There are no two ways about it — fundraising sucks.
I’ve seen it from the founder’s side and also from the VC’s side, and in both cases it’s mostly a big blackhole that drains out every ounce of time and energy you have.
To make the process a little more transparent, and hopefully win you back some time (and money), we’ve shared a whole collection of open source fundraising resources here — including our term sheet, ESOP docs, financing docs, and an overall step by step guide to our investment process.
Today we’re adding another to our list — a typical legal due diligence (DD) checklist.
So WTF is Legal DD??
The legal DD process is usually the last stage of any investment process. It’s almost always run by lawyers, and involves them reviewing key things like your incorporation docs, material agreements, and insurance policies.
The idea is to make sure everything is in place, and there are no legal issues that could create real headaches for you down the road.
Yes it’s tedious —but look on the bright side — its a good way to make sure you’ve got everything tidied up ahead of your next phase of growth —things like IP protection, shareholder registries, and employment agreements.
Also — you’ll typically only get to the legal DD stage once you’ve gone through all the commercial DD and have a term sheet from your investor. So that should at least give you something to smile about.
Important: If you’ve picked a good investor, there really shouldn’t be any more commercial DD to be done at this point — they should have already fallen in love with your business. There are exceptions of course, but generally a VC who offers you a term sheet should have already finished their commercial DD. Feel free to press them on this when you get a TS.
What does legal DD cover?
So here’s what a typical legal DD checklist might look like.
You’ll see that this list is actually pretty short (only 1.5 pages) — and that’s for a good reason.
Every company is different, but for an early stage company legal DD should be very lightweight. There is no way an early stage company should ever receive a 10-page request list… if you do then you should definitely push back because that’s crazy.
You won’t usually need the docs on this list until late in the fundraising process — but it’s worth pulling them together early so they are ready once you have the term sheet agreed. There’s nothing worse than holding up a fundraise because you can’t find one of your basic incorporation docs.
We hope this helps you to learn more about the process and get a sense of what you need to prep for (even if it just saves you a few hours work) — if anything isn’t clear, please feel free to ask at any time.
And if there any other resources you’d like us to share — we’d love to hear from you as well.