Starting at the End... When Starting a Business Venture
In “Start at the Ending” the folk musician David Wilcox advises couples to start backwards in relationships, at the end instead of a beginning. His reasoning is that if you work backwards in a relationship you’ll end up being happy. Of course his advice isn’t realistic. Or is it?
Companies face endings throughout their life cycles — at the end of each of the stages they go through — from startup to liquidity. The ends are often marked by the company being subjected to due diligence by third party.
But what is due diligence?
Due diligence is a process through which a third party reviews a company’s records to quantify the risks of doing a deal with it. Technically it is a “measure of prudence, activity or assiduity, as is properly expected from, and ordinarily exercised by, a reasonable and prudent person under the circumstances; not measured by an absolute standard, but depending on the relative facts of the special case.” In practice, the party conducting due diligence will expect to see certain documents and materials.
Significantly, due diligence can be both stressful and expensive for the subject of the review. Often companies have to scramble to document or find the materials the third party has requested. Delays in responding to due diligence requests can delay a transaction in the best situation or kill the deal in a worst-case scenario.
Following David Wilcox’s advice to start at the ending will save you time and money, and a lot of stress, when your company faces an ending during its life cycle. The expectations third parties will have during due diligence will differ depending on a variety of factors, from the stage at which the diligence occurs to the industry in which the target operates. However, obtaining, maintaining, and organizing the documents and materials will make it easier to meet the expectations, whatever they are!
From the outset you should set up a depository where you organize documents and agreements. Below is an approach to organizing the materials based on the subject matter or types of agreements involved.
∙ Formation documents
∙ Founders’ Agreement
∙ Shareholders’ Agreement
∙ Capitalization table and stock ledger
∙ 83(b) Election and securities compliance
∙ Director and Officers agreements
Employee and Independent Contractor Matters
∙Independent contractor agreements
∙Employee incentive materials
∙ Invention disclosures
∙ Non-disclosure and Invention Assignment Agreements
∙ Annotated source code or other similar documentation for an invention
∙ Trade Secret Policies and Procedures
∙ Trademark registrations and copyright registration
∙ Patent applications and supporting materials
Third Party Matters
∙ Non-disclosure agreements
∙ Vendor and customer agreements
∙ Intellectual property licenses
∙ Account receivables
Another advantage of organizing a company from the perspective of an ending is that it provides the opportunity to monitor your company’s growth, manage costs and comply with laws and regulations. Each time there is an event, whether bringing on a new employee, engaging outside developers or raising funds through equity or debt, you will be thoughtful about documenting it. For example, you can create file for each employee that contains the offer letter, employment agreement, and tax information.
Implementing a document management procedure with an eye toward an ending will help you efficiently grow your company while avoiding unnecessary stress. Approach the beginning from the perspective of what others will expect to see during a deal and your ending will be a happy one! David Wilcox is right if you start with the ending it’s the best way to begin.
Originally published in 2014 for WeWork in its Ideas newsletter. (c) Nancy C. Prager 2014