To begin, being in due diligence is a good thing! It means you have an investor willing to make a deal. At this point, and this may sound negative, the investor’s interest turns to finding reasons to not do the deal–and the way this is checked is by verifying the essential facts of the business through due diligence.
What occurs during the due diligence process?
Due diligence will start with the investors or their legal representatives issuing a long list of items they require. A good proportion of them will be documents you have close to hand, but some of them will be items you’ve not maintained, are not up-to-date, or even perhaps have not yet created. You must anticipate this and work to prepare and issue the items they require. It’s rarely the case that your company has everything ready and up-to-date, but demonstrating a commitment to speedy provision is a very worthwhile approach.
Is this something that I want for my business?
Due diligence may seem like an intrusion on the privacy of a business, but you must keep in mind that investors are only doing what they have to do. Venture capital funds are in the business of investing in risk, but the portion of that risk linked to bad or poor company information can and must be minimized.
What are the best practices that I can adopt to facilitate the experience?
The best practices you can adopt to improve the process are to maintain the main corporate, HR, accounting, and legal documents in secure cloud storage. A critically important topic is that of equity: investors will need to verify the cap table and all supporting documentation to ensure they have not miscalculated their percentage of ownership. You should also pay attention to having proper HR policies and documentation in place such as the employee handbook and departmental personnel files as companies often fall down on those points.
Finally, take the initial estimate of time and double it. It’s a useful conservative approach and helps to make sure you have enough runway to get through the diligence process before funds are transferred to close the investment deal. For some companies it may take 45 days, and for others it can stretch to 3-6 months.