Due Diligence ☠️ :  If you don't have all of these, your startup value is zero.

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Due Diligence ☠️ : If you don't have all of these, your startup value is zero.

Because you can't sell it if you don't own it...


5 min read

Due Diligence is make or break for your startup, whether you are being acquired or pitching for investment.

If you don't have the correct documentation in place, you might find that you don't even own your product. And generally speaking, no product == zero value.

I learned this lesson the hard way, and it caused at least a 6-month delay in my startup sale (and almost the collapse of the whole thing):

Can you afford that when your time comes? Make sure you have everything in this checklist in place from Day 1.

The good news: it's not too late. If your startup is already established, you should get together anything that you're missing ASAP, and ensure that it covers you from when you started.

Important Note
I am not a lawyer; I'm just relaying my own experience. Make sure you get proper legal advice on everything I mention here. I'm sure you'd rather spend your budget on engineering than lawyers, but that could be a costly mistake in the long term...

✅ Founders' Employment Contracts

You may think "why would I ever do any harm to my own company?", but investors have seen it happen time and time again.

It may not feel like it in the white heat of your startup, but remember: You are not your company, and your company is not you. Whatever work you do in your company is building value for the company, not for you. You are just like any other employee.

So every founder or shareholder who does any work at all for your startup must have signed a contract that includes the following:

  1. Assignment of all copyright and Intellectual Property (IP) to the company

  2. Non-competition / restrictive covenant clause

  3. Non-disclosure agreement (NDA)

✅ Employment Contracts (even for friends and freelancers)

As an early-stage startup you will employ all sorts of people to build your product and company. This might be friends, freelancers, contractors, temps or permanent employees.

I use the word "employ" because even if your friend is doing you a favour for free by writing a software module for you, that module is part of your product and therefore has value.

You might never think your best friend would do you any harm - but are you willing to test that later when there are millions of dollars in the picture? Money does funny things to people...

So anybody who does anything for your startup must have signed a contract that includes the following:

  1. Assignment of all copyright and Intellectual Property (IP) to the company

  2. Non-disclosure agreement (NDA)

Also, consider restrictive covenants for senior salaried employees.

Employing freelancers or contractors in a foreign country or jurisdiction may add another element of complexity. You may save a lot of money by offshoring, but their local laws may state that without a contract saying otherwise, they own the IP to everything they have developed - which would mean that you don't.

And if you don't own it you can't sell it.

It's no fun chasing down freelancers in another country - 4 years after they stopped working for you - to bribe / ask them politely to sign a retrospective contract in front of a Notary...

✅ Agency Contracts

If you use agencies to outsource design or development, make sure your contracts with them include IP assignment and non-disclosure agreement so that they have no possible claim against you in the future.

✅ Proper use of Open Source Software

I'm sure your product makes plenty of use of Open Source Software (OSS). It could be for small parts of functionality like a calendar UI, or it could be a major fundamental component like Laravel.

You might not even be consciously aware that you're using Open Source Software, because it is just so prevalent now. npm install and boom!

There are 2 main points to consider when using OSS.

  1. Ensure that you are using the open source component properly by including it fully intact within your project, rather than copy pasting the bits you want to use into your own code. Unless the licence explicitly states otherwise, this will violate the licence and potentially give the OSS author(s) IP ownership of your code.

  2. Make sure that you are only using OSS which has a "Permissive Licence". This means that you are free to use the software in a commercial application. Using OSS which doesn't allow this means that you cannot distribute it (ie. sell your product or company) and would render your product worthless until you replace that software. This could be a big job depending on how complex the OSS is and how deeply embedded it is into your product.

Consider using a service like FOSSA (https://fossa.com) to continuously audit your software and ensure that no-one on your team has started to use a random piece of software or OSS in a problematic manner.

💰 BONUS: Policies and Procedures

A missing policy is technically not going to cause your investors to run for the hills, but it builds their confidence if you show that you have the little things in place too.

Write up short policies and procedures for the following, share them with your teams and try to enforce them as much as possible:

  1. Security - include physical security of servers and infrastructure, personal security (use of tokens etc), and principles for security-first software development

  2. Audit of data breaches, data loss and security vulnerabilities: what happened; who discovered / reported it; when did it happen; what was lost / exposed; how was it fixed

  3. Backups - how are backups taken; where are they stored; how long are they retained for; how are they restored; how long does it take to restore them. Consider running regular restoration tests so you're not caught out if something happens.

So there you have it: 5 critical items that investors or acquirers expect you to have in place. Without them all, your ownership of your product is in serious jeopardy.

Don't spend years and years of blood and toil only to end up with nothing.

And remember - it's never too late to put these in place: see a lawyer ASAP to get things moving properly.

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