Diligence is that detailed assessment of your company to evaluate the strength of your assets and identify risks that may interfere with your chances of success. Diligence is conducted by investors and other companies who are considering making a large commitment of funds or resources to your company.
Start-up company leaders are understandably focused on the day-to-day tasks that are necessary to develop a product and take it to market. It’s important to preserve some leadership bandwidth to prepare for diligence every day.
A big part of diligence is organization. If an investor finds you well prepared and highly organized, that alleviates some concerns right away. For example, investors will often look at essentially every agreement you have signed, including every confidentiality agreement. Do you have these documents in order? Do you have actual signed copies in one place, or are they spread all over the company in different people’s email inboxes? There is nothing quite so frustrating as having to scramble at the last minute to pull together a company’s agreements from all sorts of sources. Prepare every day for diligence by ensuring that all company records and signed agreements are finding a home in a folder structure that is easy to navigate.
Another important aspect of diligence is determining risk. Part of the risk analysis relates to whether you have done a good job of negotiating and drafting your agreements. Have you avoided legal expense by negotiating your own agreements but increased your risk by accidentally signing documents you shouldn’t have signed? Prepare every day for diligence by ensuring that an attorney reviews all important agreements before you sign them.
An overlooked aspect of diligence is the opportunity to tell a story about the sophistication with which you are managing your company’s legal affairs. For example, intellectual property (IP) diligence often starts with providing a set of IP documents, such as patent applications. The investor or potential partner is often left to sort through the stack to make sense of the company’s IP position. A better approach is to prepare and document an IP strategy for the company, then walk the investor through the strategy and show the investor how the company’s IP position is being developed in order to execute on the strategy. Prepare for diligence every day by making IP decisions based on a well thought-out IP strategy.
These are just a few examples of how you can be prepared for the rigors of diligence with just a little effort each day.