Disclosure is Key in Due Diligence

For most start-ups and small businesses, due diligence is something to be endured when a potential investor undertakes an audit process before committing to investing in your company. The intensity of that audit often depends on the amount of investment involved. That much should be obvious to any viewer of the business reality TV shows ‘Dragon’s Den’ in the UK or ‘Shark Tank’ in the USA.

Accuracy and Transparency is Essential

Sometimes, due diligence can be as simple as a face-to-face conversation, especially if you are a start-up looking for pre-seed funding. More usually the process can involve business lawyers, accountants, and a lot of paperwork. Honesty and integrity as well as accuracy and transparency are paramount because the aim of due diligence is risk mitigation. Everything you say must match up with the data you provide because the truth will always come out in the end. Err on the side of disclosure.

Preparing for due diligence is a great opportunity to do an internal audit as well as verifying the growth plan that will be a major part of your pitch. Proper preparation also allows you to defocus on the day-to-day stuff and get an updated overview of your business which can reveal areas worth optimising even before the investor gets involved.

What Investors Will Ask

Typically, investors will have a standardised checklist to go through, although it’s likely that each investor will ask different questions. Seeking the help of business and legal consultants like Motion Paradox can make due diligence easier by preparing in advance all the most common documents that investors will usually require. Given the sensitive nature of the data you will disclose, common practice is to enter into a confidentiality agreement with the potential investor, although the efficacy of these agreements is open to question.

Your business plan and financial records are the most common data points investors ask for. The aim of reviewing this information is to make sure that your pitch matches up with the concrete numbers and you are not saddled with debt. Start-ups often have multiple co-founders so make sure any documents detailing your ownership structure are up to date and ideally include a credible contingency plan for disagreements where there is 50/50 equity between founders. Angel investors and venture capitalist (VC) investors will also likely insist on seeing properly produced minutes of stakeholder or leadership meetings as well as complete openness about any legal issues, pending or threatened, that you may face.

Customer Data, Sales Revenue and Market Knowledge

Investors will want to know about your customer base and supply chain as well as gaining an understanding of your revenue streams, cost per customer acquisition and pipeline projections. As part of the due diligence process, investors will likely undertake an intense review of your competitors and the overall state of the market, so ensure you can answer any questions a potential backer may have to demonstrate your understanding of the space you are in and how you fit into it.

Ensure Contracts are Watertight

Your existing employment contracts, client contracts and vendor contracts are all likely to be a critical part of any due diligence exercise. Many start-ups and SMEs draft contracts without expert guidance, basing those documents on internet templates or what they perceive to be “common practice.” A serious potential investor will soon discover whether those off the shelf contracts actually protect your company, and hence their investment, and are sustainable in the long run. They will look far more favourably on your business if you have put in place bespoke contracts and services since, from their perspective, that will mitigate any risk and assist you in scaling properly.

Intellectual Property Rights

Potential investors will want to take a look at your Intellectual Property (IP) rights, so if you have not already done so, file for any patents and trade marks before meeting them. Your IP rights are a key economic differentiator for investors, particularly for technology start-ups. Even if you have a really great app or product, without IP protection (patent information, copyrights, design rights, trade marks) they will argue that a tech giant could offer the same thing at scale for free, so why should they bother investing in you?

Personal Interviews

Ask anyone in business and they will likely say that people tend to do business with other people, so even if all the numbers add up, the success of your company depends on you and your team. As part of due diligence, both your business and you personally are probably going to be put under the microscope. Potential investors may wish to speak with you and your team individually to get an idea of the personalities, values, and skills.

Establish a Data Room

You can get a head start on bringing in investment by building a data room to streamline the due diligence process, housing all the information most investors are likely to want to see in one convenient location – short pitch, team background, business and marketing plan, details of contracts and software licences, financial statements and IP assets. Virtual data rooms are now the norm, but whichever cloud sharing/hosting platforms you choose, you should ensure they offer both ease of access and high levels of encryption and security, since much of the information you place there will be business sensitive and confidential.

Investors in start-up businesses in particular will also likely initially propose a term sheet. Term sheets are agreements that outline the key components of the investment deal and although not legally binding, it’s still important to have access to sound legal and business advice at this stage of any negotiation After an investor has proposed a term sheet, they will need to verify all of your information to be sure that what you are selling them is real. A well-constructed data room will conveniently give them all the detail and confidence they need.

The Motion Paradox team of start-up business and legal consultants, based in London and Los Angeles, can help you through the process of due diligence, providing informed feedback on your completed plans, preparing bespoke contracts and securing your IP assets so you can convince VC or angel investors to back your vision.

Flexible Working in 2024

Amongst the new employment laws expected to come into effect in 2024 is the Employment Relations (Flexible Working) Bill, which received Royal Assent and passed into law on 20 July 2023. Although a formal introduction date is yet to be announced, the new law is expected to come into force in April 2024, at which point employees across the UK will have greater access to flexibility over where, when and how they work. Employees will:

  • gain the right to make two flexible-working requests within any 12-month period, whereas they previously could only make one such request; and
  • no longer have to set out how the effects of their flexible working request might be dealt with by their employer.

Likewise, employers will:

  • now be required to consult with their employees before rejecting a flexible working request; and
  • be required to respond to a flexible working request within two months, a month shorter than the existing requirement.

From 6 April 2024, as a result of the Flexible Working (Amendment) Regulations 2023, which were laid before Parliament on 11 December 2023, employees will also have a new right to request flexible working from day one of a new job, removing the 26-week qualifying period before a request can be made. The measures will be supported by a statutory Code of Practice, which is currently being developed after consultation by Acas, the body that provides free, impartial advice to employers and employees on workplace rights, rules and best practice. This article considers the potential opportunities and ramifications of the new flexible working rules for employers.

What Can Be Requested?

Employees meeting the requirements to make a flexible working request from their employer may submit requests to:

  • reduce their working hours to work part-time;
  • change their start and finish time;
  • have flexibility with their start and finish time (sometimes known as ‘flexitime’);
  • do their work over fewer hours (‘compressed hours’);
  • work from home or elsewhere (‘remote working’), all or part of the time; and/or
  • share their job with someone else.

Such changes can be requested for all working days; specific days or shifts only; specific weeks only (for example, during school term time); or for a limited time only.

Access a Wider Talent Pool

Using the tagline “Happy to Talk Flexible Working” in job advertisements will certainly open your recruitment to a wider talent pool and help create a more inclusive workplace. The Chartered Institute for Personnel Development (CIPD), which has long campaigned for flexible working, suggests that employees who have greater flexibility report higher levels of job satisfaction, well-being and performance in their roles.

There’s no doubt that for many SMEs the key to being resilient right now is maintaining that sense of employee satisfaction, becoming an ‘employer of choice’ by recruiting and holding on to the best people. This can be achieved through a benefits strategy, and flexible working is certainly a part of that offer. Jobseekers are increasingly searching for vacancies offering flexible working, which according to recruitment agency Reed is proving to be more popular than four-day-week working arrangements.

Do the New Measures Go Far Enough?

Some commentators have noted that the new flexible working measures may not make a substantial difference to either employees or employers since some of the legislative reforms many organisations have championed have not materialised. The statutory grounds for refusing a flexible working request, for example, will not change. Employers can still reject a flexible working application for any of the following reasons:

  • the burden of additional costs;
  • detrimental effect on ability to meet customer demand;
  • inability to reorganise work among existing staff;
  • inability to recruit additional staff;
  • detrimental impact on quality;
  • detrimental impact on performance;
  • insufficiency of work during the periods the employee proposes to work; and/or
  • planned structural changes.

Consultation Need Not Be Substantive

After an employee has made a flexible working request, there is no minimum time frame for the required consultation with their employer and the new law does not stipulate that it needs to be a ‘substantive process’ (nor any other detail about what such consultation has to include). It therefore appears to be entirely open for employers to determine the nature, length and content of the consultation. However, while it is not a legal requirement for employers to properly consult employees on any outcome, taking the time to speak with them about how you arrived at that decision and the thought processes involved in considering their request, is a small step that can help minimise the risk of claims and maintain good relations with employees.

Sex Discrimination Claims

The right to request flexible working from day one is still to be dealt with in secondary legislation, so for now employees will still only be able to make requests once they have completed 26 weeks’ continuous service. While it may not be too difficult for employers to fit any refusal into one of the permitted reasons, the potential issue of indirect sex discrimination claims does remain.

These could arise where, for example, the requirement to work full-time hours is applied equally to men and women, but because more women have childcare responsibilities, fewer women than men are likely to be able to comply with the requested working pattern or hours.

So, if the reason for the flexible working request is childcare responsibilities, and the employer refuses, the employee may be faced with no choice but to resign. She may then look at bringing a claim for constructive unfair dismissal on the basis of indirect sex discrimination (and because the constructive dismissal is discriminatory, she does not need two years’ continuous service).

The burden of proof is then on the employer to demonstrate that their decision was proportionate within the law and that the consultation was, if not substantive, then certainly serious. Any decision to refuse a flexible-working request must be supported by a strong rationale.

Preparing for the New Flexible Working Measures

In light of the above, employers should take steps to prepare for the new flexible working measures, such as:

  • updating flexible working policies to remove the requirement for 26 weeks’ continuous service before making a flexible working request;
  • ensuring that flexible working policies and procedures are reviewed in light of the most up-to-date Acas Code of Practice and guidance;
  • developing clear guidelines for management for the process of assessing requests for flexible work arrangements; and
  • ensuring that managers are given training in order for them to be able to adapt to the new legislation.

The team of Motion Paradox start-up lawyers based in London and Los Angeles can give you legal advice and guidance in all aspects of employment law to ensure your firm hires and retains the right people to make your business more resilient, scalable, and profitable.