Due diligence – the comprehensive examination of a business or investment opportunity to assess its legal, financial, and operational aspects - is a demanding but essential process to evaluate the risks and opportunities associated with a particular venture.
Due Diligence is a Challenging Process
For a startup, the demands of due diligence can be especially challenging. The process requires careful analysis, attention to detail, and the ability to gather and interpret information from various sources, such as financial records, contracts, legal documents, market research, and interviews.
Startup management must devote significant resources, since the process is time-consuming and involves collecting, organizing, and analyzing large numbers of documents, some of which are housed with stakeholders.
Management must also have a capable team to project manage due diligence. The subject matter can be complex, especially in cases involving mergers and acquisitions, partnerships, and financial investments.
Management will likely need to engage third-party experts with knowledge of finance, legal frameworks, and industry-specific regulations, and in some cases cross-border legal and financial systems. And finally, this collaborative team must deliver in a pressure-cooker atmosphere to meet deal deadlines.
Reasons a Startup Engages in Due Diligence
A startup typically conducts due diligence during various stages of its lifecycle. Here are the key milestones when due diligence may occur:
Investment Due Diligence: A startup typically requires seed money from investors or venture capital companies. Before these money sources commit to funding, they generally require a due diligence report to assess the viability and potential risks associated with the business. This process involves evaluating the startup's market opportunity, business model, financials, intellectual property, management team, and other relevant factors.
Mergers and Acquisitions (M&A): If a startup is involved in discussions for a potential merger or acquisition, both parties engage in due diligence. The acquiring company examines the target startup's financials, operations, legal status, intellectual property, customer base, liabilities, and other relevant areas. This process helps the acquiring company understand the risks and potential synergies associated with the deal.
Partnership or Licensing Agreements: Due diligence is generally performed when a startup explores partnership opportunities or intends to license its technology or intellectual property to another entity. The prospective partner or licensee evaluates the startup's offerings, technology, legal status, financial stability, and any other factors pertinent to the proposed collaboration.
Regulatory and Compliance Due Diligence: Startups may also undergo due diligence when seeking regulatory approvals or complying with legal requirements. This could involve assessments related to data privacy, security, environmental impact, licensing, or industry regulations. For life sciences and finance startups, responding to regulatory guidelines is particularly time-consuming.
Prepping for Due Diligence Using a VDR
Once a project team is assembled, management needs a secure place for them to work. The best choice is a Virtual Data Room (VDR), a secure online platform that facilitates the storage, organization, and sharing of documents. Security is a key component of due diligence, since these documents contain proprietary and confidential information about the company’s financial performance, new marketing initiatives, anticipated patent filings, and other inner workings. A startup must protect these confidential documents and data not only from the competition, but also from hackers and cybercriminals.
Unlike file sharing apps like DropBox, Box, Google Drive, and Microsoft SharePoint & OneDrive, a VDR from a quality provider like ShareVault provides bank-grade security that protects a startup’s document sharing in multiple ways:
- With ShareVault, every document uploaded to the VDR is automatically encrypted
- Permissioning protocols like two-factor passwords and device IP registration ensure that confidential documents are only accessible by the right people
- Even those who have access have defined permissions for use, such as save, print, copy, or view only, and expiration dates on access
- Permissioning protocols can be customized down to the individual document level, allowing viewing, sharing, and usage privileges to specific parties
- As an extra precaution against hacks by the competition or cybercriminals, ShareVault provides dynamic watermarking and the ability to remotely shred documents even after they’ve been downloaded.
Virtual Data Room Benefits
Centralized Document Storage: A ShareVault VDR provides a centralized location for storing all relevant documents and information related to the due diligence process. This eliminates the need for physical documents. The project team and outside law firms, accountants, analysts, accountants, and regulatory experts, including those in remote locations, have a single hub for engaging in the due diligence process.
Enhanced Organization: A ShareVault VDR has powerful organization and indexing features, allowing documents to be categorized, tagged, and searched based on specific criteria. This streamlines the review process as users can quickly locate and retrieve the required documents, reducing time spent on manual searches. ShareVault organization and sharing tools include integration with file-storage apps, drag-and-drop uploads, a powerful full-text search engine, and inter-document hyperlinking.
Controlled Access: ShareVault provides a full set of permissioning protocols like two-factor passwords and device IP registration that ensure that confidential documents are only accessible by the right people. Even those who have access have defined permissions for use, such as save, print, copy, or view only, and expiration dates on access. These permissioning protocols can be customized down to the individual document level, allowing viewing, sharing, and usage privileges to specific parties. These access controls enhance security and confidentiality during the due diligence process. Since ShareVault includes a user activity monitoring feature, the team can produce a detailed audit trail of who accessed which documents and when with the click of a button.
Real-time Updates: For the startup due diligence team, a ShareVault VDR provides real-time updates to documents as they move through iterations. This allows stakeholders to access the most up-to-date information, which enables the collaborating team to know they are working with the latest version of a document.
Faster Due Diligence: With more than 15 years and $50 billion dollars of M&A deal making experience, ShareVault understands time constraints of due diligence. To speed the process, ShareVault provides a Due Diligence Checklist that automatically sets up folders and the user authorization permissioning process.
By streamlining document management, improving collaboration, and increasing efficiency, a ShareVault VDR significantly speeds up the due diligence process, while maintaining the highest level of document security.
Using a ShareVault VDR Improves a Startup’s Brand
A startup’s most important stakeholders - investors, partners, vendors, and regulators – are business-savvy. When these parties see that a startup is guarding its confidential records in an ultra-secure VDR environment, they will recognize your awareness of security concerns, which positions the young company as a potential market leader.
Learn More about How a ShareVault VDR can Streamline a Startup’s Due Diligence
ShareVault’s virtual data room (VDR) enhances collaboration and secure document sharing, and its built-in features and tools reduce time on organization and administrative functions. By leveraging the capabilities of a ShareVault VDR, a startup’s stakeholders can focus on the analysis and evaluation of crucial information, which expedites the transaction timeline.
Since each startup has unique needs, ShareVault customizes its feature sets and pricing. To receive a customized ShareVault proposal, contact ShareVault today!