The execution of a funding round and the preceding audit of the company by investors in addition to the operational business and management of the start-up company represents a considerable challenge especially for inexperienced founding teams. Generally, it is difficult to make universal statements about the scope or degree of an audit by investors. The scope and degree depend on various factors and differ in for each funding round and investor. The stage of the StartUp, the strategy and degree of profession of the investor, the number of potential investors and the (total) ticket size represent just a few aspects, which should be mentioned at this point.
Off-topic: Especially for inexperienced StartUp teams, we recommend our self check for Investor Readiness in the run-up of a funding round. With the founder’s team, we check the most exposed areas of the company from an investor’s point of view and thus support for a smooth process of the funding round at the targeted company valuation. Thus, most ctritical areas of future audits are identified and optimized at an early stage, before significant reductions in the valuation or less favorable investment conditions from the investors are faced.
For StartUps, the scope and degree of an investors due diligence audit is often intransparent before the process has started. Therefor, thorough research and preparation is crucial for the smoothest and most efficient process possible.Ideally, the preparation is already supported by the involved consultant set-up, consisting of tax advisor and lawyer of the StartUp.
Generally, the founder’s team should allow for enough time for investor acquisition and the corresponding auditing process. For inexperienced teams and depending on the funding form, an investment process can take up to 6 months until signing or closing. Well-structured and already experienced teams may manage to close a funding in 4-8 weeks.
In the context of an equity investment, we recommend ideally starting preparations 4-6 months before the targeted closing date and initiating investor talks in parallel:
- Start planning a funding round early on the basis of your liquidity plan (incl. buffer).
- Plan for an intensive phase of 6-8 weeks for due diligence and negotiations.
- Account for deviation between signing and closing. Following the notarization (signing), the investor first transfers their share of the equity to the company. Only when the company’s commercial register record and the list of shareholders is updated (closing) are the investors usually required to pay the premium and thus the majority of the investment into the StartUp’s capital reserves. Between signing and closing, depending on the local court, between 3-6 weeks may pass.
In addition to the well-known catalog assets (teaser, pitch deck, financial model), initial preparations for a well-structured data room should already be made. Additional documents on market, competition or trends should already be compiled in a digital data room.
As soon as tangible investors are identified, the structure of the data room should be finalized to meet investor requirements. At this stage, the audit areas should be clarified and aligned with the investors. If the StartUp enters into an auditing process with several investors at the same time, pooling and coordination throug lead investors can represent a significant acceleration. This is a standard process for this market, especially for larger funding rounds. The data room structure and the key points of the audit are then aligned with the (lead) investor. Simultaneously, the data room structure is supplemented by a transparent Q&A process in order to answer the investors’ queries in an efficient way.
The structure of the data room can usually be divided into 3 major parts, with some overlap between these areas due to the audit documents:
Commercial & Financial Documents:
- Pitch Deck
- Finance Model
- Proof of Business
- Financial Statements/BWAs
Legal Documents:
- All essential contracts relating to the operational business
- Should be professionally prepared in early funding phases, as it forms the basis for further funding rounds and is gaining in importance.
- Varies from company to company
- Comprehensive regulation of processes with external stakeholders, partners and service providers
Tax:
- Usually closely intertwined with the other two areas
- Tax intertwined with founders/incorporated companies possible
Tax considerations are usually derived from the legal basis of the main contracts of the Legal DD, in the context of the results of the Commercial DD.
