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8 Due Diligence Tips to Prepare Your Startup for Funding

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Securing funding is a significant milestone for startups around the world. However, obtaining funding is often an extensive process. This is due to the intense due diligence investors undertake to assess the viability and potential risks associated with an investment. This article will take you through eight due diligence tips for preparing your New Zealand startup for funding. 

1. Understand Why Due Diligence Important

Due diligence is a comprehensive process where investors assess various aspects of a potential investment. In a startup context, this refers to its:

Investors will conduct thorough due diligence to evaluate a startup’s prospects. However, due diligence is also a way to evaluate a business’ legal health. As such, startups must actively address legal considerations to instil confidence in prospective investors.

Preparing your startup in advance can expedite the due diligence process and increase its chances of securing funding.

2. Consider Organisational Structure

You must ensure your startup’s legal structure aligns with your growth and funding goals. Common structures for New Zealand startups include: 

You should seek legal advice on the most suitable structure for your business. Potential investors may not prefer certain business structures due to liability implications.

You should also be sure to establish strong corporate governance practices. This includes clear roles and responsibilities for directors and shareholders. Such clear structures will make the due diligence process more accessible and appealing to potential investors.

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3. Assess Your Intellectual Property Rights

A robust intellectual property (‘IP’) portfolio can enhance your startup’s valuation. As such, you must confirm that your startup owns all the IP that its employees and contractors create. This means you must have clear IP assignment agreements in place to protect your startup’s IP assets.

You should also register trade marks to protect your brand. Depending on the nature of your startup, you may also need to register patents for your inventions.

4. Look At Your Contracts

You must thoroughly review all contracts in anticipation of funding rounds. This includes your:

  • customer and supplier agreements; and 
  • employment contracts. 

They should be up to date and comply with New Zealand laws. You should consider engaging an experienced legal professional to assist with this process.

5. Know Your Industry Regulations

You must understand and comply with industry-specific regulations and licensing requirements that may apply to your startup. Again, engaging an experienced legal professional can be a great way to ensure you are across all of your obligations. 

One regulation that applies to all startups is New Zealand’s privacy laws. You should develop and implement thorough privacy policies to protect customer and employee data and information.

6. Review Your Financial Records

You must maintain accurate financial records. This includes your:

  • income statements;
  • balance sheets; and 
  • cash flow statements. 

You must be confident that they reflect your startup’s current financial situation.

Furthermore, you must comply with New Zealand’s tax laws and regulations. You must also address any outstanding tax issues and seek professional advice where needed.

You must disclose any ongoing legal disputes to investors during the due diligence process. You should be prepared to explain the potential outcome of these disputes.

Additionally, you must also be able to sufficiently demonstrate that your startup complies with all applicable laws and regulations. This includes:

  • employment laws; and 
  • consumer protection laws.

8. Review Your Employee Relationships

Finally, you must ensure that all employment contracts are legally compliant and contain essential clauses. Essential clauses include:

  • termination;
  • confidentiality;
  • employee rights and obligations; and 
  • non-compete agreements.
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Key Takeaways

Investors usually undertake intense due diligence to assess the viability and potential risks associated with an investment. Preparing your startup for this process in advance can expedite due diligence and increase your chances of securing funding. Some essential due diligence tips for preparing your New Zealand startup for funding include:

  • considering your startup’s organisational structure;
  • assessing your intellectual property rights;
  • looking at your contracts;
  • knowing your industry regulations;
  • reviewing your financial records;
  • assessing legal disputes; and
  • reviewing your employee relationships.

If you need assistance preparing your New Zealand startup for the fund-raising process, you can contact our experienced startup lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.

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