“Due diligence is mother of good luck” this statement was given by Benjamin Franklin and value of this statement can be seen in the start-ups these days. Before starting any business, it is very important to have a good research and investigation of all the things associated with that business. Such procedure of research and investigation which is done to ensure that whether there are potential issuers for the business is called due diligence or Due diligence is a fact gathering process by which a buyer or investor obtains information about the business they are seeking to buy or in which they are seeking to invest, both from a business and legal perspective. Generally, the entrepreneur who come which an innovative idea has adequate knowledge of technologies but not in other field related with business. It is not possible to be successful in business by just having the knowledge of technologies so, due diligence is needed in business. Following are the requirement which can be done for due diligence in start-up but this list is not exclusive-
- Basic information-
- Founders- for selection of founding team it is very important to have a well organise selection or interview process. Background, creditability and relevance with the product and market must be checked.
- Product or service- the applicability of product or services in market must be insured. It is important to know that how revolutionary the idea is and how it can fill the void space of market.
- Industry and market analysis- it is important to analyse the other industries which are already working in that area and all the competitor. Market analysis should be done to know the market share, demographics, target market, trends, barriers etc.
- Company’s Statutory Records- all the statutory records must be checked and carefully maintained like Permanent Account Number, Tax Deduction & Collection Account Number, Memorandum of Association, Articles of Association, Minutes, and Statutory Registers.
- Other basic things are press release, list of shareholders and proportion of their share, all agreements and contracts like Founder agreement, shareholders agreements, joint venture agreements, employee agreements and other agreements, contracts or commitments to which the start-up or any of its stakeholders are a party are gathered to understand the legal compliance.
- Securities and financial statements-
- Account Books and Financial Information- account book contain the information about the financial performance so it must be checked to ensure the financial performance.
- Capital Structure- Prepare details of company’s authorised issue and subscription and ensure that whether any change in capital structure are required or not.
- Debt- identify the amount of debt and understand the stability of the company.
- Revenue and Customer Information
- Sales- for due diligence investor should check the sales and know the performance of the company.
for sales two things should be insure that is-
- i) Description of recurring,
- ii) Non-recurring revenue,
iii) Product and non-product related revenue, including royalty, licensing, trademark or patent revenues
- Customers – to understand the target market and get feedback a list of customers should be prepare.
- Tangible and Intangible Properties-
- Property- Listing of all assets owned, leased, subleased, or used along with copies of all deeds, leases, sales contracts, sublease contracts, etc. is done to evaluate the net worth of the start-up and further it also helps to prepare its valuation report.
- Trademark, Patent and Copyrights– list of all IPs which is owned by company must be prepared and understand that who owns such property and rights of others.
- Litigation and Claims-
- Litigation and Disputes- All disputes related to the company which is pending and also which is settled must be summarised in order to understand clear picture of legal compliance.
- Governmental Investigations- To have an understanding of the standards of corporate governance in the company the summaries of regulatory investigations are prepared to which the start-up is or was a subject.
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