14. My #1 advice to startups: Always be due diligence ready

When founders come to me for advice, they are often looking for help with pitching, fundraising, strategy, or security. At some point, they will often ask what one piece of advice I would give them. I always tell them “stay due diligence ready”.

This comes from my personal experience of being totally unprepared when an offer to buy my business come out of the blue five years after starting. What followed was months of the hardest work and longest days I have ever experienced. We had to obtain signatures from former employees and past vendors for work done years earlier. We hunted through old emails for key contracts and agreements. It was a mess.

If we had started keeping all of our records organized early on, and kept them up to date, we could have avoided all that pain. In the end, the deal fell through and it was for the best, but it was an experience I will never forget.

The bottom line is that it is much easier to stay due diligence ready than to get due diligence ready, and the earlier you start the simpler the process will be. Investors will want different things, so it is impossible to be perfectly prepared but with the right systems and processes you can be 99% ready and able to fill in that last part with minimal effort. The following is my list of the records you need to have close to hand and up to date.

Investments and Equity

The most important thing is to know who actually owns your company. That means an accurate cap-table with all the associated documents. Things like purchase agreements, term sheets, and voting agreements. Additionally, you will need convertible notes, SAFEs, option plans, grants, and agreements. All of these need to include the fully executed signature pages.

HR Documentation

An org sheet will show who is in your business and what roles they fill. Keep bios of key employees highlighting how their particular skills and backgrounds contribute to the business.

Because HR issues can seriously damage companies, having clear documentation of all hiring, promotion, termination, and compensation decisions shows that you are taking this seriously. There should never be any “casual work” for your company.

Intellectual Property

For many startups, intellectual property is their largest and most important asset. You need to be able to show that you own all the IP you claim. Require and keep intellectual property assignments or agreements with anyone who touches your code, contributes to inventions, or develops any content. Copyright laws strongly favor the individual creator. Without explicit assignments and agreements, they could later make a claim.

Intellectual property includes Patents, Trademarks, Copyrights, and Trade Secrets.

Contracts

I was shocked by just how many contracts my company had executed over its first five years. Considering only the material contracts, they included things like contractor agreements, office leases, software licenses, service contracts, insurance, and purchase agreements. Any of these might contain important obligations of your company or commitments to it.

Because of the huge number of contracts, it is important to set up some kind of database for them. To begin with, a spreadsheet can work. It should include things like who the contract is with, the kind of agreement, effective date, and termination date.

Legal

In any investment or acquisition, you will be making many representations about the business and its legal status. If you are a corporation you should have: The articles of incorporation along with all amendments and restatements; The company bylaws; Minutes of all board and shareholder meetings; Resolutions for all actions of the board or shareholders.

You will need to disclose records related to any past, current, or anticipated litigation.

Additionally, you will need to have any required business licenses and permits to operate in your location.

Operations

Operations covers a lot of the nuts and bolts of your business. What are your continuity / disaster recovery plans? Do you have written IT plans and policies? Have you done any security testing or threat modeling? Maintain lists of all software licenses, servers, computers, and network diagrams.

Beyond technology assets, what physical property does the company have? Track the purchase date and price of all real estate, furniture, vehicles etc. This was another massive blind spot for me back in the day.

Financials

Everyone will want to see your financial records. Financial statements should conform to Generally Accepted Accounting Practices (GAAP). Ideally, they would be audited, but that is not required early on. They do need to clearly show the financial condition of the company, it obligations, income, and cash position.

Projections are also important, showing if / when your business will need to take in additional investment.

Keep your business intelligence and analysis up to date. What are your cost of goods sold, user acquisition costs, customer lifetime value, churn, sales pipeline, virality, etc?

PR

While you are generally not required to disclose your publicity, this is your chance to brag about the company. Keep track of all press releases, marketing materials, publications, interviews, videos, and anything else that illustrates how awesome your company is, and the great things others have said about it.

Data Room

Finally, I strongly encourage you to keep all this in a virtual data room. You will need to prepare one before due diligence can start, but there are significant advantages to doing it much earlier. First, it is a great place to store all the information discussed above. Second, having it ready means you can simply hand over the keys when an opportunity arises. That way, you can focus on the negotiation not scrambling to answer questions.

This is not sexy advice, but it can make transactions much faster and smoother. Start getting your ducks in a row now. It is never too early to start and the less stuff you have to gather, the easier the whole process will be. Once you get everything pulled together in a category, immediately implement policies and procedures to ensure that it stays that way, so you don’t need to do it all over again. If you do, you will thank me when you are faced with a serious due diligence process.