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Episode Date: January 21, 2021
https://youtu.be/Nx0qtl-pSDo
Top Insights
- Investors spend time doing diligence on companies they are interested in, so make sure you are prepared for the opportunity and don't waste it. Being prepared for diligence will help demonstrate that you will manage, track, and spend their money wisely — when they give you their money.
- Cap tables are usually the domain of lawyers but your accounting firm should reconcile your cap table. Money that was supposed to come in, may not have. Lawyers don't reconcile the cap table.
- The amount of diligence done by investors depends on the size of the deal. Small, early deals usually don't involve much diligence from investors.
- Due diligence is the process of making sure all the representations you made about your startup are correct so that the person who is going to invest feels comfortable.
- Do not procrastinate your preparedness for financial and legal due diligence because funding opportunities can appear suddenly. You do not want your company to look ugly at a critical moment.
- Great companies have their data room (diligence folder) set up and maintained on a regular cadence. This keeps small things from snowballing into big things.
- Make sure your financials are up to date every single month.
- Closing the books
- Accounting questions all answered
- Doing a debrief with your controller once a month
- Historical financials
- Making sure they accurately reflect what the founders have told the investors in the lead up
- Forward looking financial model
- Doesn't have to be perfect.
- It is a map to judge where you think you can take the business so they can sell it to their partners and firms.
- Tax compliance
- Reputational certification
- VCs like working with CPA firms because there's no incentive for them to hide something from them.
- For large deals, VCs will hire accounting firms to re-build the financials from scratch and compare them against the financials that the founder provides them.
- Legal certification
- Reps and warranties: The founder states, via a signed document, that all financial information provided is true and accurate, but also delivers information to support this statement. The information provided includes financial statements, customer and supplier listings, copies of all major contracts, proof of asset ownership, etc.