How to Use Ironclad to Respond to Due Diligence

Michael Ohta, Legal Counsel, explains how Ironclad can be a diligence game-changer, and how we used the platform in our own recent Series E financing.

A venture financing, like many corporate transactions, can add sudden and significant short-term work to already stretched legal teams. One large workstream that often falls on the legal team is responding to investor due diligence. This can involve marshaling a company’s entire corpus of contracts to determine what may need to be produced, what may need to be disclosed, and what contractual issues may be relevant to the transaction. In a worst-case scenario, the inability to find and disclose a key contract could sink a deal or result in litigation down the line.

This post will explain how we used the Ironclad platform in our own recent Series E financing, and how Ironclad is a game changer for helping legal teams quickly and confidently respond to transaction diligence, whether in a financing, acquisition, IPO, or any other key deal.

What is due diligence?

Due diligence is the process by which investors and their lawyers investigate your company for red flags. Thankfully the diligence in most venture financings follows a similar format, with two main parts:

  1. General legal diligence
  2. Creating a disclosure schedule

By being prepared for these in advance, you can ensure a smooth, cost-effective process and look great to both investors and internal stakeholders.

General legal diligence

General legal diligence usually begins when a company receives a due diligence request list (DDRL) from its lead investor or investor’s counsel. The DDRL might request “a list of your top ten customers and top ten vendors and copies of agreements with each party.” The company will then populate a virtual data room with responsive documents for review by investors.

Creating a disclosure schedule

Creating a disclosure schedule begins with the primary transaction agreement, which in the case of our Series E would be a Preferred Stock Purchase Agreement, that contains a list of “representations and warranties” – statements of fact that your company must guarantee. A representation, or “rep,” might, for example, say “The Company’s assets are owned free and clear of all mortgages, liens, loans and encumbrances.” The party making the rep must determine whether there is any exception, such as a loan agreement, and list the exception on a “disclosure schedule.” Items disclosed on the disclosure schedule will generally also need to be populated into the virtual data room for review by investors.

Different transactions will involve different types of diligence, but most, including acquisitions and IPOs, will involve the same principles of producing documents against a request list or exceptions against representations.

How Ironclad helps in the diligence process

There are a few features in Ironclad’s contract management platform to make this process much smoother:

 

Easy filtering by contract data

Some representations, such as the “material agreements” rep found in standard venture capital financing documents, can require long lists of responsive contracts. But what could be a laborious process is made much easier by the ability to filter our contracts by specific data points.

For example, as part of our disclosure schedule, we were required to list all contracts, both customer and vendor, with an expected total contract value over $500,000. Because we had tagged our contracts with a “Total Contract Value” metadata field at the time of signature, we were able to filter our contract repository for “Total Contract Value” and “>$500,000” to quickly return a list of responsive documents.

Here’s an example of how this might look, using dummy info:

 

Of course, certain contracts might have variable value or might have accounted for more dollars than originally expected. So we cross-referenced our repository results with our accounting software to see if cumulative payments to or from any parties also exceeded the threshold. We could then quickly pull agreements for those parties from the repository and add them to the list.

 

 

 

 

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Advanced keyword searchability

Sometimes you won’t have the exact right tags to filter for the contracts you want. When that happens, Ironclad still allows you to keyword search across your entire contract base or, importantly, any subset of it.

For example, we were required to disclose non-standard intellectual property licenses. If we know that only our partnership agreements might have these types of special licenses, we can filter by “Workflow Type: Partnership Agreement” and then keyword search only within our partnership agreements for use of the term “license.”

Ironclad then allows us to flip through to each highlighted mention of “license” to quickly check which contracts might be relevant.

For more uncommon terms (which for us may be a term like “lien”), we can easily search across our whole contract base and flip through the returns for peace of mind that there aren’t any liens we are missing.

Quality assurance

A terrible feeling that many transactional lawyers will have experienced is pulling up a contract only to realize it wasn’t fully signed, still has placeholders for certain key information, or has some other material defect. Diligence is often the time when these defects are uncovered by you, or more embarrassingly, by your investors.

Unlike repository-only solutions, Ironclad preempts such problems by only allowing contracts to progress through the path you design. You can require that before a contract enters your repository, it has received the proper approvals, been signed by the right parties, and been archived with the right metadata. So you can feel confident that your repository searches will uncover the right contracts and that any contracts you send to investors are properly papered. This may be especially important for larger teams or teams with new members, where individuals must work with historical contracts with which they are unfamiliar.

Good contract management makes an impression

Being able to quickly and confidently pull well-organized documents from your records is not only a huge time saver for your team, it’s a fantastic signal to investors of your company’s sophistication and quality. Conversely, when companies struggle to identify and produce key contracts, investors are left to wonder what other problems may be lurking within your company. Ironclad can help you keep your records clean and bring them to bear efficiently when it matters most.

 

P.S. Interested in centralizing all your contracts with Ironclad? Get in touch with our team today! 

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