A Founder’s Toolkit: Legal Due Diligence for your Series A Financing – A No-Nonsense Guide to Ensuring Success

These situations result in not just nerve-wracking delays but also unexpected expenses that strain the startup’s already stretched resources.

It is not just about investor perception (though, that is certainly part of it). The real crux lies in the undeniable truth that every hour spent scrambling to find a document or clarify a company detail is an hour not spent on strategy, product development or customer acquisition. In the high-stakes, high-speed start-up ecosystem, these lost hours translate into missed opportunities.

From these experiences was born the motivation to create a robust, no-nonsense guide on legal due diligence. This guide isn’t just a list of documents you will need; it is the culmination of years of experience, lessons learned and best practices that have been proven to pave a smoother road toward closing that elusive Series A financing. It is about instilling a mindset of readiness so when the time comes, you can meet the process with confidence and the kind of efficiency that speaks volumes about your company’s potential for success.

1. Company Structure and Compliance

A crystal-clear company structure and compliance are foundational for Series A financing.

• The How: Begin with an in-depth review of organizational documents, including company charts, shareholder agreements and board meeting minutes. Confirm the current status of all regulatory compliances, licenses and permits.
• The Why: A sound and compliant structure indicates to investors the viability and legal robustness of your startup, instilling confidence.

2. Intellectual Property

Guarding your startup’s IP extends beyond mere patents and trademarks.

• The How: Compile a detailed inventory of all intellectual properties. Crucially, ensure that employees, consultants and advisors have executed proprietary information and invention assignment agreements favoring the company, thereby preserving your firm’s assets and preempting potential disputes.
• The Why: A meticulously documented IP portfolio emphasizes your startup’s unique value. Secure agreements further accentuate the company’s holistic approach to protecting its innovation, appealing to discerning investors.

3. Financial Documents

Transparent financial documentation is non-negotiable.

• The How: Prepare an exhaustive set of financial documents, inclusive of financial statements, tax returns and future projections. Have a detailed account of revenue streams and operational costs at hand.
• The Why: Detailed financial documentation is indispensable for investors assessing the fiscal health and potential growth of your startup.

4. Commercial Agreements and Client Contracts

Clear and up-to-date commercial agreements and client contracts are paramount.

• The How: Gather all existing agreements and contracts, ensuring their relevancy and compliance with prevailing laws and regulations.
• The Why: Transparent contracts highlight a well-structured business, fostering trust among potential investors.

5. Modern-Day Compliance: Inclusion, Harassment, Cybersecurity and Data Privacy

With the evolving business landscape, investors are increasingly valuing startups that prioritize contemporary challenges, like harassment, diversity, cybersecurity and data privacy.

• The How: Implement and routinely update policies related to equitable and inclusive hiring practices, harassment prevention, cybersecurity and data privacy. Conduct regular training sessions for employees, ensuring awareness and adherence. Maintain a proactive stance on cybersecurity by employing modern tools and practices to guard against breaches. On the data privacy front, ensure that all data collection and processing activities comply with the relevant laws and best practices.
• The Why: Companies that actively address these contemporary issues not only demonstrate their commitment to a safe and respectful work environment but also signal their readiness to operate in the modern business ecosystem, a trait highly valued by today’s investors.

6. Organizing a Streamlined Data Room

Last, but certainly not least, navigating due diligence smoothly hinges on one pivotal aspect: a well-organized, comprehensive data room.

• The How: Implementing a data room means consolidating every critical piece of documentation into a secure online repository. This process involves gathering and categorizing all essential paperwork, ranging from corporate records and financial documents to compliance policies and HR files. Opt for a data room provider known for robust security, and establish a clear, intuitive structure for document storage. Prioritize regular updates and maintenance to ensure the information remains current and reflective of real-time company status.
• The Why: Beyond mere storage, a data room serves as a testament to a company’s organizational acumen and transparency. It assures investors of a hassle-free due diligence procedure, with easy access to necessary data, thus fostering confidence in your business operations and generally accelerates the entire process.

Conclusion

Embarking on your Series A financing is both an exciting and critical phase in your startup’s journey. However, navigating the legal intricacies of this process can be challenging. Remember, you do not have to go it alone. If the prospect of preparing for and navigating through this complex process seems daunting, reach out to us. With a wealth of experience and expertise in this field, we are well-placed to assist you in seamlessly maneuvering through this crucial phase, ensuring your startup is perfectly poised for success.

Join us for a CLE, “Decoding the Series A Term Sheet,” on October 26, 2023, for more information on Series A financing.

Author Jason Acevedo is a partner in the Venture Capital & Emerging Growth practice group in the Corporate and Securities Department at Klehr Harrison.

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