How Much Diligence Does a Seed Check Deserve?

Are you considering investing in a tech startup or another type of startup? When you are considering an investment at the seed stage, you need a clear understanding of how much due diligence you should be doing, and how much due diligence is simply too much at this stage. At a point, due diligence can become superfluous or overkill at the seed stage, and you may be spending time and effort that you do not need to be spending. Venture capital seed checks typically range from about $100,000 to $500,000, with a majority often coming in around that lower amount. While a $100,000 check does not justify $40,000 of due diligence, zero is also wrong. As an investor, you want to right-size it.

At Triumph Law, we can assist investors in keeping their legal spend proportional to the deal. Consider the following information about spending on due diligence at the seed stage, and do not hesitate to get in touch with our firm to learn more about the services we provide to investors.

What is Worth Your Time and Legal Spend for a Seed Check

At the seed stage, you want to ensure that the amount you are spending on due diligence is appropriate to the amount of the seed check. As we indicated above, if you are writing a $100,000 check, you do not want to spend $40,000 on due diligence. Rather, you want to ensure that your legal spend is proportional to the seed check.

What do you actually need to spend time and money on at this stage? There are some key materials that you will want to confirm:

• Cap table, or capitalization table, which details essential information about the ownership structure of the startup, including any existing investors, existing shareholders and the current equity distribution (the cap table provides information about every shareholder, including the type of equity and number of shares owned), and any convertible instruments such as SAFEs that will convert to equity at a later date, according to Carta;
• IP assignments, meaning the creation of any work product or other intellectual property created for the startup transferred to the startup; and
• Prior convertible instruments, which we mentioned above, including any convertible notes or Simple Agreements for Future Equity (SAFEs) that will be converted into equity later on in the life of the startup.

Investors may also want basic financials at this stage, including information about the viability of the startup, market research, and the business’s growth strategy.

Excess Due Diligence: What Matters Less at the Seed Stage

Much of the rest, at the seed stage, is theater. For most investors, it is not worth spending time and money on confirmation of additional information beyond what we discussed above.

Right-Size Your Diligence Before You Wire the Check

You can keep your legal spend at the right size and amount by getting in touch with our firm to discuss the particulars of your investment plans. One of the startup attorneys at Triumph Law can speak with you today. Contact us to find out more about how we assist investors with due diligence.

Source:

carta.com/learn/startups/equity-management/