An appropriately constructed due diligence checklist, according to the article entitled "Due Diligence: The Critical Stage in Mergers and Acquisitions," attempts to answer such vexing questions for a venture capitalist as if indeed the product in question "is what he or she thinks it is." In other words, is the venture capitalist in question really and truly buying the company or an interest in the product that is advertised by its producers -- or something else, when he or she reads to infamous 'fine print'? The potential venture capitalist, when conducing an appropriate risk assessment must first ask, "are you sure it [the product] is as good as the seller says?" Or, in this case, as good as the capitalist, who is being advised by technical gurus regarding the viability of the product, whom are conducting independent risk audits of the microchip in question, says the product is. (Howard, 2003)
Even if the product is of high quality, the questions do not end there. Once the financials and the technical questions are settled, internally and externally, from a legal perspective one must ask before entering into a settlement "how can you be certain unexpected costs and obligations will not suddenly appear once you are the owner and responsible for them? How best can you arm yourself for the negotiations? Have you worked out precisely what you are going to do with it once it is yours? How do you set the priorities change to recoup the premium you have paid for it? The answer to all these questions, and many more, lies with effective due diligence." (Howard 2003) Also, when conducting a risk assessment of the IT industry, it should be determined if the chip in question has a long-term future within the industry by the appropriate outside technological 'auditors' whom are well-versed in not only general technical marketing strategy and the market itself but the specifics of technical components of the device developed by 'Newco.'
Although it fundamentally attempts to answer the question of 'what am I getting into,' when financing a prototype for a new microchip, the concept of due diligence in practice, because of its speculative nature "remains one of the most important but least well understood aspects of the acquisition process. It is not, as many believe, a chore to be left to the accountants and lawyers. To get the best from it, due diligence has to be properly planned and professionally managed." (Howard, 2003)
To get "due diligence right," is to essentially answer the unanswerable -- no one can predict the future. However, to minimize one's risks in the best possible scenario requires a checklist to be used in connection with a specific due diligence investigation of or a product. This checklist delineates a request for various kinds of documents from the company, or in this case, the producers in question, whom the venture capitalists are dealing with. ("Due Diligence, All Business, 2004)
This agreement relates to a series of potential transactions with venture investors. "Please provide us with the following materials or information relating to the prototype for a new, developing microchip of the 'Newco' corporate entity." ("Due Diligence, All Business, 2004) "Upon review, we may request additional documents. If compiling any of the requested items would be unduly burdensome, please let us know so that we may arrange a less burdensome alternative. If you have already delivered any of the information, please so indicate and you need not provide an additional copy." ("Due Diligence," All Business, 2004)
A) Corporate Documents regarding ChipeX Company and Subsidiaries
Please provide written and documented proof that Newco Company, which formerly employed individuals in question, no longer has a material interest in the product. Also provide the most recently obtained good standing certificates for all states and jurisdictions where the Company is qualified to do business.
This part of the document certifies that the agreement is valid, that ChipeX, which previously employed the individuals in question, has no intellectual property claims upon the chips
B) Issuances of Securities
As this is a new company, with the stated intention of going public within two years, all applications and permits for issuances of future securities and a sample copy of stock certificates, warrants and options, should be included here in pending draft document form.
This standard clause, as delineated in the online business journal, All Business, (2003) is present in most venture capital agreements. Also, the powers of attorney on any matters regarding stock options in the future, should be included here, and, other contracts, arrangements, or public or private documents or commitments relating to the future stock of the company, and "any debt arrangements, guarantees or indemnification between officers, directors or the shareholder and the company." (All Business, 2003)
Thus, the nature of the agreement, that 51% of the ownership interest will be delineated to the manufactures of the chip, should also be noted here.
Material Contracts and Agreements
Usually, the due diligence checklist also includes a "list of banks or other lenders with whom the future company might have a financial relationship, including credit agreements, debt instruments, security agreements, mortgages, financial or performance guaranties, indemnifications, liens, equipment leases or other agreements evidencing outstanding loans to which the company is a party or was a party within the past two years.
Also, all material correspondence with lenders during the last three years, including all compliance reports submitted by the company or its accountants should be included here. (All Business, 2003)
However, in addition to this, given the technical nature of the venture, there should also be verification from outside sources about the technological value and credibility of the microchip in question, with an inclusion of expert testimony, on signed documents, about the viability of the product within two years, and an explanation (although no guarantee is possible) of its success and potential.
D) Employees and Related Parties
Lastly, there should be management organization chart and biographical information, all employment and consulting agreements, loan agreements and documents relating to other transactions with officers, directors, key employees and related parties, followed by a business plan and other documents describing the expected business of the company including all "material marketing studies, consulting studies or reports prepared by the company, a description of all accounting methods or principles to be used, and all real and material personal property owned by the company at present." (All Business, 2003)
This is a financially chancy and dicey time for technological investment. According to some of their independent analysts, the microchip to be developed by the aforementioned former members of ChiepX Company is a sure thing. This alone, however, should raise red flags. Even though the technical viability of the product has been sung in its praises by many technologically forward independent experts, in business, particularly the business of technology, experience and the dot.com bomb has taught us all that there is no sure thing.
If this sounds overly cynical, remember that Step 1 in any risk assessment is to "look for the hazards," that is the potential hazards that could threaten one's financial health with the result of the product's failure. There is a tremendous investment time involved, here, and even if the product's development and salutary quality goes exactly as planned, other market maneuvers and influences could easily cause things to turn and to go 'another way.' Step 2 in any financial risk assessment is to "decide who might be harmed and how this could occur," and should there be a harm inflicted in terms of loss of funds, the potential loss could be quite significant, given the slightly less than half and half split of the risks in question. Then, according to the generalized guidelines of "Five Steps to Risk Assessment," one should embark upon "Step 3: Evaluate the risks and decide whether the existing precautions are adequate or whether more should be done." In this case, no real precautions can be extended, other than further analysis of competitors in the industry.
Finally, in "Step 4: Record your findings," and in "Step 5: Review your assessment and revise it if necessary," one can come to a conclusion in risk assessment. (2003) In this case, the domestic technological business environment seems shaky, as does the international business environment, and there is little evidence that one can be secure that a competitive, less expensive technology is not foreseeable by competitors. (Rogers, 2003)
Furthermore, the threats posed by such factors as internet viruses and worms that are developed make venturing into such risky technical waters quite shaky at best, Information technology risks must ensure that developing technologies have appropriate backup to meet not only current threats, but also proposed threats, a challenge even to the corporate behemoth of Microsoft Systems currently in use internationally. A loss that could include the loss of a network, automated system or any other IT resource that would affect an organization's ability to carry out its mission or function could cause an entire business to lose…