Venture capital funding rounds can be more complicated compared to seed and early series rounds. This is Part 1 of our guidance on the basics to consider.
1. Due Diligence
It is inevitable that your Venture Capital investors will do some (and probably a lot) of due diligence on your business. They want to be sure that your business matches your description and no hidden costs which might reduce the pre money valuation you have agreed.
Many details are available online on websites like DueDil and Companies House. You will disclose a fair amount of information about your business, including your key financial, legal and commercial documents. Venture Capital funds will normally send you a due diligence questionnaire (DDQ) covering their standard enquiries, with headings are: corporate documents (articles etc), management accounts, IP licenses, key contracts, insurance policies, licenses/regulatory correspondence, litigation details, property, data protection, officers/employees, financials, management questionnaire.
Having this information quickly and clearly available to investors can avoid issues down the line when gaps or issues can be more disruptive.
2. Intellectual Property
Early stage companies need to ensure they own the Intellectual Property created for the company by its founders, employees or contractors. This avoids claims that IP on which its business is based does not belong to it or belongs to a third party. It’s also critical to register Intellectual Property, like trademarks (UK Intellectual Property Office, European Intellectual Property Office and the World Intellectual Property Office in Geneva).
VC due diligence will want to confirm your business has a clean IP situation. Moreover Founders will be asked to warrant this in the investment documents and therefore take the risk of any gaps.
Check your contracts with developers and employees and where there is no contract, ensure you get these in place as quickly as possible (with retrospective coverage for what has already been done).
For open source software, check you are operating within their licenses. For trademarks, patents and domain names, check they are in the company and not founder or individuals names. If the latter, disclose this to the VC and make arrangements for assigning back to the company.
Showing you are on top of IP will gain trust from your investors. This can be really important, as the IP position is rarely smooth in technology driven businesses, especially those looking to disrupt existing business models.
3. Existing Investors
You will need to consider rights of your existing shareholders do no conflict with the new VC round.
Founders have always used Angel Investment platforms like Bill Morrow’s Angels Den. Increasingly entrepreneurs are also using crowdfunding to source funds before getting to VC stage. Companies like Crowdcube, Seedrs and Syndicate Room offer This has particular issues, often simply this is due to the large number of minority. You must be address this before you subsequently take on a VC.
Check your contractual documents with existing investors early and ensure you manage the communication process to obtained resolutions and consents. Very important is to not forget it’s likely you have signed an NDA with potential VC, which you will need to get consent from before disclosing the deal to your existing shareholders.
4. Existing Investors
Your company is required by law to maintain certain registers including capital, shareholders, directors and charges. These are often referred to as statutory books.
It is now so easy to incorporate a company and update records online that founders forget to create or maintain statutory books at the company’s registered office. However your VC will want to check you have these documents in place, because they are the legal record of who owns the company etc.
If you have any doubts of your legal obligations check at Companies House or speak to your legal advisers.
5. Companies House
As part of the due diligence process, your VC will compare Companies House or www.DueDil.com with the information you have provided via the statutory books. If they don’t match up, it sends a poor message and you’ll need to explain why and rectify it before closing the round.
Make sure you have made all the appropriate filings for changes to share capital, directors, shareholders etc. www.companieshouse.gov.uk has very clear guidance on forms and steps for all company filings.
We hope this was helpful! Get in touch if you need more detail firstname.lastname@example.org
Stay tuned for Part 2.