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Nikhil Jain .

Does Detailed Due Diligence in a Startup happen after Term Sheet signing or before Term Sheet?

What should be the ideal set of documents a Startup needs to share with any VC or Investors before term Sheet?

Context-
A Friend raising funds asked me out when a new VC fund started asking too much of Business details and all Contracts as a Part of dur diligence and never confirmed for Funding terms yet and saying that post DD Only they will decide if they are interested to fund or not.

Is that legit?

Originally Posted Here
14 Comments

CA Gaurav Sukhija

Before

They do communicate termsheet before hand but dont sign it

Hitz Gupta

All DD happens after TS execution, before that discussion happens on biz model, scale etc

Jeet Parekh

Some of contracts may be asked prior in case of early stage vc.
It is to prevent misuse of termsheet and check whether what promoter is saying true or not.

Vivekananda Rongali

If it is early stage and you are asking for big fund, you gotta let them do the DD.

It also gives you advantage. You can say "Now that DD is done, these are my terms".

Get a NDA signed incase of Data/Accounts details are being shared.

PS- Get a solid lawyer.

Karishma Jumani

There is nothing legit or non legit as such inasmuch it all boils down to commercials and how the transaction documentation are structured and negotiated. The timing of the diligence also affects the bargaining power to a greater extent. Provisions interm sheet documentation generally allow an investor to walk away from the deal if diligence is unsatisfactory - giving the investor more bargaining power than promoters and often leads to hostage negotiations. It all comes back to structuring the deal depending on the intention of the promoters. Happy to answer any further queries and help in case you need legal assistance with any aspects. Please feel free to connect.

Also confidentiality issues can be addressed in non disclosure and confidentiality agreements if diligence is done pre term sheet to protect the target company's confidential information.

Achintya Surya

heard stories that non disclosure agreements were ineffective for startups who got their info stolen in such cases

Karishma Jumani

that is the case with any agreement / contract - it doesn't guarantee effectiveness i.e. the other party will comply/ won't breach but it serves as written evidence entitling the non breaching party to sue the breaching party for damages/ specific performance / other reliefs.

Achintya Surya

true maybe the party that could sue was left penniless to actually do it so maybe that was why they were ineffective🤔

Karishma Jumani

that could be the case with any agreement. Like I said you need to approach the courts to enforce it, however, having a well drafted agreement not just acts as a positive reinforcing factor for ensuring compliance but also betters chances of succeeding in any potential dispute.

Prayas Mittal

I wouldn't share too much before the term sheet is signed. Unless it's a series b or above level transaction.

Swaroop Evani

I will try and break the answer into parts:

1. there is no fixed rule on when the DD has to happen but logically anyone would want it to be done before they sign the termsheet.

2. often there is a clause in the termsheet which allows the investors to walk-away if the DD reveals information detrimental to the deal./ contradicts the claims.

3. You can AND SHOULD ask them to sign an NDA to make sure they are legally forbidden from disclosing information (even after signing the termsheet)

4. TS can get revised with the context of the investment so it's not fixed per say. however at some point this is a conversation that should come up. its not a great sign if there is no conversation in this direction.

5. you can and should do DD on them as well:)(example a friend of mine was offered a pretty good deal for his start-up but he realized that for some reason all the startups the said VC had invested in, could never unlock a series B round at all)

Shivam Malhotra

There's nothing legit or not legit about it.It depends on a case to case basis.

Term sheet isn't a legally binding document so whether you've signed it or not won't make a lot of differecence,legally speaking.Though all due diligence (in detail) happens post signing of Term sheet only because there's no point sharing business details or examining a business without even agreeing to the terms first of all.

Also,if your friend isnt comfortable with this behaviour then ask him to walk away.Its not a bad thing to say no to capital,aaj nahi toh kal aajaegi!👍

Ankit Bohare

Here generally businesses are taking Escrow Route,

So suppose if a company who is raising funds have claimed certain growth numbers, their assets etc

Then Investor, if interested can appoint a bank + lawyer as escrow and sign an agreement where funds release is contigent on due dilligence terms and conditions!

Neeraj Tiwari

Due Diligence: A final leg to confirm the funding.

Share the details if they have signed the term sheet, hope you have mentioned the time line to close the deal (if not give them the date to close or else move on)

If the investor has not signed the Term Sheet, you have full right to walk away and tell them sir invest karn hain to bataiye or else we will move.

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