Preparing for Investment: Key Documents Investors Commonly Review Before Funding a Startup
Raising capital is an important milestone for many startups. Whether a company is seeking funding from angel investors, venture capital firms, strategic investors, or private investment groups, investors typically review information about the business before deciding whether to invest.
This review process is commonly referred to as due diligence.
While every investor conducts due diligence differently, certain categories of documents are commonly requested during the fundraising process. Preparing these materials in advance can help startups respond efficiently to investor inquiries and provide a clearer picture of the company's operations, ownership, and legal structure.
1. Formation Documents
Investors often begin by confirming that the company has been properly formed and remains in good standing with the applicable state authority.
Depending on the entity type, these documents may include:
Articles of Incorporation
Certificate of Incorporation
Articles of Organization
Certificate of Formation
Certificates of Good Standing (where applicable)
These records are generally maintained through the relevant Secretary of State or similar state filing authority and help establish the company's legal existence and organizational structure.
2. Corporate Governance and Shareholder Documents
Corporate governance and shareholder documents help explain how a company is managed, how ownership is structured, and how important decisions are made.
Common examples include:
Bylaws
Operating Agreements
Shareholder Agreements
Share Subscription Agreements
Investor Rights Agreements
Side Letters or Side Agreements with shareholders or investors
Board Resolutions
Written Consents
These documents may address management authority, voting rights, ownership rights, transfer restrictions, investor rights, and corporate decision-making procedures.
Investors often review these materials to better understand the company's governance structure, existing shareholder arrangements, and any rights that may affect future investment transactions.
3. Capitalization Table (Cap Table)
A capitalization table, commonly referred to as a cap table, is one of the most frequently reviewed documents during fundraising.
A cap table typically identifies:
founders and owners
shares issued
ownership percentages
stock options
warrants
convertible securities
Investors frequently review cap tables to understand the company's ownership structure and outstanding equity interests.
4. Financial Statements
Financial information is a common component of investor due diligence.
Depending on the stage of the company, investors may request:
profit and loss statements
balance sheets
cash flow statements
financial projections
These documents provide information about the company's financial condition and operations.
5. Tax Records
Investors may also request tax-related documentation as part of their review.
Examples include:
federal tax filings
state tax filings
payroll tax records
sales tax registrations and filings, where applicable
These records may provide information regarding the company's tax history and compliance activities.
6. Intellectual Property Documentation
For many startups, intellectual property is a significant business asset.
Investors commonly review:
trademark registrations and applications
copyright registrations
patent filings
intellectual property assignment agreements
licensing agreements
It is often important to confirm that the company has appropriate ownership rights to the intellectual property used in its business operations.
7. Material Contracts and Commercial Agreements
Investors frequently request copies of significant contracts that affect the company's operations.
Examples may include:
customer agreements
vendor agreements
service agreements
subscription agreements
partnership agreements
licensing agreements
These documents can provide information about the company's business relationships and contractual obligations.
8. Employment and Contractor Documentation
Investors may seek information regarding the company's workforce and related agreements.
Examples include:
employment agreements
independent contractor agreements
confidentiality agreements
invention assignment agreements
equity incentive plans
These documents can help clarify employment relationships and ownership rights relating to work product and intellectual property.
9. Regulatory Licenses and Permits
Certain businesses require licenses, permits, registrations, or regulatory approvals to operate.
Where applicable, investors may request documentation relating to:
professional licenses
industry-specific permits
regulatory approvals
compliance-related registrations
These records may help demonstrate that the company has obtained required authorizations for its operations.
Why Organization Matters
Due diligence often involves reviewing a significant amount of information within a relatively short period of time.
Investors commonly request supporting documentation during their review. If requested records are unavailable, investors may seek additional information before completing their evaluation of the company.
Maintaining organized corporate, financial, and legal records can help a company respond more efficiently to diligence requests and facilitate the review process.
For founders, preparation can be just as important as the pitch itself. Having key documents readily available allows management to spend less time searching for records and more time focusing on discussions about the company's growth, operations, and future plans.
Every investment transaction is different, and investors may request additional information depending on the industry, stage of growth, and structure of the proposed investment.
However, formation documents, governance and shareholder records, capitalization information, financial records, intellectual property documentation, material contracts, employment-related agreements, and compliance-related records are among the categories of information that are commonly reviewed during startup due diligence.
For startups preparing to raise capital, organizing these materials in advance can help ensure that information is readily available when investor discussions begin and may help facilitate a more efficient diligence process.