By Jonathan Shechter, Founding Partner
What is the most overlooked thing before due diligence? Corporate governance.
For private companies, especially smaller ones, it is the piece that gets missed most often. The problem is usually not that the company did something wrong. It is that the company never put in place the paper trail showing that it approved what was happening along the way.
Why the paper trail matters
A company’s corporate records are its roadmap and its story. They are there whenever you need them down the road, and you will need them at the moments that matter most:
- Investor due diligence. A new investor, a lender or an acquirer will want to see that key decisions were properly approved.
- A financing or a sale. Missing approvals can slow down a deal while the other side waits.
- A dispute. If a disagreement turns into a lawsuit, good records can protect the company.
A simple example
Say an investor comes on board early, puts in $50,000, and later says they were supposed to receive more stock than the company believes it agreed to. With the records in order, we can go back to the story, see what was approved and when, and hopefully clear it up amicably. Without them, the company has to reconstruct its own history under pressure.
What a good paper trail looks like
It does not need to be complicated. When something material happens, such as bringing on an investor, issuing shares, adding a director or officer, or adopting an equity plan, the board and, where required, the shareholders approve it in writing, and the signed approval is filed where it can be found later.
Start early
“Corporate governance” is just a fancy word for paper trail. The habit costs far less than fixing gaps later, and the best time to start is at the beginning, before the first investor asks.
Questions about your own situation? Talk to us.
This article is provided for informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship.