Essential Financials to Include for Due Diligence on Your Startup

In this article, we will explore the essential financial documents to include when an investor wants to dig deeper into your startup.

Financial Statements

First and foremost, provide your investor with a clear and organized set of financial statements. These should include:

a. Income Statement (Profit and Loss Statement): This document shows your startup's revenues, costs, and expenses over a specific period, usually quarterly or annually. It demonstrates your revenue growth and profitability.

b. Balance Sheet: The balance sheet lists your startup's assets, liabilities, and shareholders' equity at a specific point in time. It reflects your company's financial position and its ability to meet its obligations.

c. Cash Flow Statement: This document tracks the inflow and outflow of cash within your startup. It's essential for assessing your company's liquidity and cash management.

Budgets and Projections

Investors want to know where your startup is headed. Include detailed financial projections and budgets that cover at least the next three to five years. These should encompass:

a. Revenue Projections: Provide a breakdown of expected sales by product or service, customer segments, and geographical regions.

b. Expense Projections: Outline your startup's anticipated operating expenses, including salaries, marketing costs, and overheads.

c. Cash Flow Projections: Forecast how much cash your business will generate or require in the future, highlighting when you expect to achieve profitability.

d. Break-Even Analysis: Demonstrate when your startup is projected to break even, which is a critical milestone for investors.

Historical Performance Data

Offer a historical perspective on your startup's performance. Include:

a. Previous Years' Financial Statements: Show the financial statements from the last three to five years to reveal your startup's growth trajectory.

b. Key Financial Metrics: Highlight important financial ratios and metrics, such as gross margin, EBITDA, and net profit margin.

Tax Returns

Investors may request to review your startup's tax returns for the past few years. Ensure these documents are up-to-date and in compliance with tax regulations.

Debt and Equity Structure

Detail your startup's capital structure, including:

a. Debt Agreements: Provide copies of any outstanding loan agreements, including terms, interest rates, and repayment schedules.

b. Equity Ownership: Outline the ownership structure of your startup, indicating the distribution of shares among founders, employees, and investors.

Intellectual Property and Legal Documents

Investors will want to ensure that your startup's intellectual property is protected. Include:

a. Patents, Trademarks, and Copyrights: Provide documentation to prove ownership of any intellectual property assets.

b. Contracts and Agreements: Disclose any significant contracts, agreements, or legal disputes that may affect the company's financial health.

Compliance and Regulatory Documents

Demonstrate your startup's compliance with legal and regulatory requirements by including:

a. Business Licenses and Permits: Show that your startup operates within the bounds of the law.

b. Regulatory Filings: Share any necessary filings with regulatory authorities.

When an investor expresses interest in conducting further due diligence on your startup, it's a promising sign that they are considering investing in your venture. By providing a comprehensive set of financial documents that showcase your startup's financial health, historical performance, and future projections, you can instill confidence in potential investors. Transparency and thorough preparation will go a long way in building trust and facilitating a successful investment process for your startup.