Diligencing the Legal Issues
In diligencing the startup’s legal documents, ask the following questions:
For the intellectual property, ask what was filed and when?
Did they file a provisional patent or a utility patent?
It takes three years from the date of filing for the patent to be approved, so it most likely will not have been awarded yet.
Have there been any office actions yet?
The Cap Table represents the result of the term sheet and other documents related to ownership.
Review the term sheet to see if there are any unusual clauses.
What third-party contracts have been signed?
What obligations do those agreements require?
Check the employment agreements.
Has every employee signed a non-disclosure and non-compete agreement?
Are there any outstanding lawsuits against the company?
If so, what is the dollar amount involved?
Most startups do not focus much time on the legal aspects, so it’s important to check.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.