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How to Prepare Your Startup’s Legal Documents for Due Diligence

January 26, 2024

When a startup is seeking investment, due diligence is a critical step where investors assess the company’s legal, financial, and operational standing. For startups in Switzerland and Europe, having well-organized legal documents is key to a smooth due diligence process. Legal documents provide the foundation for evaluating the startup’s compliance, intellectual property, contracts, and potential liabilities. In this article, we will explore how to prepare and organize your startup’s legal documents to pass due diligence with confidence and secure investor interest.

 Why Legal Documentation is Important for Due Diligence

1. Building Investor Confidence

Investors need assurance that the startup is operating within the bounds of the law and has no hidden legal liabilities. Well-prepared legal documents help demonstrate that the company is professionally managed, transparent, and ready for investment. This builds confidence and positions the startup as a trustworthy and low-risk investment opportunity.

Example: A Swiss AI startup that presents organized and complete legal documents, including clear intellectual property ownership, will attract investors who are assured that the company is well-prepared and legally sound.

2. Mitigating Legal Risks

Startups that have missing or disorganized legal documents may raise red flags for investors, increasing perceived risks. Incomplete documentation, unresolved disputes, or poorly drafted contracts can delay or derail investment negotiations. By preparing comprehensive legal documentation, startups can mitigate legal risks and reduce the likelihood of concerns arising during due diligence.

Example: A Swiss biotech startup that has all regulatory approvals and licenses clearly documented will avoid delays in the due diligence process, ensuring a faster investment decision.

 Key Legal Documents to Prepare for Due Diligence

1. Incorporation Documents and Corporate Governance

Investors will want to review your startup’s incorporation documents to understand its legal structure. This includes the articles of incorporation, bylaws, and shareholder agreements, which outline the company’s corporate governance framework. Ensuring that these documents are accurate and up-to-date is essential for avoiding legal complications.

Key Documents to Prepare:

  • Articles of incorporation
  • Shareholder agreements
  • Bylaws or company constitution
  • Board meeting minutes

Example: A Swiss fintech startup should ensure that its shareholder agreements are clearly documented, especially if multiple investors have varying ownership stakes.

2. Intellectual Property (IP) Documentation

Intellectual property is often one of the most valuable assets for a startup, particularly in tech, biotech, and creative industries. Investors will closely scrutinize the company’s IP documentation to verify ownership, registration, and freedom from disputes. Clear documentation of patents, trademarks, copyrights, and IP agreements will be essential in demonstrating the startup’s competitive advantage.

Key Documents to Prepare:

  • Patent filings and certificates
  • Trademark registrations
  • Copyright documentation
  • IP licensing agreements
  • IP assignment agreements

Example: A Swiss health tech startup with a proprietary medical device should have all patent filings and approvals readily available to reassure investors of its legal ownership and market exclusivity.

3. Contracts and Agreements

Investors will evaluate your startup’s contracts and agreements to assess potential liabilities and obligations. These include customer contracts, vendor agreements, employment contracts, and partnership deals. Well-drafted contracts protect the company from legal risks and demonstrate that the startup has robust processes in place.

Key Contracts to Prepare:

  • Customer and supplier contracts
  • Employment contracts (including non-compete and non-disclosure agreements)
  • Lease agreements
  • Vendor agreements
  • Partnership or joint venture agreements

Example: A Swiss e-commerce startup should have vendor agreements clearly outlining delivery timelines, pricing terms, and dispute resolution mechanisms to avoid potential conflicts with suppliers.

4. Regulatory and Compliance Documents

For startups in regulated industries, ensuring regulatory compliance is a top priority. Investors will need to see documentation that the startup complies with local, national, and international regulations. This includes licenses, permits, data protection compliance (e.g., GDPR), and certifications required to operate legally.

Key Compliance Documents:

  • Regulatory approvals
  • GDPR compliance documents
  • Industry-specific licenses and permits
  • Environmental or health and safety certifications

Example: A Swiss medtech startup developing diagnostic tools should have its certifications from regulatory bodies like Swissmedic or European Medicines Agency (EMA) available during due diligence.

5. Litigation History and Legal Claims

Investors will closely examine the startup’s litigation history to identify any ongoing or past legal disputes. Unresolved legal claims can be a major red flag, so startups must disclose all relevant details and provide documents related to settlements, lawsuits, or claims. Transparency is key to building investor trust and minimising concerns.

Key Documents to Provide:

  • Pending or resolved litigation records
  • Settlement agreements
  • Correspondence related to legal claims

Example: A Swiss tech startup with a past legal dispute over intellectual property should provide details of the case’s resolution and explain how the risk has been mitigated.

 Best Practices for Organizing Legal Documents

1. Create a Virtual Data Room

To streamline the due diligence process, startups should create a virtual data room where all legal documents are securely stored and easily accessible to investors. A virtual data room allows for organized, secure sharing of sensitive legal and financial information, ensuring that investors have real-time access to key documents without compromising confidentiality.

Tip: Use a secure cloud-based platform to store and organize documents in categories such as corporate governance, IP, contracts, and compliance.

2. Maintain Clear and Up-to-Date Documentation

All legal documents should be current, accurate, and clearly organized. Outdated or incomplete documents can lead to delays in due diligence or raise concerns about the company’s management. Regularly reviewing and updating contracts, IP filings, and compliance certifications will ensure that everything is ready when investors begin their review.

Tip: Conduct periodic audits of your legal documents to ensure that they reflect any changes in business operations, regulatory requirements, or market conditions.

3. Involve Legal Counsel Early

Engaging legal counsel early in the process can help startups identify and address potential legal issues before due diligence begins. Experienced legal professionals can assist in drafting contracts, reviewing compliance requirements, and organizing IP filings to ensure that the startup is fully prepared for investor scrutiny.

Tip: Work with a lawyer who specializes in startups and has experience with venture capital investments to ensure your documents meet investor expectations.

4. Disclose Legal Risks Transparently

During due diligence, transparency is essential. Startups should disclose any known legal risks or unresolved issues upfront. Investors prefer transparency, and providing a clear explanation of how the startup is managing or resolving these risks builds trust. Hiding potential legal liabilities can backfire and harm the relationship with investors.

Tip: Be proactive in addressing potential concerns by including a summary of any pending legal issues and how the company is resolving them.

 Red Flags Investors Look for in Legal Documents

1. Unresolved Legal Disputes

Ongoing or unresolved legal disputes can raise significant red flags for investors. Startups involved in litigation or facing potential legal action may be seen as high-risk, especially if the outcome could affect the company’s financial standing or operations.

What to Watch For:

  • Pending lawsuits or IP disputes
  • Undisclosed litigation or legal claims
  • Unresolved regulatory non-compliance issues

Example: A Swiss startup facing an unresolved lawsuit over its core technology patent may deter investors until the dispute is resolved.

2. Missing or Incomplete Contracts

Investors expect startups to have complete and enforceable contracts with customers, vendors, and employees. Missing or incomplete contracts signal poor legal management and may expose the company to future liabilities. Startups should ensure that all agreements are properly documented and that there are no gaps in key contracts.

What to Watch For:

  • Incomplete or unsigned contracts
  • Missing non-disclosure or non-compete agreements with key employees
  • Vague or unenforceable contract terms

Example: A Swiss startup without signed non-compete agreements for its key technical staff risks losing proprietary knowledge to competitors, raising concerns among investors.

 Case Study: Preparing Legal Documents for a Swiss Fintech Startup

A Swiss-based fintech startup was preparing for its Series A funding round. Investors requested comprehensive documentation covering corporate governance, IP ownership, and regulatory compliance. The startup had proactively organized its legal documents in a virtual data room, including up-to-date shareholder agreements, GDPR compliance certificates, and detailed customer contracts. By preparing these documents in advance, the startup was able to complete due diligence quickly, building investor confidence and securing funding.

Key Takeaway: Preparing legal documents thoroughly and organizing them in a secure data room accelerates the due diligence process and helps build investor trust.

 Conclusion: How to Prepare Legal Documents for Due Diligence

Preparing and organizing your startup’s legal documents is a crucial step in passing due diligence and securing investment. For Swiss startups, having clear, well-organized documents related to incorporation, intellectual property, contracts, compliance, and litigation history will help mitigate legal risks and build investor confidence. By following best practices such as maintaining up-to-date documentation, involving legal counsel, and using a virtual data room, startups can ensure a smoother due diligence process and increase their chances of securing investment.