Every startup aspires to become a “unicorn”, where the business is valued to achieve over USD 1 billion.  However, the path for startups to reach the unicorn status is a bumpy road and to achieve that success, funding becomes a critical element that provides the company the resource to continuously conduct its products/ services development and expand its business.

While obtaining funding is an uphill task itself, one of the most crucial ingredient to obtain funding is the Legal Due Diligence (“LDD”).

What is Legal Due Diligence?

LDD is the process of gathering, understanding and evaluating all legal risks prior to an investment or funding by the investor.  The investor conducts LDD to fully understand the benefits and risks for the investment. Prior to the LDD, the potential investor would provide to the business the “Term Sheet”, a document consisting of the framework and key terms that are set up for negotiating in the final definitive agreements such as share subscription agreement and shareholders’ agreement.

Conversely, LDD keeps and prevents startups from conducting non-compliance activities and take effective measures to prevent such conduct.

At every funding stages listed below, LDD is required.

Before conducting LDD, a startup will enter into the Term Sheet with investors, which is a non-binding document that indicates the proposed terms and conditions of a potential transaction.  Key terms of the Term Sheet are generally comprised of provisions on the proposed transaction and valuation, investment instruments, investment considerations, pricing of shares, the condition precedent to closing, share transfer restriction, representations and warranties, drag-along or tag-along rights, exclusivity period, due diligence, non-compete agreement, confidentiality, anti-dilution, governing law, and other relevant provisions.

Once the Term Sheet is finalized, LDD will commence.  In this stage, the investors will request to have a face-to-face meeting with founders of the startup and may typically request for a large number of documents that must be carefully examined as follows:

When completing the LDD, the results obtained will determine the decision making of all investors, which will directly impact the valuation of the startup.

Considerations

We have highlighted the following common issues that we have previously encountered, which should be taken into consideration when preparing the LDD:

While tedious, LDD is a process that will help ensure preparedness and maintain transparency, which is highly significant for startups as it helps to ensure the credibility of the startup allowing investors to critically assess the business and be fully informed of their investment before it can consider entering into any transaction with any investors or even listing it in the capital market.

As we are one of the pioneers in providing not only legal expertise but pragmatic business solutions to startup companies, please contact our Startup team at Kudun and Partners for further information. Every startup aspires to become a “unicorn”, where the business is valued to achieve over USD 1 billion.  However, the path for startups to reach the unicorn status is a bumpy road and to achieve that success, funding becomes a critical element that provides the company the resource to continuously conduct its products/ services development and expand its business.

While obtaining funding is an uphill task itself, one of the most crucial ingredient to obtain funding is the Legal Due Diligence (“LDD”).

What is Legal Due Diligence?

LDD is the process of gathering, understanding and evaluating all legal risks prior to an investment or funding by the investor.  The investor conducts LDD to fully understand the benefits and risks for the investment. Prior to the LDD, the potential investor would provide to the business the “Term Sheet”, a document consisting of the framework and key terms that are set up for negotiating in the final definitive agreements such as share subscription agreement and shareholders’ agreement.

Conversely, LDD keeps and prevents startups from conducting non-compliance activities and take effective measures to prevent such conduct.

At every funding stages listed below, LDD is required.

Before conducting LDD, a startup will enter into the Term Sheet with investors, which is a non-binding document that indicates the proposed terms and conditions of a potential transaction.  Key terms of the Term Sheet are generally comprised of provisions on the proposed transaction and valuation, investment instruments, investment considerations, pricing of shares, the condition precedent to closing, share transfer restriction, representations and warranties, drag-along or tag-along rights, exclusivity period, due diligence, non-compete agreement, confidentiality, anti-dilution, governing law, and other relevant provisions.

Once the Term Sheet is finalized, LDD will commence.  In this stage, the investors will request to have a face-to-face meeting with founders of the startup and may typically request for a large number of documents that must be carefully examined as follows:

When completing the LDD, the results obtained will determine the decision making of all investors, which will directly impact the valuation of the startup.

Considerations

We have highlighted the following common issues that we have previously encountered, which should be taken into consideration when preparing the LDD:

While tedious, LDD is a process that will help ensure preparedness and maintain transparency, which is highly significant for startups as it helps to ensure the credibility of the startup allowing investors to critically assess the business and be fully informed of their investment before it can consider entering into any transaction with any investors or even listing it in the capital market.

As we are one of the pioneers in providing not only legal expertise but pragmatic business solutions to startup companies, please contact our Startup team at Kudun and Partners for further information.