It is a procedure by which an investor in a business, asset or organisation examines the target’s financial records to support its worth and determine whether there are any issues on which it needs more information or which should be used as a basis for renegotiating the price.
Firstly, it’s finance. Each investor will want a copy of the past financial record. One shall be required to transmit general ledger, balance sheet, income statement, cash flow statement, and other financial records. The investor wants to ensure that the company does not have any unusual circumstances that might make it a poor investment, such as being completely indebted.
The second is Intellectual property. Angel investors will want evidence that the company has the right to the Intellectual property that is being developed. Patents, trademarks, Copyrights etc are vital for showing that the company can sell the products that were pitched.
The third one is Information on any outstanding litigation. If the company is in any lawsuit, it will invariably have to produce documentation about them including potential outcomes. An investor will need to consider this before coming on board for credibility.
The fourth is Revenue streams. Investors would dive deeper into the key revenue streams. They will ensure that the revenue streams will continue to grow in the future.
The fifth is the Cap table which is the capitalization table. It needs to be examined by an angel investor to make sure it isn’t over diluted. If the company has previously accepted sizable contributions, one should be ready to discuss them more and persuade the angel investor that their position will not experience the same amount of dilution.
The sixth is Market. Investors will look into various factors during the due diligence process in addition to the company. Further, they would be interested in the viability of the market that the company is entering and the overall position in it.
The last is Equity structure. Startups often have complicated ownership structures. Multiple co-founders, angel and early-stage investors may all have equity. Additionally deals struck with them might also include conditions that will influence how the firm is perceived at the current stage of funding.
Done By:
Sruthi Saravanan, Law student – University of Birmingham.