Due Diligence Checklist

1. Corporate Structure and Corporate History

Articles of incorporation
Corporate by-laws and operating agreements
Minutes of Board of Directors and Shareholder meetings
Past and Current Shareholders Agreements
All other documents provided to directors and shareholders
Board of Directors
- Members (Experience and Skills)
Business Advisory Board
- Members (Experience and Skills)
Officers of the Company
Legal Counsel
Auditor

2. Financial Information

Annual financial information since inception
- Audited income statements, balance sheets, cash flows, and footnotes
- Extraordinary income or expense details
- Explanation of any material write-down or write-offs
- Summary of bad debt experience
Current Financials
- Financial statement and trial balance current to previous month end
- Accounts receivable and accounts payable aging schedule
- Current backlog by customer
- Details of any outstanding contingent liabilities
- Bank statements for prior six months
Financial Projections
- Up to date business plan
- Financial plan for the next three fiscal years
  - Revenue by product type, customers, and channel
  - Income statements, balance sheets, cash flow by month
  - Major growth drivers and prospects
  - Predictability of business
  - Explanation of seasonality of business
  - Industry and company pricing policies
  - Economic assumptions underlying projections (different scenarios based on price and market fluctuations)
  - Explanation of projected capital expenditures, depreciation, and working capital arrangements
  - Expectation of and need for external funding
    - Amount of and sources for external funding being sought, including other potential investors being courted
    - Expectation of grants and other non-dilutive (e.g. government) funding during next three years
  - Capital Structure
    - Current shares outstanding, including nature of different classes of shares
    - List of all stockholders with shareholdings, options, warrants, or notes
      - For non-arms length investors: relationship to founders or principals, any experience relevant to company, any expectation for advice or contributing role
      - For arms-length investors: business experience, prior investment experience, any expectations for advice or contributing role
    - Schedule of all options, warrants, covenants, rights, and any other potentially dilutive securities with exercise prices and vesting provisions
    - Summary of all debt instruments/bank lines with key terms and conditions
    - Off balance sheet liabilities
  - Other financial information
    - Schedule of financing history for equity, warrants, and debt (date, investors, dollar investment, percentage ownership, implied valuation and current basis for each round)
    - Summary of current federal, provincial and foreign tax positions, including net operating loss carry-forwards
    - Discuss general accounting policies (revenue recognition, etc.)

3. Products

Description of each product
- Major customers and applications
- Historical and projected growth rates
- Market share
- Speed and nature of technological change
- Timing of new products, product enhancements
- Cost structure and profitability
- Cost and other liabilities for any warranties or need for customer support

4. Competition

Description of the competitive landscape within each market segment including:
- Market position and related strengths and weaknesses as perceived in the market place
- Basis of competition (e.g. price, service, technology, distribution)
Defences against competition within each market segment or product
Primary market research conducted by Company
Secondary market research
- Survey of each market segment
- Economic and regulatory trends affecting each market segment

5. Marketing, Sales and Distribution

Strategy and implementation
- Discussion of North American and international distribution channels
- Positioning of the Company and its products
- Marketing opportunities/marketing risks
- Description of marketing programs and examples, if any, of recent marketing/product/public relations/media information on the Company
Major Customers and Partners
- Status and trends of relationships
- Prospects for future growth and development
- Pipeline analysis
Principal avenues for generating new business
Sales force model
- Compensation
- Sales Cycle
Ability to implement marketing plan with current and projected budgets

6. Research and Development

Description of R&D organization
- Strategy
- Key personnel
- Major activities
New Product Pipeline
- Status and timing
- Cost of development
- Critical technology necessary for implementation
- Risks

7. Management and Personnel

Organization chart
Historical and projected headcount by function and location
Summary biographies of senior management, including employment history, age, service with the Company, years in current position
- Compensation arrangements
  - Copies (or summaries) of key employment agreements
  - Benefit plan
- Discussion of incentive stock plans
- Copies of non-disclosure agreements and non-competition agreements if not already part of employment agreement
- Significant employee relations problems, past or present

8. Legal and Related Matters

Pending lawsuits against the Company (detail on claimant, claimed damages, brief history, status, anticipated outcome, and name of the Company’s counsel)
Pending lawsuits initiated by the Company (detail on defendant, claimed damages, brief history, status, anticipated outcome, and name of Company’s counsel)
List of material patents, copyrights, licenses, trade secrets, trademarks and domain names
- Status of application (issued and pending)
- Jurisdiction of application
- Copies of filed patents
- Assignments of patents by founders to Company or licensing agreements between founders and Company
Summary of insurance coverage/any material exposures
Summary of material contracts
- Long-term capital contracts
- Contracts with consultants, agents, distributors, partners, etc.