What is Early Seed Stage Due Diligence?
The due diligence process typically involves verification of the company’s financial records, legal documents, personnel and employees, vendors, and more.
Essentially, due diligence verifies a company’s claims regarding who they are, what they do, and how they do it. However, at the early seed stage of a company, the financial records are brief or nonexistent. Clients have little experience with the company and there may be few employees.
In reality, a seed stage investor is buying into the people themselves. Investment due diligence comes down to who the company principals are and how they conduct themselves. Angel and VC investors must therefore follow a specific due diligence process. Read on to learn about the early seed stage due diligence process and what really matters.
The Due Diligence Process
At the seed stage, financials are not the priority. Instead, use the reputation and previous practices of the company principals to inform your investment choices. This process may seem invasive but is essential to protect your investment.
If a degree or diploma is claimed by a founder or other key personnel, it should be verified. This is especially true for regulated business sectors where current registration with a governing body is required to conduct business.
Reputation and Social Media Assessments
Because the company is in the early seed stage, founder reputation plays a large role in the due diligence process. Media and social media should be screened for the founders’ names, businesses and groups they have been associated with, and so on. Any content authored by the founder(s) should be included in this assessment.
The negative reputation of a founder or other key personnel can hobble an otherwise strong business plan. These associations can also reveal a pattern of misconduct in some cases.
Criminal Record Check
Investors should conduct extensive background checks on the company’s founders, management, and any other key personnel. Any information revealed during this process should be carefully considered before proceeding with the investment.
Legal and Financial Review
Any paperwork filed in association with the company should be included in the legal and financial review. This includes state sales tax license(s), partnership agreements, articles of incorporation, and so on. This review should also include any patents, registrations, or licenses associated with your business. Any lawsuits past or current should be revealed during this process.
Financially, the investor should examine the full financial history of the company. This should include any profit and loss, budgets, projections, and other investments under consideration. The company should also have a business plan and should provide any contracts with suppliers and customers.
Any contracts or employment agreements should be examined to protect intellectual property rights. Some business sectors should include protections for trade secrets or non-compete clauses.
Early seed stage due diligence should be thorough and focus on reputation. This can and should include degree verification media and reputation assessments, criminal records check, and review of any legal or financial discrepancies. Any information revealed during the due diligence process could lead the investor to believe the person is dishonest about how they will use the seed money.