from the diligence team.  I guarantee you the more quickly you have these answers available the less questions you will get. 

You are going to have multiple in-person (or in-Zoom) meeting with the diligence team.  These can be long and hard.  It can really help to have multiple team members on these calls so the workload can be shared.  I have been the only company attendee on a 3-hour diligence call and that will wipe you out.

Then, there is the Data Room.  This is super basic, but one of the items that many smaller, private companies are woefully inadequate at maintaining. The data room is where all of your important company documents live. Things like your stock option plans, by-laws, incorporation documents and key personnel employment agreements are obvious but there are others that are less obvious that require a bit of effort to get a handle on and actually turn into a value creator when it comes to the due diligence process. Have a look-see online to find any number of due diligence check-lists available and work a process with your founding/management team to assign folks to keeping the various classes of subject matter up-to-date. When the time comes, you will be very happy you did, and it will assist with reducing the stress level of what is inherently an overwhelmingly stressful process of due diligence. 

Once you get through a diligence process, you can begin to utilize the diligence report that was generated as part of the process for future activities, so do not think of this as a one-off exercise. If done properly, this can be beneficial for the future and help to lighten the load for future processes.

So overall, in this particular situation, the old adage that “an ounce of prevention…” holds true in spades.  Working to make the diligence process go smoothly will pay off by maximizing your valuation. I will leave you with one other thought and this is one of my mantras:  Make them happy with EVERYTHING but the price.

About the author:

Pete DeAngelis is President & CEO of TrakPoint Solutions.  TrakPoint Solutions offers the most accurate, lowest cost and most scalable indoor asset tracking (RTLS) system for healthcare, retail and industrial markets. We develop proprietary technologies in RF, IoT, machine learning, and location algorithms and combine them with a SaaS business model that is attractive for our customers as well as TrakPoint.

Pete DeAngelis
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