How to pass venture capitalist due diligence

There are two main types of venture capital due diligence. The types of due diligence are business due diligence and legal due diligence. These represent aspects of an investigation that a potential investor or venture capitalist will want to conduct before investing in a potential company or business opportunity. There are many tools that are available to use in conducting due diligence but the basic structure is broken down into two parts.

Business Due Diligence

Before venture capitalists make an investment in your company they will conduct business due diligence. This part of the investigation will give the venture capitalist a fairly complete picture of the financial affairs of the prospective company. This investigation should yield a fairly clear picture of all aspects of the companies' finances beyond a simple profit/loss statement. This is done by a review of many aspects of the financial within a company. This generally includes:

A review of the marketability of all products from the company

A complete background check on the founders and key management team.

A complete market review of the competition for the company.

This may include discussions with all key customers of the company,

An analysis of all financial projections for the business both short and long-term.

A complete review of the management structure and analysis of any possible holes in the management.

Legal Due Diligence

The second half of due diligence focuses on the legal structure of any prospective company. Venture capitalists or investors will also have their lawyers conduct a legal due diligence. A prospective company that is being looked at for investment should expect to receive a due diligence checklist from the venture capitalists attorneys. This will request lots of information about the company.

Responding can be time-consuming.

Yet the prospective company will want to make sure their legal documents are all in order. Delaying this action can taint the deal or potentially even kill it! The company being investigated will also want to have an experienced attorney representing them that knows how to handle this matter quickly and accurately. Some of the documents that can be requested in legal due diligence's are:

All key contracts for the business.

Any current and past employment agreements.

All minutes and consents for the board of directors and shareholders.

All invention assignment agreements and confidentiality arrangements with employees.

Copies of the corporate charter and bylaws.

All past and present litigation-related documents.

All intellectual property-related documents such as patents and copyrights.

These legal documents are called for in the event that the company may be carrying legal fees or possible litigation that a potential investor would want to know about before assuming any ownership into the company. Most venture capitalists do not expect to find all potential business opportunities with no legal entanglements. Obviously though a company with few or no legal problems presents a better risk to potential investors or venture capitalists.

The above lists are only a partial description and serve only to indicate documents that may be called for. A company that is looking for venture capital can do a few things to increase their chances for investments from potential investors. Some of these things are:

Any and all documents requested should be made available for venture capitalists review on a timely basis.
This will help ensure that the deal will go forward as quickly as possible eliminating the need for further investigation or the possibility that the investor will move onto other investments.