Lecture Notes on Due Diligence by Amit Botti

Speaker Introduction

• Amit Botti is a legal expert at 500 Startups.
• Former attorney at WS GR, representing tech companies from startup to IPO.
• Experienced in VC funds and investments.

Overview of Due Diligence

• Purpose: Verify information and expectations from the company.
  • Not to discover every single detail but to assess risk.
• Outcome of Diligence: Not necessarily a deal breaker if issues are found.

Timing of Due Diligence

• Depends on the type of diligence.
• Significant legal diligence typically starts after signing a term sheet or LOI.

Conducting Due Diligence

• Conducted by the investing team or outsourced.
• Lead investor typically handles the main diligence effort.

Where Due Diligence Occurs

• Virtual data rooms or informal folders (e.g., Dropbox).
• Important to request missing documents.

Key Areas of Due Diligence

• Commercial Points: Product demo, target market size, team assessment.
• Technical Diligence: May include code reviews.
• Financial Diligence: Hard to rely on projections for early-stage companies.

Focus Areas for Early-Stage Diligence

• Team: Confidence in the team is crucial.
• Market: Understanding of market assumptions is vital.
• Legal Structure: Ensure basic legal structure is sound.
• Intellectual Property (IP): Important for IP-intensive companies.

Sample Commercial Diligence Items

• Team and Founders: Background checks, reference calls.
• Market: Review market size assumptions, competitor analysis.

Sample Legal Due Diligence Checklist

• Key Documents: Certificate of incorporation, bylaws, stock purchase agreements.
• Cap Table: Detailed cap table and all convertible securities.
• IP Assignments: Verify all IP rights are assigned to the company.

Common Issues in Legal Diligence

• Incomplete information and cap table issues.
• Missing IP assignments and unauthorized stock/options.
• Ensure all documents are signed.

Changes as Company Grows

• More intensive diligence with company growth (Series A, M&A, IPO).
• Increased cost with larger checks.

Q&A Highlights

• Importance of organization and using tools like Dropbox.
• Exit strategy considerations should use industry comparables.
• Team issues can be a major deal killer in early-stage investments.

Conclusion

• Due diligence varies greatly by stage and size of investment.
• Legal and commercial diligence are critical in early-stage investments.
• Next webinar will focus on early-stage commercial diligence.