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    Angel Knowledge Series
    Best Practices:
    40 Ways for Angels/Seeds To Lose Their Tails in Diligence.
    (What matters, common losses, and ways to reduce getting burned).

    Panelists.
    • Angel Roundtable, Tony Lettich.
    • Investors Circle of York, Michael March.
    • Keiretsu Forum Portland, Don Megrath.
    • Krevolin & Horst, Gerald Balboni.
    • TechCoast Angels & Berkus Ventures, David Berkus.
    • York Angels, Scott MacCannell.
    • Moderator: Michael Price, CEO Ventures

    Agenda.

    A. Corporate Docs Diligence Losses.
      1. Pooled and Supervoting rights missed in diligence (many angels lost control).
      2. Warrants, options and verbal promises not disclosed.
      3. Puts, calls, and bad agreements missed in diligence.
      4. Verbal and email promises to employees and contractors forgotten/not disclosed.
      5. Service agreements with performance kickers.
      6. Not mitigating all related or intertwined entities, subs, partners, JVs.
      7. Coverage gaps in insurance
      8. Others.

    B. Intellectual Property Diligence Losses.
      1. Assignments by employees and contractors not signed (huge losses).
      2. Unenforceable non-competes and Acqui-Hires.
      3. Provisionals unconverted and Patent response windows missed.
      4. Threatened IP claims (verbal or email) not fully disclosed.
      5. IP claims stayed or hidden pending a deeper wallet or acquirer.
      6. Vastly inflated values patent values easily worked around or irrelevant.
      7. True IP non-owned, different or not identified til after the closing.
      8. Key person IP, knowledge or relationships not risk mitigated.
      9. IP in the cloud issues (must track user/pw/expirations for all).
      10. Others.

    C. Product Diligence Losses.
      1. Founders oversold but underdeveloped.
      2. Pending or unforseen future refunds by key customers.
      3. Regulations (or coming ones) unawareness or unforeseen.
      4. Future or next rev products not stated by founders (who plan to pursue).
      5. Unfulfilled orders bell (why, get to real reasons).
      6. The True value of inventory.
      7. Others.

    D. Financial Assets/Liability Diligence Losses.
      1. Delayed expenses and advanced revenue not discovered.
      2. Non-conveyable agreements that kill acquisition value.
      3. Unusual controls and policies disclosed but not noticed.
      4. Proper controls over checkbook pre-funding.
      5. True ownership of hardware/software/assets used.
      6. Founder & key persons credit/criminal/suit checks (history repeats).
      7. If financials or margins look too good, they aren't.
      8. Extended credit or return policies that will come back to bite.
      9. Past LOIs and M&A agreements give insight on true bottom line.
      10. Tip: review past invoices from all law, accouting and consulting firms.
      11. Others.

    E. HR Diligence Losses.
      1. Employees expecting undocumented raises/rewards once bigger pockets in.
      2. Employees rebelling against founder at first light or once spoils carved.
      3. Unfiled, staid or pending litigation (wrongful termin, harassment, discrim, etc).
      4. Accident claims not filed yet and lapse or no insurance coverage, or workers comp.
      5. Large amounts of accrued holiday, vacation and sick time available.
      6. Others.

    F. Tax Liability Diligence Losses.
      1. Missed local, state, federal and other country's sales taxes (surprise)!
      2. Unfiled or pending Nexis claims by the worst states (expansive/new policies).
      3. Employee payroll tax completeness and accuracy.
      4. Cost/profit transfer liabilities (can be severe with dual taxation).
      5. Others.





Early Stage Tech Company Streamlined Due Diligence Checklist.
A. Corporate Materials.
_ 1. Articles of Incorporation/Formation & Bylaws (and all amendments).
_ 2. Minutes book (with all resolutions of shareholders, directors, committees).
_ 3. Organizational chart.
_ 4. List of shareholders (and number/type of shares held by each).
_ 5. Options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.
_ 6. Certificate of Good Standing from the Secretary of State of the state where founded.

B. Intellectual Property Assets/Liabilities.
_ 1. Source code location, condition, platform, code quality/comments.
_ 2. Schedule of patents, patent apps, provisional apps, trademark and copyrights.
_ 3. Any patent clearance or rejection documents.
_ 4. Any claims or threatened claims by or against the company regarding intellectual property.
_ 5. All consulting agreements, "work for hire" agreements, or agreements regarding inventions.
_ 6. All licenses or assignments of intellectual property to or from the company.
_ 7. Important technical know-how & methods used to protect trade secrets and know-how.

C. Product or Service Assets/Liabilities.
_ 1. Existing products or services and products or services that are under development.
_ 2. Any regulatory related correspondence regarding its products or services.
_ 3. Summary of material or frequent complaints or warranty claims.
_ 4. Results of all studies and data on products or services existing or under development.
_ 5. Top 10 largest customers by sales and sales descriptions for last three years.
_ 6. Any material ununfilled orders for the last three years.
_ 7. Material supply and service agreements.
_ 8. Summary of purchasing and credit policies.
_ 9. Material major competitors and any correspondence related to competitiveness or threats.
_ 10. Schedule and explanation for any major customers lost over the last two years.
_ 11. Current marketing plans, budgets, and marketing materials.

D. Financial Assets/Liabilities.
_ 1. Most recent financial statements.
_ 2. Schedule of all indebtedness.
_ 3. Schedule of any contingent liabilities.
_ 4. Which are fixed and variable expenses.
_ 5. Inventory, physical assets, and locations.
_ 6. Accounts Receivable & Payable.
_ 7. Company's credit report.
_ 8. Description of internal control procedures.
_ 9. Description of depreciation methods and changes.
_ 10. Sales & purchases of major capital equipment in last 5 years.
_ 11. All leases of equipment.
_ 12. Real estate leases, deeds, mortgages, title policies.
_ 13. Any UCC (Uniform Commercial Code) filings.
_ 14. Environmental audits, hazardous substances, permits and liabilities.

E. Human Resources Assets/Liabilities.
_ 1. Schedule of employees, resumes, positions, salaries, bonus plans, years of service.
_ 2. Schedule of all benefits, health and welfare insurance policies, or self-funded arrangements.
_ 3. Any material threatened or filed employee liabilities in last three years (i.e. alleged wrongful termination, harassment, discrimination, labor disputes, requests for arbitration, grievance procedures currently pending or settled, etc).
_ 4. Worker's compensation claim history.
_ 5. Unemployment insurance claims history.
_ 6. Employment, consulting, nondisclosure, nonsolicitation, or noncompetition agreements.
_ 7. Personnel handbook, employee benefits including holiday, vacation, and sick leave policies.
_ 8. Summary plan descriptions of qualified and nonqualified retirement plans.

F. Material Contract Assets/Liabilities.
_ 1. Schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements.
_ 2. Loan and financing contracts, line of credit, or promissory notes.
_ 3. Security, indentures, collateral pledges, and similar contracts including guaranties.
_ 4. Any installment sale contracts.
_ 5. Distribution, sales representative, marketing, and supply contracts.
_ 6. Options and stock purchase contracts involving interests in other companies.
_ 7. Nondisclosure or noncompetition agreements.
_ 8. Contracts between the company and any officers, directors, five-percent shareholders, or affiliates.
_ 9. Letters of intent and contracts from any actual or abandoned mergers, acquisitions, or divestitures in last five years.
_ 10. Standard quote, purchase order, invoice, and warranty forms.
_ 11. All other material contracts.

G. Tax Assets/Liabilities.
_ 1. Any tax credits or NOL remaining.
_ 2. Federal, state, local, and foreign income tax returns for the last three years.
_ 3. States sales tax returns for the last three years.
_ 4. Employment tax filings for three years.
_ 5. Excise tax filings for three years.
_ 6. Any audit and revenue agency reports.
_ 7. Tax liens and settlement documents for the last three years.
_ 8. List of states/countries where authorized to do business (and annual reports for the last three years).
_ 9. List of states or countries where property owned or leased, or employees maintained, or business conducted.
_ 10. Employees payroll & benefits records showing taxes fully paid.

H. Legal Assets/Liabilities.
_ 1. Schedule of all pending or threatened litigation.
_ 2. Insurance policies possibly providing coverage litigation.
_ 3. Injunctions, consent decrees, or settlements and related documents.
_ 4. Insurance policies (general liability, property, product liability, errors and omissions, key-man, D&O, worker's comp, etc).
_ 5. Insurance claims history for past three years.
_ 6. Schedule of all law, accounting, consulting and similar firms used in the past five years.
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