A look into the detail that investors will put you through as they do due diligence

1. This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
The Due Diligence Process
We like the deal but
we have just a few questions…

2. Intent of due diligence
• Finding all the reasons NOT to invest
• Investors need to sort through risk factors:
– Corporate Structure
– Encumbering Relationships
– Industry / Competitive issues
– IP and Product completeness
– Sales and Distribution channels, warranties, etc.
– Management team, board, investors
– Financials

3. Starting Due Diligence
• Company needs to know
– No commitment to invest at this stage
– Deal terms may change if there are issues
• Form a Due Diligence Team
– Develop a plan to uncover risks
– Make assignments, set a timeline
– List of deliverables
• Communicate plan to company
• Make them understand that they are responsible for everything
• Due diligence should be completed to each investors satisfaction
• An angel or VC firm - If you are not satisfied, you should not invest, even if
others are planning to push forward

4. General Corporate
• 1.1 Company Information
– 1.1.1 Current Business Plan
– 1.1.2 AIl PowerPoint Slides including pitch decks
• 1.2 Organization Chart
• 1.3 Capital Stock
• Most recent, detailed capitalization table including employee stock
option pool (issued and remaining) and warrants.
• Evidence of securities filings and/or compliance for all issued shares
and outstanding options.
• All prior funding round documents, including stock purchase
agreements, shareholders agreements, side letters, etc.
• 1.4 Articles of Incorporation, Bylaws and Minutes

5. General Corporate II
• 1.5 Leases
• When you moved into your current premises. The deal (e.g. lease terms), and how long it will be
suitable as you grow. What are your current plans for expansion and where?
• 1.6 Mergers & Acquisitions
• Provide a schedule of businesses acquired by XYZ since inception. Indicate purchase price, date acquired and schedule of assets and
liabilities acquired, or equity exchanged.
• 1.7 Public Relations
• Brochures and Literature. All brochures, reports, studies or publications relating to or describing XYZ
and its products or services, including sales and marketing literature.
• Press Clippings and Releases. Press clippings, articles and releases relating to XYZ and the industry
for the past three years.
• Analyses and Reports. Analyses of XYZ or its industry prepared by investment bankers, engineers,
management consultants, accountants or others, including marketing studies, credit reports, geological
reports and other types of reports, financial or otherwise.
• 1.8 Litigation
• A description of all litigation or threatened litigation current, concluded or settled since inception and all
documentation (including litigation files, settlement agreements, decrees, orders and judgments) with
respect thereto.

6. Industry Background
• 2.1 Competitive Information (full disclosure)
• On each competitor, broadly construed to include your existing
customers and their current methodology. Information such as size of
company, location, revenues, features, niche focus, product offerings,
public/private, venture backed, pricing, your competitive advantage,
sales/distribution strategy, etc.
• Provide the estimated lead time for an existing competitor or future
entrant.
• 2.2 Provide Industry Demand
• List and flesh out the key demand factors in the market.
• A list of market-knowledgeable references who can speak to the
emergence of the need for your product, how your company fits into the
market, why you might succeed, who the competition is, etc.

7. Products and Services
• 3.1 Products and Services
– Describe the product and/or service in detail
– Provide every corporate presentation that’s been given to
date
– Discuss future products and when they might be released

8. Intellectual Property filings
• 3.2 Patents, Trademarks and Other Intangible Assets (as applicable)
• Information with respect to all foreign and domestic patents, trademarks, trade names,
service marks, copyrights and other intangible assets used in the business of XYZ and all
agreements (including, without limitation, license agreements), documents or filings
governing such use.
• 3.2.1 Copies of all Patents and all documents relevant thereto, including but not limited to
any and all offers by third parties to license similar technology, any and all internal reviews
of prior art, any and all demands by third parties to cease use of any patent or allegations by
third parties that they contest in any form XYZ's rights to the patented intellectual property.
• 3.2.2 Copies of all Patent Applications and all documents relevant thereto, including but
not limited to any and all responses in an form by the U.S. Patent and Trademark Office or
any foreign government or regulatory body charged with registering and or examining patent
applications.
• 3.2.3 A report showing the status of the Patents, and of any inventions for which a patent
application has not yet been filed.
• 3.2.4 Copies of all licenses that have been granted by the Company to third parties which
involve the Patents or other intellectual property rights.

9. Sales and Distribution
• 4.1 Strategy
Detailed sales and distribution strategy. Discuss different types of
customers and the corresponding sales cycle time for each.
• 4.2 Customers and Suppliers
All current marketing and distributorship agreements or arrangements, sale
or supply contracts and purchase contracts (including any government
contracts), including requirement or service contracts of XYZ, including the
following:
– 4.2.1 Contracts or agreements with any international, national,
regional or local representatives, distributors or resellers.
– 4.2.2 Contracts or agreements with manufacturers.
– 4.2.3 Service and manufacturing agreements and contracts.
– List and description of XYZ’s customer base including quotes outstanding, current backlog by
account and the most palpable prospect list for the next twelve months.
– List and description of XYZ’s vendor base.
– Please provide a list of customer references who have purchased your product and/or service.

10. Sales and Distribution II
4.3 Joint Ventures or Partnerships
– Documents on all present or pending joint venture or partnership
agreements and other such arrangements in with XYZ is a party or is
otherwise involved.
4.4 Licenses and Royalties
– Documents on all license and royalty agreements.
4.5 Sales Contracts
– Standard form sales contracts, agreements or arrangements.
4.6 Supply Contracts
– Documents on all agreements with suppliers.
4.7 Nondisclosure Agreements
– Documents on all secrecy and nondisclosure agreements, including
employee confidentiality agreements, relating to technical and other
proprietary information.

11. Sales and Distribution III
4.8 Other Significant Contracts
Documents on all significant contracts, agreements and arrangements,
other than those already enumerated
4.9 Warranty Claims
A description of any warranty claims made against XYZ and any action
taken with respect to such claims.
4.10 Noncompetition Provisions
Description of any provisions which purport to restrict XYZ's ability to
compete, whether imposed by agreement, court order, oral
understanding or otherwise.

12. Management and Board of Directors
• 5.1 “Key” senior management
• Resumes of all key senior managers
– Any legal actions, arrests, prosecutions
• One paragraph job descriptions of your next four key hires.
• Discuss key man life insurance policies.
– What executives have key man life insurance? How much?
– Is it payable to the company or investors?
• 5.2 Board Information
• Bios of the formal board
• Agreements with board of advisors
• View of the Board post-financing.
• 5.3 Management References
• 3-4 professional references for all key senior managers
• Reference
check
everyone
at
least
3x

13. Credit Agreements
All agreements of XYZ (together with all amendments, documentation and correspondence)
relating to the borrowing of money, including bank lines of credit, letters of credit, indentures,
notes, term loan and revolving credit agreements and debt instruments.
Recent evidence of compliance with lending agreements
6.2 Loans to, or Guarantees of Obligations of, Third Parties
6.3 Guarantees
All guarantees by management, stockholders or others of debt of or performance
6.4 Security Agreements
All currently effective security agreements (including a recent UCC search) covering assets such
as mortgages, pledges, liens or security interests in significant personal property, such as
receivables, inventory or equipment.
All currently effective security or pledge agreements covering capital stock held beneficially or of
record by any selling shareholder.
No need for “audited” financials but pour through the books

14. Financial Statements
• 7.1 Detailed Historical Financial Statements, since inception
• 7.2 Projected balance sheets, income statements and cash flows.
– minimum of three years).
– The projections should include any major assumptions utilized to
develop the projected financial data, including (as applicable):
– New product/service introductions.
– Market share data, general industry expectations.
– Expected reactions from competition
• Revenue growth rates and operating expenses.
• Salary and headcount figures to correspond with the projections. Please break-
out by Sales, Engineering, Manufacturing and G&A employment.
• Revenue detail by product/channel (including any volume and pricing
assumptions).

15. What are you going to do with this money?
• 7.3 Use of proceeds schedule.
• Milestones.
• How much cash do you need and when?
– If you raise a round, they will likely require milestones and
issue payments accordingly.

16. Exit Strategy
8.1 Liked Exit types Strategy
8.2 4-5 likely acquirers and why they would be
compelled to buy you

17. Investment Due Diligence
Once you’ve gathered all the data….
Is it a good investment? Strong potential for 10x return?
• Build Optimistic and pessimistic financial model
• Careful assessment of sales cycles, revenue plan, cost structure, profitability, balance sheet items
• Capital requirements through life of the investment
• Sensitivity analysis (e.g. delays in execution are very common)
• Sources and uses of funds
• Fundraising plan
• Exit valuation & comparable
• ROI analysis (cash flows by yr., years to exit, times capital returned)
• Very helpful to test above against what other similar startups did
• Look at sales ramps, capital needs, exit values for 5 best startups
What valuation do you need to get a 10x return, assuming it performs as well as other leading startups in
same space?

18. Legal Due Diligence
• Everything, Everything and Everything
• Articles of Incorporation, charter, bylaws, etc.
• Minutes and consents of the board of directors and shareholders
• All signed contracts
• Copies of any side letters, voting agreements, etc.
• Employment agreements
• Confidentiality and invention assignment agreements
• Litigation-related documents
• Patents and copyrights, and other intellectual property-related documents
• Filings and payments for tax, securities, customs, environmental ...
• List of property owned & leased
• Insurance

19. Representations and Warranties
• At the end of the process the company offers
representations and warranties to the investors
• These concern the accuracy and sufficiency of the
company’s disclosures as well as the existence of certain
conditions
– Not everything is perfect
– Disclose and document issues that investors are willing to
contend with
• These become part of the Stock Purchase Agreement

20. Due Diligence - Experts
• Consider using due diligence experts
• Sources
• Specialized consultants, industry analysts, technical experts
• University professors
• CTO's at non-competitive companies
• Use entire SHA members network to find the right expert
• Experts often need to be paid. Interested investors need to
decide how to create a pool for payment.
• Use lawyers to review key docs
• "A penny of prevention is worth a pound of cure”

21. Investor End Goals
• Going
through
the
en8re
litany
of
what
could
trip
up
the
company
• Iden8fying
areas
of
highest
risk
• Trying
to
make
the
decision
of
risk
vs.
reward
• If
possible,
make
the
investment
• They’re
looking
to
stay
ac8vely
involved
and
de-­‐risk
the
company
as
it
grows
to
the
next
stage