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5 types of due diligence documents to help seal the deal

If you’re fundraising, start collecting your due diligence documents now. We’ll tell you what you need and how to organize them.
due diligence documents

Every decision a good investor makes is based on empirical evidence. Even if they really like your company and the product or service it provides — they can’t just take your word about how great it is. In order to confirm the claims you make about your company, investors must see documents that prove the claims are true.

Not putting in the necessary time and effort into building documentation for your company can stifle a potential fundraising deal before it begins. You won’t be able to get into the room with an investor if you can’t provide the necessary documents to help them make their decision. Even if you don’t have a fundraising deal on the horizon, you should still have these documents on hand in case you’re audited or summoned to court.

In order to avoid any potential issues that may stem from these kinds of situations, create a unified database of due diligence documents, and store them in a single, secure location.

What are due diligence documents?

Due diligence is a legal term that refers to the steps we take before we decide to buy or sell something. We do it all the time with a quick Google search before buying even the simplest of items. It should come as no surprise, then, that an investor would want to conduct their own due diligence before giving your business a significant sum of money.

Due diligence documents essentially refer to all of the important paperwork your company has compiled about what it has done, which will allow outside parties to verify that information.

Standard due diligence documents are often grouped into five categories: Corporate, financial, legal, asset, and intellectual property.

Corporate due diligence documents

Corporate due diligence documents reveal the inner workings of your company. After reading the documents, investors should know how the company came to be, how it’s structured, and who the key employees are.

One example is a company history  document, which tells the story of your company. This is your opportunity to tell investors why the company was started, outline major turning points, share the challenges you’ve overcome, and even profile the founder(s).

Another example is a corporate structure document, which clearly outlines all the key roles and departments that make up the company. This can include everyone from marketing and sales personnel to the board of directors. Below is an organizational chart showing what a typical corporate structure might look like at the very top:

due diligence documents corporate structure
Source: http://www.hnjmny.com/en/about-us/corporate-structure/

A similar due diligence document is an employee list, which shows all the employees within the company and highlights key employees that serve specific high-level functions, such as CFOs and CTOs.

These corporate due diligence documents should leave investors with a strong understanding of your company’s trajectory, its internal structure, and its key people. From there, an investor will want to examine all the important financial aspects of your company.

Financial due diligence documents

In order to understand the overall financial standing of your company, potential investors will need to see financial due diligence documents. These documents verify your revenue, customer and vendor transactions, and other financial claims that your company has made.

There isn’t a single investor out there who won’t be interested in seeing your revenue history. Providing monthly recurring revenue (MRR) and annual recurring revenue (ARR) reports is critical. Investors want to know exactly how much revenue your company is bringing in, and when.

In addition to knowing how much money your company has coming in, you also need to have a record of every transaction your company has made with customers and outside vendors. Known as an account statement, this document shows all the transactions between buyers and sellers. Other financial due diligence documents that investors may require include balance sheets, income statements, and cash flow statements.

Now that the investor knows your company’s financial history in detail, they will need to see all of the necessary documents that show how your company legally functions.

Legal due diligence documents

Legal due diligence is one of the most important steps in any potential fundraising deal. Investors need to understand the legal entities that govern your company and whether it is recognized as a legal corporation by the government.

Because it outlines the ways in which the company should operate and the rights and obligations of a shareholder, the shareholders’ agreement serves a critical purpose in the due diligence process. This example of a shareholders’ agreement from the SEC shows investors how much power shareholders have within the company and what their duties entail.

Another important legal due diligence document is called the articles of incorporation. Simply put, your company doesn’t exist in the eyes of the U.S. government without it. It can also include the date your company was founded, whether it plans on selling shares of stock, and other important information that pertains to its inception.

Last but not least, bylaws are the rules by which your company operates. This document can include the protocols to be used by shareholders and board members, the methods for contract revision, and other rules related to how the company runs. Bylaws are essentially all the rules by which a company governs itself.

With all the legal duties and entities now confirmed, it’s time to show investors what your company has in its arsenal that gives it value beyond how much money it brings in.

Asset due diligence documents

When an investor comes in for a potential fundraising deal, they want to know exactly what your company owns. That can mean everything from that bean bag chair in the lobby to your office space to the company vans in the parking lot outside.

An asset overview document should detail all the fixed assets your company owns, including office space, equipment, and furniture. The investor needs to know exactly what you own as a company in order to distinguish it from what you may be renting or leasing, which would not be included in an asset overview document.

Knowing what you own is just the first step. Investors also want to know whether what you own is in good shape or not. Maintenance reports for all equipment and facilities management reports for office space, storage space, garages, etc., are also important. This example from the California Independent System Operator highlights all the basic material that should be included in a maintenance report.

Intellectual property due diligence documents

You’ve worked hard to build your company from the ground up, but it’s more than just equipment, office space, and people. Your ideas are a part of your company, too, and they require legal protection.

Those ideas are known as intellectual property. Trademarks, copyrights, and patents all fall under this umbrella, and you need to have the documents to prove ownership over your creations. Investors also need to know this, because the more intellectual property you own as a company, the more valuable it becomes as it grows.

Trademark documents differentiate a product or service from others through recognizable signs, logos, designs, and expressions. This generally applies to brand names — for example, Nike’s “Just Do It” slogan or the Starbucks mermaid logo. If your company has a recognizable logo or design, trademarking it will ensure that your original branding is secure.

Similarly, copyright documents protect original works of authorship, such as computer software or even case studies and ebooks. If you’ve created an incredible piece of software, you need to be credited properly for it. More importantly, potential investors also need to understand that it’s your work.

Finally, there are patents. These documents legally identify a company (or person) as the owner of an invention and give them legal power to stop others from making, using, selling, or importing that same invention. Patents let investors know that you have sole ownership over an invention you’ve created and that it cannot be legally duplicated.

A better way to compile due diligence documents

Having all of your due diligence documents in one database can save you time and energy when fundraising becomes a priority for your startup. It also shows the level of professionalism and attention to detail that your company has and will make any deals run smoother as a result.

A secure and organized way of getting a fundraising deal done is with DocSend’s virtual data rooms. Instead of a flurry of email attachments, you can provide a single link that viewers can access safely to read all the due diligence documents they need. Start your free trial of DocSend today.