Fundraising Due Diligence Checklist for Startups

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Fundraising Due Diligence Checklist for Startups

Are you a startup founder looking to raise funding for your company?

If so, you should be prepared to give equity investors like venture capitalists and angel investors the information they need to carry out their due diligence process, satisfy their criteria that your business is well-run, and explore any potential investment risks.

By gathering the appropriate documentation in advance, you can:

  • Respond to due diligence requests in a timelier manner
  • Show prospective investors you’re organized, with properly managed finances 
  • Speed up the fundraising process

In addition to a well-constructed pitch deck, here are 7 key fundraising documents that should be on the due diligence checklist of every startup.

1. Company Valuation Statement

Whether or not your products or services are turning a profit, you’ll need to show potential investors what your company is worth. 

There are several methods for determining the financial value of SaaS businesses and other startups, including:

SDE (Seller Discretionary Earnings) = Revenue - Cost of Goods Sold - Operating Expenses + Owner Compensation

  • By calculating what’s left after costs and expenses are covered, SDE lets early-stage companies with less than $5 million in annual revenue demonstrate their value.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) = Net Income + Interest + Taxes + Depreciation + Amortization

  • More accurate than SDE, EBITDA is the valuation of choice for mature companies with more than $5 million in annual revenue. You can even compare your business to the industry average by calculating your EBITDA margin (EBITDA ÷ Total Revenue).

ARR (Annual Recurring Revenue) & MRR (Monthly Recurring Revenue)

  • As a measure of future growth based on current revenue, ARR and MRR are useful for valuing pre-seed and seed-stage startups that have a minimum $2 million in ARR, a forecasted year-over-year growth rate of 50%, and a reduced reliance on founder involvement.

2. Financial Statements

As an integral part of any due diligence checklist, startups must have an up-to-date balance sheet, income statement, and cash flow statement to share with investors.

To ensure these financial statements offer an accurate picture of your accounts that will inspire investor confidence, you should use cloud accounting software like QuickBooks or Xero—rather than spreadsheets—to keep your books and prepare your reports.

If you lack the time or knowledge to properly track your finances, outsourcing to a cost-effective service provider like Enkel is a great way to optimize your day-to-day bookkeeping

Not only can Enkel’s accounting professionals generate the reports you need to support your fundraising, you can take advantage of fractional controller services to ensure all your finances and projections (see more below) are investor-ready.

3. Financial Projections

Much like a bank does when examining your business plan, investors will be looking to determine the future profitability of your company by examining your financial projections.

These projections should:

  • Indicate future revenues, expenses, and growth patterns
  • Be based on a combination of your historical data and realistic predictions around market influences
  • Include both short-term (monthly estimates covering a single year) and long-term (3 to 5-year) forecasts 

You can use your financial statements to create sales, expenses, and cash flow projections.

4. Cap Table

A capitalization (or cap) table is a spreadsheet showing all your startup’s investment transactions. 

While you’ll typically begin by recording the percentage of ownership individual investors have in your company—including the value and dilution of securities over time—the more rounds of funding you initiate, the more complex your cap table is likely to become. 

Eventually, it may include:

  • IPO (initial public offering) or M&A (merger and acquisition) transactions
  • Lists of venture capital funds and other potential investment sources
  • Legal documents outlining events like stock issuances, transfers, and cancellations, stock options, and debt-to-equity conversions

To ensure the investment activity you share with new and existing funders is accurate, you’ll need to carefully manage all your documentation from the time your startup is founded.

5. Organizational Chart

An organizational chart is similar to a family tree, but instead of relatives, it shows the roles and relationships of people inside your company.

As a simple, visual diagram that identifies team members, their duties, and how they interconnect, an org chart gives investors quick insight into:

  • How your startup is structured in terms of a president, vice president, executive officers, directors, and management teams
  • Who individuals report to or collaborate with
  • What benefits each team member brings to your company

For fundraising goals that include hiring new staff, organizational flowcharts are an effective way to see which areas of your business may be over or under-resourced. 

6. Intellectual Property Documents

If you lay claim to intellectual property (IP), investors will want to assess the value of your IP portfolio as part of their due diligence checklist. Startup founders should also be prepared to show lawful ownership of all IP assets—both to secure funding and to avoid legal issues in future.

That said, you may need to assure prospective investors that:

  • Your company isn’t infringing on the intellectual property rights of others
  • No other party is infringing on your rights
  • You aren’t currently (or expecting to be) involved in any legal action involving IP rights

If, rather than owning intellectual property outright, your company is part of a leasing or licensing agreement, you’ll need to disclose that to investors as well.

7. Material Agreements

If your startup is committed, contracted, or partnered to another company—or has any other agreements that impact revenue—you’ll need to make supporting documentation available in your fundraising portfolio.

Common examples of material agreements investors will want to see include:

  • Property or equipment lease or purchase agreements
  • Business insurance policies, loan documents, and term sheets
  • Confidentiality, consultant, or contractor agreements
  • Employment agreements (including those addressing employee benefits)
  • Your company’s terms of service

As you work to cross the 7 items in this guide off your due diligence checklist, your startup may wish to store gathered documentation in a secure data room so it’s ready when investors request it. 

Remember that you’ll also need to get and keep your financials up to date throughout the fundraising process. 

To ensure your numbers hold up under scrutiny—and that you’re prepared to answer investor questions knowledgeably—you’ll need accurate books and a solid understanding of your company’s financials.

If you're having trouble getting your financials ready for fundraising, we can help! Get in touch with us today to get the bookkeeping and accounting support you need.

Gracia Chua
About Gracia Chua
Gracia Chua is the Marketing Specialist at Enkel Backoffice Solutions, a Vancouver based accounting firm that provides day-to-day bookkeeping services for small to medium-sized businesses and non-profit organizations.