Signed term sheet: The Founder Blueprint For VCs-Founders Negotiations (Due diligence)
(Read the first part of our article here. 😉)
Due diligence process
The due diligence process is an audit which could cover different things such as the legal risks, the financial records or a product/technology review. There are different things to check to establish a good summary of the situation of the company at the time of the investment. Obviously, the due diligence is not the same for a 5 years-old deep tech company or for a 1-year-old Saas. Most of the time, due diligence (especially financial and legal) is performed by a specialised company. The most common aspects of the due diligence are well summarised here.
Is the due diligence a pure administrative step?
Not at all! According to Djamil, “the process was really useful to have a clear picture of what’s working really well and what needs to be improved fast. We now have a clear to do about things we need to improve.We are even considering doing it again for ourselves in the next few months”. Nicolas from Shine confirms that “the researches made to answer the questions asked during the due diligence were super useful”.
When do I need to start the preparation?
According to Charles, “You need to prepare it before you sign the Term Sheet. Just consider that the due diligence will start as soon as you have signed the Term Sheet. It will help to both not to slow down the process and to feel more peaceful during this stressful period.”. According to Beena, the accounting part is the easiest as you have an accountant who asks you to do it on a regular basis but for the legal part, you need more self-discipline.
Who pays for the due diligence?
The company will pay for the due diligence and the lawyers with a cap, after that limit the cost is shared between the investors and the company. The investors provide the result to the company, and it is a tool to help the company to have a very complete vision of its strengths and weaknesses at the time of the investment.
Pro tip: You can negotiate a floor, once this trigger is reached, the investors and the company share the costs altogether.
Our best advice for you to make it smooth
- First and foremost, take very experienced lawyers in that kind of deals. You will rely on them for a lot of things and they are the main differential factor between a smooth process and a total nightmare. If there was only one line in this article it would be this one. Charles “has done some reference call” previously with both founders and investors that have worked with them to be sure that they know how it works. “Another important point is to agree on a clear price and on what is included in the package”.
- Let the lawyers talk together as much as possible, good lawyers have the best proposals for each issue for both sides.
- Be reactive and prepared, a few days lost to negotiate a clause or provide some documents can stifle the momentum.
- Prepare a very organised data room that you can share with the investors and the people responsible for the due diligence.
- As a founding team, you need to be clear about what you want.
- Have a good knowledge about what is market practice and what is reasonable to negotiate. The investors also have their requirements from their own investors.
- Set a closing date soon in the process. Even if it is not respected in the end, it will accelerate the process as nobody wants to be the one responsible for delaying the deal.
Our founders also accepted to share with you THE thing they could have done better:
- Camille: We wasted some time by lack of experience. Also sometimes by trying to gain time and go fast you regret it later. Better to take the time early, not rush and do it well right away rather than return to it later.
- Djamil: Work more on the different possibilities of the Liquid Pref and the Leaver clauses before the negotiation. We could have saved a lot of time if we had a much more precise understanding of these clauses beforehand (eg. xls simulations)
- Beena: As we are a company with a history, the shareholder agreement was a bit more complex. We wasted time on discussing the same points several times. It would have been great to have a table with the clauses still to discuss and the output of the discussion on top of the traditional documents.
- Charles: As a founder, you also need to understand very well what you are negotiating. I regret that we didn’t plan a 2h kick-off with the lawyers at the beginning of the process to define all the terms and the process. For instance, you need to understand what a pre-emption right is, and you cannot just decide that the lawyers will negotiate for you. They can also inform you in advance about some practical elements such as insurance and bank accounts. If you don’t have them, it could also slow down your access to the money which is very frustrating!
Our last advice would be not to freak out too much about all this legal stuff. This part would be very intimidating but just keep in mind that as an early stage company, as a founder you are its main asset.
A special thanks to Shabir Vasram for his meme skills and to Mathieu Daix for proofreading.
