Series A Diligence Checklist
Recently the well known startup incubator /seed accelerator Ycombinator, (which was launched in March 2005 and has been used to launch over 2,000 companies including Stripe, Airbnb, Cruise Automation, DoorDash, Coinbase, Instacart, and Dropbox) published a 70-page Series A guide based on its work with 190 YC companies over the last couple of years. This was first reported on by Techcrunch. The guide has wealth of knowledge on things such as working on the investor pitch and pitch decks, investment memos, 409A valuations, what financial metrics/benchmarks do VCs look at (such as ARR, annual recurring revenue), and more.
If your startup is an early-stage company that is looking to fund raise in 2020, you should be thinking about preparing a due diligence materials which includes financial documents such as P&L statements, business plans, financial cash flow forecasts, tax computations, proof of tax compliance, your cap table and more. Other documents to be retained will include incorporation and constitutional documents (that evidence legal ownership, such as the company’s register of members); annual and management accounts; commercial contracts also leases; IP licences or also assignments (including development agreements; employment contracts and insurance documents.
This detailed list will run through all the pieces of information you’ll need to have ready once you sign a term sheet. Your financial documents tell your investors a story—how you manage money, how you plan to grow your business, etc. Working with an strategic startup accounting expert to get your books in order (before investors start looking) will help you understand the story they are currently telling.
Here is the information you’ll need to have ready once you sign a term sheet. Having all of this together in one place – a Data Room – before you sign a term sheet will cut as much as a week off of your closing process. Founders don’t generally realize that closing a Series A can take more than a month, much of which is often spent tracking down documents for lawyers.
Corporate Records and Charter Documents
All minutes of directors’ and stockholders’ meetings also and all written consents of directors and stockholders.
Certificate of Incorporation, Certificates of Designation, Rights, etc., and Bylaws.
- Similar information for the Company and subsidiaries, if any.
- A corporate entity organizational chart, if there are any parents or subsidiaries.
Business Plan and Financials
- Current business plan and any financial projections also
- Most recent financial statements also
- A list of the Company’s trademarks, patents, copyrights and domain names (or any applications therefore) including documentation of filing or registration with the appropriate governmental entities.
- If any of the foregoing were assigned to the Company, please so state and provide documentation of the assignment and recordation with the appropriate governmental entities.
Security Issuances and Agreements Concerning Securities
- A list of the Company’s stockholders, including issuance dates and original issuance price.
- A list of the Company’s option holders, including grant dates and exercise prices.
- Copies of agreements relating to outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition of any of the Company’s securities, and also agreements relating to the Company’s past stock issuances.
- Any documents evidencing registration rights for the Company’s also securities, or evidencing any agreements among the Company’s shareholders or between the Company and its shareholders.
- A summary of the vesting schedules of any stock or options subject to vesting, including any vesting acceleration.
- Agreements relating to voting of securities and restrictive share also transfers.
- Evidence of qualification or exemption under applicable federal (including Rule 701) and state blue sky laws for issuance or transfer of the Company’s securities.
- agreements, understanding, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound which involve obligations of, or payments to, the Company in excess of $25,000.
- personal property leases.
- agreements concerning the purchase, lease, or sublease of real property.
- Any documents evidencing indebtedness for money borrowed or any other liabilities incurred by the Company.
- Any documents evidencing any mortgages, liens, loans and encumbrances with respect to the Company’s property or assets.
- documents evidencing any loans or advances made by the Company.
- licenses or agreements of any kind with respect to the Company’s or others’ patent, copyright, trade secret or other proprietary rights, proprietary information or technology, including employee confidentiality and proprietary information agreements.
- insurance policies held by the Company or of which the Company is a beneficiary and a summary of such policies, if available.
- judgment, order, writ or decree by which the Company is bound or to which it is a party.
- standard forms of agreements used by the Company.
- joint venture and partnership agreements.
- management, service and marketing agreements.
- confidentiality and nondisclosure agreements.
- agreements requiring consents or approvals in connection with the financing.
- consulting contracts.
- other agreements material to the business of the Company, or outside the ordinary course of business.
- A list of officers and directors. If any officers are not currently devoting 100 percent of their business time to the Company, please note them
on this list.
Information Regarding Disputes and Potential
- Any correspondence or documents relating to any pending or threatened action, suit or proceeding or investigation, including, without limitation
- those involving the Company’s employees in connection with their prior or present employment or use of technology and
- those being conducted by or before any governmental entity or regulatory agency.
- Any correspondence or documents relating to allegations of the Company’s infringement of the proprietary rights of others.
- Any correspondence or documents relating to any labor agreements or actions, union representation, or strike or other labor dispute.
- Information Regarding Employees and Employee
- A list of the Company’s employees and consultants, including title, base salary, target bonus (if applicable), commission plan (if applicable), classification (including, if an employee, whether the employee is exempt or non-exempt) and state of residence.
- The Company’s standard form of offer letter.
- Any agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof, including without limitation, employment agreements and offer letters with severance benefits or vesting acceleration provisions.
- Any plans, agreements or arrangements that provide benefits contingent upon a change in control.
- The severance or deferred compensation plans (including any salary deferral agreements, whether written or oral, with employees or consultants).
- Such employee benefit plans, including, without limitation, stock option plans, 401(k) plans, pension plans and insurance plans.
- So forms of agreements used in connection with any stock option plans. (such as a form of option agreement, notice of exercise and restricted stock purchase agreement).
- If the Company sponsors a 401(k) plan, any determination or opinion letter and Form 5500 filings for the last 3 years.
- All documents or other information relating to any loans made by the
Company to its employees, directors or consultants.
- The Company’s employee handbook.
- If the Company has any foreign employees, separately list (by country) all benefits provided to foreign employees.
Of course, we suggest working with an experienced startup-focused accounting firm, like Huckabee CPA, well before your startup is in the due diligence phase of an important fund raising or m&A transaction.