Due Diligence Checklist

Posted by Mohammed Chowdhury on

Start-up and emerging companies should be prepared for the significant amount of due diligence that a venture capital investor and its counsel may require before consummating a venture capital financing. Even angels are requiring many of these things to be under control today at earlier development stages. The following is a sample Due Diligence Checklist, which acts as a compliance request to the Company of all relevant documents and information. In appropriate circumstances, some listed items can be scaled back.

Corporate Documents of the Company and Subsidiaries

Articles of Incorporation and all amendments thereto.
Bylaws and all amendments thereto.
Minutes of all Board of Directors, committee, and shareholders meetings and all consents to actions without meeting.
List of states and jurisdictions in which qualified to do business and in which the Company has offices, holds property or conducts business.
Material information or documents furnished to shareholders and to directors during the last two years.
Most recently obtained good standing certificates for all states and jurisdictions where the Company is qualified to do business.
Previous Issuance of Securities

All applications and permits for issuance/transfer of securities.
A sample copy of stock certificates, warrants, and options.
Stockholder information, indicating the number of shares held, dates of issuance, and consideration paid.
All stock option, stock purchase and other employee benefit plans and forms of agreements
List of any outstanding stock options and warrants.
Any voting trust agreements, buy/sell agreements, stockholder agreements, warrant agreements, proxies, or right of first refusal agreements.
Any registration rights or preemptive rights agreements.
Powers of attorney on any matter.
Convertible debt instruments.
Other contracts, arrangements, or public or private documents or commitments relating to the stock of the Company.
Any debt arrangements, guarantees, or indemnification between officers, directors, or the shareholder and the Company.
Material Contracts and Agreements

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List of banks or other lenders with whom the Company has a financial relationship (briefly describe nature of the relationship - lines of credit, equipment lessor, etc.).
Credit agreements, debt instruments, security agreements, mortgages, financial or performance guarantees, indemnifications, liens, equipment leases, or other agreements evidencing outstanding loans to which the Company is a party or was a party within the past two years.
All material correspondence with lenders during the last three years, including all compliance reports submitted by the Company or its accountants.
List of major clients and their locations.
Any other material contracts.
Litigation

Copies of any pleadings or correspondence for pending or prior lawsuits involving the Company or the Founders.
Summary of disputes with suppliers, competitors, or customers.
Correspondence with auditor or accountant regarding threatened or pending litigation, assessment, or claims.
Decrees, orders, or judgments of courts or governmental agencies.
Settlement documentation.
Employees and Related Parties

A management organization chart and biographical information.
Summary of any labor disputes.
Correspondence, memoranda, or notes concerning pending or threatened labor stoppage.
List of negotiations with any group seeking to become the bargaining unit for any employees.
All employment and consulting agreements, loan agreements, and documents relating to other transactions with officers, directors, key employees, and related parties.
Schedule of all compensation paid to officers, directors, and key employees for the most recent fiscal year showing separately salary, bonuses, and non-cash compensation (i.e. use of cars, property, etc.).
Summary of employee benefits and copies of any pension, profit-sharing, deferred compensation, and retirement plans.
Summary of management incentive or bonus plans not included in (7) above, as well as other non-cash forms of compensation.
Confidentiality agreements with employees.
Description of all related party transactions which have occurred during the last three years (and any currently proposed transaction) and all agreements relating thereto.
Financial Information

Audited financial statements since inception (unaudited if audited financials are unavailable).
Quarterly income statements for the last two years and the current year (to date).
Financial or operating budgets or projections.
Business plan and other documents describing the current and/or expected business of the Company including all material marketing studies, consulting studies, or reports prepared by the Company.
A description of all changes in accounting methods or principles during the last three fiscal years.
Any documents relating to material write-downs or write-offs other than in the ordinary course.
Revenue, gross margin, and average selling price by-product or service.
Management letters or special reports by auditors and any responses thereto for the last three fiscal years.
Letters of counsel to the Company delivered to auditors for the last three fiscal years.
Aging schedules for accounts receivable for the last two years.
Breakdown of G&A expenses for the last two years.
Copies of any valuations of the Company's stock.
Description of all contingent liabilities.
Property

List of real and material personal property owned by the Company.
Documents of title, mortgages, deeds of trust, and security agreements pertaining to the properties listed in (1) above.
All outstanding leases with an original term greater than one year for real and personal property to which the Company is either a lessor or lessee.
Documents pertaining to proprietary technology developed/owned by the Company, including any copyright or patent filings. This will also include information confirming that the Company's systems, software, and technology is owned solely by the Company and do not infringe on any other party's rights.
Taxation

Any notice of assessment, revenue agents' reports, etc. from federal or state authorities with respect to any currently "open" years.
Federal and state income tax returns for the last three years.
Evidence of Company being current on sales tax, unemployment, social security, and other tax payments.
Insurance and Liability

Schedule or copies of all material insurance policies of the Company covering property, liabilities, and operations, including product liabilities.
Schedule of any other insurance policies in force such as "key man" policies or director indemnification policies.
All other relevant documents pertaining to the Company's insurance and liability exposure, including special reserve funds and accounts.
Acquisition, Partnership, or Joint Venture Agreements

All acquisition, partnership, or joint venture agreements.
Documents pertaining to potential acquisitions or alliances.
Any agreements regarding divestiture or assets.
Governmental Regulations And Filings

Summary of OSHA inquiries for the past three years.
Summary of federal and state EPA, EEO, or other governmental agency inquiries during the past three years.
Material reports to government agencies for the past three years (e.g., OSHA, EPA).
Copies of all permits and licenses necessary to conduct the Company's business.
Summary of applicable federal, state, and local laws, rules, and regulations.
Miscellaneous

Press releases during the last two years.
Articles and other pertinent marketing studies or reports relating to the Company or the industry.
Information regarding competitors.
Customer satisfaction surveys, if any.
Current brochures and sales materials describing the Company's services.

Typical suggestion for a Due Diligence Checklist

CORPORATE ORGANIZATION

Articles of Incorporation
Bylaws
Recent Changes in Corporate Structure
Shareholder List
Show Number of Outstanding Shares and Percent Owned
Stock Option or Share Appreciation Rights Plans
Parent, Subsidiaries, and Affiliates
Shareholder’s Agreements
Minutes of the Board of Directors
BUSINESS INFORMATION

Product Offering
Depreciation Method
Patents
Management Information System
MARKETING

Pricing Strategy
Patents
Distribution Channels
Promotion Tactics
Customer Base

Top Ten Customers By Product Line - Showing Volume
Market Share By Product Line
BUSINESS PLAN

Most Recent Five Year Business Plan
Prior Business Plan
FINANCIAL STATEMENTS

5 Years of Historical Audited Statements
Income Statement
Balance Sheet
Statement of Cash Flows
Change in Equity Statement
Year-to-Date Internally Generated Monthly Statements
Most Recent Five Year Projections
Monthly Sales Projections Taking Seasonality Into Account
TAX STATUS

Historical Tax Rate
Net Operating Losses
OPERATING DATA

Accounts Receivable
Turnover or Days
Aging
Control and Credit Policy
Seasonality
Inventory
Turnover or Days
Obsolescence Policy
Sources of Supply
Valuation Method
Backlog
By Product Line
Five Year History
Current
Seasonal Issues
CONTRACTS

List Major Contracts by Product Line
Terms
CAPITAL EXPENDITURES

Last Five Years
Five Year Gross Projection
Detailed Priority List With As Much Analysis as Possible
EQUIPMENT

List
Age
Appraisal
Orderly Liquidation Value
Replacement Value
DEBT AND LEASES

Lender
Terms
Interest Rate
Payment Schedule
LITIGATION

Current
Description
Potential Damages
Potential
Description
Potential Damages
PROPERTY

Description
Recent Acquisitions or Spin-Offs
Expansion Plans
INSURANCE

Property
Liability
Workman’s Compensation
Other
COMPETITION

By Product Line
Name, Address, and Phone Number
Size of Overall Company
Size of the Business Unit that is the Competitor
Market Share
Competitive Advantages and Disadvantages
Trade Publications
Name, Address, and Phone Numbers
MANAGEMENT

Organizational Chart
Resumes
Ownership Interest
Compensation and Contracts
Performance Evaluation Criteria
Profit or Gain Sharing Policies
EMPLOYEE RELATIONS

Unions
Name of Union
Name of Local President, Address, and Phone Number
Copy of Contract
PENSION PLANS

Funding Status
Balance Sheet Treatment
Ten Year Projected Cash Expense
RETIREE MEDICAL BENEFITS LIABILITIES

Funding Status
Balance Sheet Treatment
Ten Year Projected Cash Expense
ENVIRONMENTAL LIABILITIES

Description
Phase One Studies
Phase Two Studies
Five Year Projected Remediation Cost
Five Year Projected Compliance Cost
LAST CORPORATE TRANSACTIONS

Description of Each Purchase and Sale Agreement of Each
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