Due Diligence: Kicking the Tires Before You Buy (or Sell)

One-sentence takeaway: Due diligence is like a home inspection for investments—it’s how buyers and sellers confirm they’re getting what they expect.

Due diligence is an investigation, audit, or review performed to confirm the facts of a matter under consideration. In the context of a secondary transaction, it is the process by which a buyer investigates a company and its shares prior to a sale, and the process by which Earlyasset qualifies a seller and their shares to determine eligibility. It often involves examining financial records and other relevant information. This is critically important as it ensures a more efficient and transparent process for all involved, and helps ensure compliance with legal and regulatory considerations.

Why is it important?

Think of buying a house. You wouldn’t just hand over a giant check without making sure the roof isn’t about to cave in, right? Same idea here. Due diligence helps both the buyer and seller in several ways:

• For Buyers: It helps verify the company’s health, financial performance, legal standing, and the validity of the shares being offered. This reduces the risk of buying into a company with hidden problems or overpaying for shares.
• For Sellers: Participating in due diligence helps demonstrate transparency and builds trust with potential buyers. This can lead to a smoother, quicker sale.

What does due diligence typically involve in a secondary transaction?

Due diligence varies depending on the size and complexity of the deal. It might include reviewing:

• Financial statements: Are revenues growing? Are expenses under control?
• Legal documents: Are there any concerning lawsuits or regulatory hurdles?
• Cap table: Who owns what percentage of the company, and what rights do those shares carry?
• Shareholder agreement: What are the rules governing share ownership and transfers?
• Intellectual property: Does the company have valuable patents or trademarks?

Earlyasset also performs diligence on the seller side to determine eligibility and ensure that a potential transaction complies with relevant regulations.

What if something concerning is found?

Sometimes, due diligence uncovers issues that need addressing. This doesn’t necessarily mean the deal is off. It could lead to renegotiating the price, requesting additional information, or putting certain safeguards in place.

Due diligence for you as a shareholder considering a sale via Earlyasset:

While Earlyasset manages the heavy lifting of due diligence, you’ll likely need to provide certain documents to verify your share ownership and comply with regulations. This might include your stock grant agreement or option exercise documents. Earlyasset makes this as easy as possible with its secure document upload and management system. It’s common to have questions about what’s needed, so don’t hesitate to reach out to Earlyasset’s support team for guidance (link to contact form).

Learn More: The Role of Due Diligence in a Secondary Sale (This link is a placeholder and follows the requested GitHub Wiki format).

So here’s what we covered:

• What due diligence is and why it matters.
• How it benefits both buyers and sellers.
• The types of information reviewed during due diligence.
• How Earlyasset helps manage the due diligence process.
• Where to go for help if you have questions.