The recent events around FTX are a reminder that any investment requires appropriate due diligence. Here are a few tips on where to start:
- Search the web and social media for the founder team, the company, its products and services and - if available - key employees. This may reveal things that people don't tell in business meetings.
- Request the company to prepare a proper data room and read everything in the data room. You should not cut a check based on a teaser document.
- Read the cap table and verify its correctness. Cap tables are often wrong. Classical errors include rounding errors and not properly reflecting the fully diluted view.
- Ask the company to explain what they do and how they make money. Ask the founders and key employees separately, in search for a consistent story and understanding of the business.
- Ask for references, e.g. with prior founders or employers. Verify these references.
- Meet the entire team together at least once. This shows the dynamic in the team and how they get along.
- If the company's business depends on a specific technology, get an experienced person to review the tech stack.
- Be cautious any time someone pushes you into skipping due diligence. Consider passing on this opportunity.
- Conduct an appropriate legal, tax and financial due diligence - either internally (if appropriate staff is available) or externally. The scope of such due diligence should be appropriate in respect of the size of your investment, the stage of the company and the business in which the company is active (e.g. whether the company is regulated or exposed to specific risk, such as product liability).
- For regulated companies: Speak with their legal team and ask them to explain their legal setup and strategy to ensure compliance, especially how they monitor compliance.
Obviously, this is not an exhaustive list and any due diligence should be appropriate in the given circumstances. Lastly, the Schoenherr teams are happy to support any legal due diligence process #staysafe #staydiligent
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.