WHAT IS DUE DILIGENCE?Investopedia1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
WHAT DOES THAT MEAN?The 70-30 Rule*70%: Intuition (aka: gut). Can they do it? Will they do it?30%: Facts (aka: prove it): What have you done? How do you know?*Subjective in all cases and different in a sale
WHEN IS IT APPLICABLE?Examples and Personal ExperienceInvestmentLoan GuaranteeGrantsLicensing AgreementStrategic Partnership/Founding MembersMergerAcquisition/Sale
HOW IT WORKSWhat They May Be ThinkingPrivate Investor: Can this venture make me money? Can this guy do it?Angel Investor: Interesting concept. I like this CEO. Can I make money?Committee: Do they have enough to go before our investor group?Consultant (scrubs deals): Why should I believe you? Who are you?Partner: Will they deliver? Can we work together? Can we get more sales?Founder: Are they trustworthy? Who is leading?Buyer: Is this going to propel my business forward? Is this added value?Entrepreneur: Is it enough? Can I make the business case?
ANGEL INVESTMENT EXAMPLE Sub- Contact MembershipCoherent, clear, well- Committee 15 min pitchwritten exec summary 15 min pitch 5-10 min q/a or business plan 5-10 min q/a Who you Who you know/ED. Who you know/Champion. know/Champion. DUE Term Sheet Assignment DILIGENCE Risk Assessment Reports Team Membership Vote Board Membership
NO MATTER WHATAs an entrepreneur, your fiduciary responsibility is to maximize wealth for your shareholders. In good faith, you must be on your game and be prepared.Have confidence (not arrogance).
DOCUMENTATIONVersion Control:Governance: formation papers, operating agreement/by-laws, cap table,board notes, lawsuits (current or pending)Intellectual Property: applications, process documents, awards(trademarks, copyrights, patents)Sales: customer list, pipeline, projections/actual, demos/presentations,client testimonialsInvestment package: business plan, financials, PPM, deck, qualifiedinvestor
DON’T GET IN A BOONDOOGLE!Don’t waste their time or yoursDo it - Document itGives you confidence about the businessStorageDue diligence e-room: access to various levels of information.Notebooks: Some like paper.
WHAT DOES THAT MEAN?The 70-30 Rule* Leadership. Can they do it? Will they do it? Facts. What have you done? How do you know?*Subjective in all cases and different in a sale