The Role of Due Diligence in a Secondary Sale

1-sentence takeaway: Due diligence protects both buyers and sellers in a private-market secondary transaction by confirming crucial information about the company and the shares being sold.

Due diligence is an investigation process. Think of it like a home inspection before buying a house – you want to know what you’re getting into. In the context of a secondary sale (selling shares of a private company before it goes public), due diligence ensures all parties are informed and the transaction proceeds smoothly. It’s especially important because private markets lack the transparency of public exchanges.

Who Conducts Due Diligence and Why?

• Buyers: They perform the most extensive due diligence to assess the company’s financial health, legal standing, and future prospects. They want to be confident the shares are worth the asking price. Is the company growing? Are there hidden liabilities? What’s the management team like? These are the kinds of questions buyers seek to answer.
• Sellers: While sellers usually have insider knowledge, they also benefit from understanding the buyer’s due diligence process. This knowledge allows sellers to anticipate questions and have supporting documentation ready. It also reinforces the seller’s understanding of the company’s value and strengthens their negotiating position.
• Earlyasset (as the platform facilitating the transaction): Earlyasset facilitates due diligence by providing a secure platform and tools to share information efficiently. While Earlyasset doesn’t conduct due diligence on the company itself, it verifies seller identity and share ownership as part of the transaction process.

What Does Due Diligence Typically Include?

Due diligence varies in scope depending on the size and complexity of the transaction, but generally includes reviewing:

• Financial Information: Revenue, expenses, profits, debt, cash flow, projections. Think of this as checking the company’s “bank account” and future earning potential.
• Legal Documents: Shareholder agreements, articles of incorporation, option grants, cap table. These confirm legal ownership and any restrictions on share transfers. See also: Understanding Your Shareholder Agreement
• Business Operations: Product/service overview, market analysis, competitive landscape, management team. This helps assess the company’s overall strategy and potential for success.
• Cap Table Review: A clear understanding of the company’s ownership structure, including different share classes and investor rights. See also: The Cap Table Capitalization Table Who Owns What

Why is Due Diligence Important?

• Price Discovery: Helps determine a fair price for the shares.
• Risk Mitigation: Identifies potential red flags and legal issues.
• Informed Decision-Making: Empowers both buyers and sellers to negotiate with confidence.
• Transaction Efficiency: Reduces delays and complications by addressing potential issues upfront.

How Earlyasset Simplifies Due Diligence:

Earlyasset’s platform streamlines the due diligence process by:

• Providing a Centralized Repository: For securely storing and sharing documents.
• Facilitating Communication: Between buyers and sellers.
• [Specific features of SecondaryOS if applicable, but don’t invent.]

So here’s what we covered:

• Definition of due diligence and its importance.
• Who performs due diligence and their respective motivations.
• Key elements of the due diligence process.
• Benefits of conducting thorough due diligence.
• How Earlyasset facilitates the process.

[Link to relevant glossary terms like cap table, shareholder agreement, etc. if they exist as separate wiki articles]