Due Diligence checklist: investment (start up)
Legal due diligence checklist for an investment in a start-up company, for a company which has not commenced trading or has only traded for a limited period.
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When do I use this document?
- for the legal due diligence for an investment transaction
- where the subject company is a start-up company or has a limited trading history
- as initial requests for the company to answer and provide supporting documents
What are the key features?
- requests in tabular form, with the company’s answers to be inserted in the table
- requests covering 10 key subject areas, including:
- corporate
- contracts
- litigation and compliance
- assets
- intellectual property
- commercial property
- employees
- finance and insurance
- taxation
- business plan/forecasts
What else do I need to know?
In evaluating a start-up company, investors typically focus on:
- share capital: verifying the number of issued shares and shares reserved or granted as share options
- funding: understanding how the company has been financed, including loans from the founders or family members which may need to be converted to equity
- founder service contracts: investigating whether the founder(s) have service contracts, committing them to the business and including post-termination restrictive covenants and intellectual property protections
- intellectual property: checking that externally developed intellectual property is owned by the company
- business plan and projections: scrutinising the preparation and basis of the company’s business plan, forecasts and projections
When do I use this document?
- as an advance subscription agreement between the company and a single investor
- where the conversion price will be calculated as a percentage discount to the issue price for shares in the qualified investment round
- if agreed, where there is an agreed valuation cap on the company’s valuation
What are the key features?
- advance subscription terms and payment
- conversion on the occurrence of defined events, including a qualifying financing round, the sale of the company or on a longstop date
- conversion price on a qualified financing round to be at an agreed percentage discount to the qualified financing round share price
- if agreed, a cap on the valuation of the company for the purpose of calculating the conversion price
- warranties regarding the investor’s compliance with Financial Services and Markets Act 2000 regime regarding financial promotions
What else do I need to know?
For detailed discussion regarding the purpose of advance subscription agreements and their benefits and disadvantages for investors and the company, click here.
Negotiating points
Prior to entering into this ASA, the parties will need to consider and agree:
- discount rate: the discounted price per share (expressed as a percentage) at which the ASA investor will receive shares in the qualified financing round
- valuation cap: if agreed, the cap on the valuation of the company for the purpose of calculating the price at which the advance subscription will convert into shares on a qualified investment round
- default valuation: the default valuation of the company which will be used to calculate the conversion price of the advance subscription in circumstances where conversion occurs on the agreed longstop date or the company’s insolvency
- longstop date: the longstop date on which (and in the absence of a prior qualifying financing round) the ASA will automatically convert into shares
- qualified financing round: the minimum amount of funding which the company must raise before that funding round will count as the qualified financing round under the ASA which results in the conversion of the advance subscription into shares
- subscription amount: the amount of the investor’s advance subscription
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Updated by a lawyer on 21/07/2025
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