You will not be able to close a round of financing, sell your company or do an IPO if your corporate house is a mess.
Investors, buyers and underwriters all insist on doing pre-transaction diligence to ensure that you have copies of all of your key documents and to assess whether these documents contain any unusual provisions. If you are missing board minutes, stock option grant approvals, employee proprietary information agreements, etc. or if your documents are a disorganized mess, then the best case scenario is that your deal will be significantly slowed down (costing you valuable time and perhaps more money as issues are identified) while you locate and organize documents, and, in the worst case, your deal could be derailed entirely. In either case, you are going to find yourself stretched to the limit trying to simultaneously run your company, negotiate/close your deal and organize your corporate materials.
How do you avoid a potential train wreck like this?
The answer is to start organizing your corporate house NOW. Often companies will either set up their own secure cloud data site (personal and often free editions of cloud file storage sites are usually not appropriately “secure” in that they don’t allow the user to appropriately restrict access, though business editions tend to have more robust security features) or use one provided by their law firm and organize that site into folders that correspond with the categories that you would see in a typical investor/buyer due diligence request list (you can preview and download a sample due diligence request list below). There should be separate folders for board and stockholder minutes, stock records, employment agreements, commercial agreements, etc.
Once you’ve done the hard work of setting up the site and populating the site with relevant materials, it will be relatively easy to update the site in real time as new documents arise. The advantages of this approach include:
- When you get that term sheet for a new financing or a Letter of Intent for the sale of the company, you won’t be stressed about due diligence. Instead you can focus on running the business and trying to negotiate the best deal.
- Because you will have fewer corporate housekeeping problems to clean up, the buyer/investor will have fewer excuses to “re-cut” your deal prior to closing (e.g., lowering your valuation or sale price, or insisting on aggressive post-closing indemnification provisions).
- Your level of organization will impress investors/buyers and they will often ratchet down their level of due diligence scrutiny accordingly because your company looks “clean” (disorganized companies tend to get labeled as having “hair” and are typically subjected to higher levels of due diligence scrutiny). This can make your deal move faster and lower the risk of “deal fatigue”.
- Your regular routine of maintaining the data site will cause you to catch and address corporate problems early, before they turn into potential deal killers (e.g., the contractor who wrote your code and never signed an IP assignment).
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