Whenever a company seeks capital and a firm offers a term sheet, it will undergo a process of due diligence which comprises of two major parts: the legal/operational documents and the accounting books. I have observed that the process is identical — whether the company is a startup or is preparing itself for an IPO. Of course, the older the company, the more documentation will be delivered to the legal and accounting firms. But it behooves any company to make sure that it has every document ready for inspection. The better organized company gets its financing faster than those who run a sloppy operation.
What sort of documents are normally requested? The company will need to produce corporate books, leases, contracts, Public Relations announcements, advertising, and any other sort of relevant paperwork which reveal the true existence and management of the company. From the accounting side, the company should deliver audited statements as close to the date of the request and going back several years.
Why is the systematic delivery of the documents so important? If, for example, a company has an office, it should have a lease. The lease would then have the principal terms and conditions which reveal the yearly costs. The lease is compared to the accounting entries in the balance sheet. If they conform, then this company is performing well and handling its costs in a perfunctory manner.
Not having a lease raises a red flag. The landlord might be able to evict that tenant, which has no legal recourse on paper. Or, if the lease is lost, the failure to produce the lease might suggest that the company cannot manage and organize important paperwork.
One private equity manager stated that the investment process would occur much faster if the company prepared its files well in advance for delivery during the due diligence process. Since any delay might add an additional wrinkle to the final closing, a company should focus on organizing its important corporate files from the singular perspective of the potential investor.
Recently, I encountered a CEO who indicated that he wanted to raise capital. He had no lease, no local incorporated documents. He was definitely not ready for prime time and approach an investor. So I always recommend that companies seeking capital at whatever stage make sure that the paperwork is organized and ready, and that its accounting be up to date. The due diligence will go much faster and the investors will be able to write that check sooner.