Raising money is a dirty job, but someone has to do it right?
Very true, but it’ll go a lot easier if everything behind the scenes is clean, well-organized and ready to go.
If you get to the point where you’re about to marry a VC and take their money, there will be a due diligence process. The complexity and depth of this process will vary depending on the stage of funding you’re at (it gets more intense in subsequent rounds), and how the VCs operate, but there’s any number of things that can throw a wrench in the process.
Get your house in order.
This work is usually a pain, because it’s not doing anything incredibly relevant to the day-to-day success of your startup, but it’s going to help smooth out the funding / due diligence process, and that’s going to make everyone happy. If you get to the point where you’re talking to acquirers, the same thing will hold true – they want you to be clean.
Here are some key things to get cleaned up:
- Minute books. You may not even be having formal board meetings yet, but you should implement some forms of good governance, so investors understand that things are well organized.
- Accounting. Roll up your sleeves and get the bookkeeping / accounting done. Or outsource the work. Either way, get the basics up-to-date: Profit/Loss, Income Statement, Balance Sheet.
- Employee Agreements. Make sure every employee has signed a good employee agreement, with an NDA included. Deal with IP Assignment as quickly as possible; you don’t want to leave any loopholes in there that will scare investors away. And don’t forget – you’re an employee too, so founders need to sign employee agreements just like everyone else. (You may also need to present employee resumes, so might as well have those at the ready.)
- Contractor Agreements. The same rules apply for contractors as they do for employees. Contractors need to sign proper agreements, with non-disclosures and IP assignment.
- Vendor & Partner Agreements. If you’re working with any vendors or partners, there needs to be proper paper in place for that as well. Non-disclosures are fairly standard, but there will be other paperwork as well: contracts on how the relationship is structured, responsibilities, IP assignment (potentially), etc.
- Previous fundraising documents. If you’ve raised money before, put all of those documents together, so future investors can understand them thoroughly.
- Cap table. Make sure you have an updated cap table ready to go. Oftentimes startups add employees or mentors and forget to update the cap table to reflect those changes.
Prospective investors may dig into a lot more than what I’ve described above, but this is a good start on the basics of due diligence. Having all of this stuff at the ready is important; you don’t want investors getting scared off at the last minute because you’re disorganized. And you don’t want to slow down the process! It’s a good habit to take care of this stuff and keep it up-to-date. It might feel like a distraction (from building your business), but you’re absolutely de-risking future fundings and acquisition opportunities.
The hand with sponge cleaning image is courtesy of Shutterstock.