Before committing to an investment, investors should conduct thorough due diligence on the company and its management team. This includes reviewing the company's financials, employment market potential and history as well as more specific requests for larger investments including insurance documents, ESOP Plans and Cybersecurity information.
From the startup’s perspective, it sends a clear message that you are a sophisticated investor and will be proactive in your company dealings.
This blog post will break down the different areas of due diligence which you should be aware of, as well as some of our tips on how to best conduct your own research into a company before making your investment.
- Financial Due Diligence: Reviewing the company's financial statements, cash flow projections, and financial health is essential. Request documents such as income statements, balance sheets, and cash flow statements. Here, you should analyse the Company’s financial performance, profitability, and stability to holistically understand their financial standing. It may also help to request interim statements, as Company’s are only obliged to formally submit their financials annually, so they may have changed since the formal document was made. We also recommend asking for information about any audits of the Company to make sure you cover your bases financially and can invest knowing that the Company has their affairs in order.
- Legal Due Diligence: Engage with legal professionals to conduct a comprehensive review of the company's legal documentation. Here you should be trying to request as broadly as possible, capturing the Company’s key legal documents, including contracts, agreements, intellectual property rights, and information about the Company’s litigation history. Double check these documents to ensure the company has complied with regulations. At this stage, we also recommend asking for information about any threatened proceedings against the company or any of its directors, because the company is not obliged to include this as part of their litigation history, however it can have substantial effects on your investment. Requesting information about the Company’s capitalisation table is a must, as well as information about the Company’s registration and charter documents.
- Operational Due Diligence: Once you are confident that the Company is financially and legally above-board, we suggest you evaluate the company's operational processes, management team, and organisational structure. Documents you should be requesting here would include an organisational chart, employment agreements, ESOP plans, policies and incentives. In doing so, it is important to make an assessment of the scalability of the company's operations and its ability to execute its business plan.
- Market Due Diligence: Finally, it is important to get a bigger picture by understanding the market in which the company operates, including its size, competition, and growth potential. Conduct market research to validate the company's value proposition and target audience. Identify market trends, customer needs, and potential barriers to entry. To assist you, we suggest requesting a copy of the Company’s pitch materials, sales charts and
Doing your research
Though due diligence is a great way to make sure the company is legal, operational and profitable, you should conduct further research to ensure it is a good cultural fit for your investment. Here we recommend looking to some other places to find out if the company matches your values and ethics, as well as has a team that will maintain a good relationship with their investors.
- Company Website and Materials: Start by exploring the company's website to gather information about its products, services, mission, and values. Look for case studies, whitepapers, and press releases that provide insights into the company's achievements and future plans. This tells you a lot about the Company and their goals, with it essentially being their sales pitch to the general public. If a company has a bad website, or no website at all, this is a red flag that you should follow up with them.
- Industry Publications and News: Stay updated with industry publications, news articles, and press releases related to the company and the industry more broadly. This helps in understanding market trends, competitor analysis, and any significant developments or partnerships the company has made. At a minimum, a subscription to the Australian Financial Review is necessary, though we encourage all Angels to stay across other sites including Startup Daily too.
- Social Media Presence: Review the company's social media profiles to gauge its online presence and engagement with customers. Assess customer feedback, comments, and reviews to gain insights into their experiences and satisfaction. If the Company has done other forms of physical or online advertising we also recommend you investigate those to see what claims the company is making about itself.
- Professional Networks: Leverage professional networks and platforms like LinkedIn to research key members of the management team, their backgrounds, and industry connections. Look for endorsements, recommendations, and relevant experience.
- Investor Relations: If the company has an investor relations section on their website, explore it for financial reports, investor presentations, and shareholder communications. This can provide a deeper understanding of the company's financial performance and strategy.
TLDR: Is there a list of documents I should request?
Though we always recommend consulting with a lawyer and financial adviser in relation to due diligence, we’ve assembled a basic list of documents that should be in any due diligence request.
- Financial statements:
- Income statements
- Balance sheets
- Cash flow statements
- Interim financial statements
- Audits and Reports
- Legal documents:
- IP rights
- Litigation history
- Threatened proceedings against the company or any of its directors
- Capitalisation table
- Registration and charter documents
- Organisational chart
- Employment agreements
- ESOP plans
- Insurance policies
- Investor presentation materials
- Privacy policies and standard terms and conditions
Some tips from us:
A smart angel will not overload a company with due diligence requests. Be sensible. Request documents proportionate to the amount of your investment, and make reasonable inquiries where you notice gaps.
Many companies will have already prepared a data room containing due diligence documents. As a first point of call, you should request access to the company’s existing data room, and only ask for extra documents if you are sure it is absolutely necessary.
Finally, you should always seek financial and legal advice specific to your circumstances. Angel investing involves complex legal structures and agreements, and it's important to have a thorough understanding of the legal implications of your investment.