Legal Due Diligence Audit Kit

Introduction

Legal due diligence is where deals die. Missing documents, unclear IP ownership, problematic contract clauses—these issues can derail an otherwise perfect transaction or severely discount your valuation.

This audit kit helps you identify and resolve legal gaps before buyers start asking questions. Being proactive with legal readiness demonstrates operational maturity and significantly accelerates the deal timeline.

Why Legal Readiness Matters

Speed: Clean legal documentation can reduce due diligence from 90 days to 30 days
Confidence: Organized legal files signal a well-run business to buyers
Valuation Protection: Legal issues discovered late can result in price reductions or deal termination
Negotiating Power: Being prepared gives you leverage in negotiations

Corporate Documents Checklist

Buyers will request these corporate formation and governance documents immediately. Having them organized and accessible is table stakes.

1. Formation Documents

Certificate of Incorporation

Original filing with the state, including all amendments

Bylaws (C-Corp) or Operating Agreement (LLC)

Current version with all amendments documented

Good Standing Certificate

Recent certificate from the state (within last 30 days)

Foreign Qualification Documents

If operating in multiple states

2. Governance & Meeting Records

Board of Directors Minutes

Complete minutes from all board meetings since inception

Shareholder/Member Meeting Minutes

All formal shareholder meetings and written consents

Board Resolutions

Major decisions: financing, acquisitions, officer appointments

Common Gap: Many small companies have informal governance. If minutes are missing, create retroactive minutes documenting major decisions with board/shareholder approval now.

3. Capitalization Table (Cap Table)

Current Cap Table

Detailed breakdown of all equity ownership (common, preferred, options, warrants)

Stock Certificates

All issued stock certificates or electronic records

Stock Purchase Agreements

All agreements for issuance of equity

Stock Option Plan & Grants

Option plan document, board approvals, individual option grants

Vesting Schedules

Documentation of vesting for founders and employees

4. Shareholder/Investor Agreements

Shareholders Agreement

Buy-sell provisions, drag-along, tag-along rights

Investors' Rights Agreement

Board seats, information rights, registration rights

Right of First Refusal/Co-Sale Agreement

ROFR and co-sale provisions

Voting Agreements

Any agreements affecting voting rights

Intellectual Property Filings

Clear IP ownership is critical. Buyers need proof that your company owns all the IP necessary to operate the business.

1. Patents, Trademarks & Copyrights

Patent List

All issued patents and pending applications with filing/registration numbers

Trademark Registrations

Registered trademarks (USPTO and international)

Copyright Registrations

Registered copyrights for software, content, designs

Domain Names

List of all owned domains with registrar information

2. IP Assignment Agreements

Founder IP Assignments

All founders must have signed IP assignment agreements

Employee IP Assignments

IP assignment provisions in all employment agreements or separate assignment agreements

Contractor IP Assignments

Work-for-hire or assignment provisions for all contractors and consultants

Critical Issue: Missing IP assignments are a deal killer. Buyers will not close without clear IP ownership.

Fix: If you have contractors or employees without IP assignments, get them signed immediately. For departed employees/contractors, track them down and obtain retroactive assignments.

3. Open Source Software Audit

Open Source Component List

Inventory of all open source software used in your products

License Compliance Documentation

Verify compliance with open source licenses (MIT, Apache, GPL, etc.)

Warning: Copyleft licenses (GPL, AGPL) may require you to open source your code. Buyers will audit this carefully.

Key Contracts Review

Buyers will review all material contracts to understand obligations, liabilities, and change-of-control provisions.

1. Customer Agreements

Standard Terms of Service

Current version and history of changes

Top 10 Customer Contracts

All agreements with your largest customers

Long-Term Contracts

Any multi-year agreements or commitments

Change of Control Provisions

Identify which contracts have change-of-control clauses that could require customer consent

2. Vendor & Supplier Agreements

Critical Vendor Contracts

Hosting, infrastructure, SaaS tools essential to operations

Exclusive Agreements

Any agreements granting exclusivity to vendors or suppliers

Service Level Agreements (SLAs)

Agreements with performance guarantees or penalties

3. Partnership & Channel Agreements

Reseller Agreements

All agreements with resellers or distributors

Referral/Affiliate Agreements

Commission structures and payment terms

Strategic Partnership Agreements

Joint ventures, co-marketing, integration partnerships

4. Real Estate & Lease Agreements

Office Lease

Lease term, renewal options, assignment provisions

Equipment Leases

Servers, furniture, vehicles, etc.

Employment & HR Documentation

1. Employment Agreements

Executive Employment Agreements

CEO, founders, C-suite agreements with terms, compensation, change-of-control provisions

Offer Letters

All employee offer letters

Confidentiality & Invention Assignment Agreements (CIIA)

Every employee must have signed CIIA with IP assignment provisions

Non-Compete/Non-Solicit Agreements

If applicable and enforceable in your jurisdiction

2. Contractor & Consultant Agreements

Independent Contractor Agreements

All contractor agreements with work-for-hire or IP assignment provisions

Consulting Agreements

Scope, deliverables, IP ownership

3. Employee Benefit Plans

401(k) Plan Documents

If applicable

Health Insurance Policies

Current coverage and provider agreements

Stock Option Plan

Already covered in cap table section

Common Legal Gaps

1. Missing Founder IP Assignments

Issue: Founders created IP before the company was incorporated and never formally assigned it to the company.

Fix: Execute retroactive IP assignment agreements from all founders transferring all pre-incorporation work to the company.

2. Contractor Work Without IP Assignments

Issue: Early contractors or freelancers built parts of the product without signed IP assignment agreements.

Fix: Track down all contractors and obtain retroactive IP assignment agreements. For unavailable contractors, document work-for-hire arrangements and payment records.

3. Incomplete Corporate Records

Issue: Missing board minutes for major decisions (funding, acquisitions, option grants).

Fix: Work with your attorney to create retroactive minutes and board resolutions documenting historical decisions.

4. Change-of-Control Consent Requirements

Issue: Key customer or vendor contracts require consent before a sale can close.

Fix: Identify all contracts with change-of-control provisions early. Approach customers/vendors proactively once you have a signed LOI.

5. Unclear Equity Ownership

Issue: Cap table discrepancies or missing stock issuance paperwork.

Fix: Reconcile all equity issuances with supporting documentation. Correct any discrepancies with board approval and updated certificates.

Clean-Up Workflows

Step-by-step processes to address the most common legal gaps.

Workflow 1: IP Assignment Clean-Up

Create a list of all employees, contractors, and consultants who contributed to IP
Review files to identify who has signed IP assignment agreements
Draft retroactive IP assignment agreements for anyone missing proper documentation
Track down individuals and request signatures (offer nominal consideration like $100)
For unavailable individuals: Gather evidence of work-for-hire relationship (contracts, invoices, emails)
Document everything in a centralized IP assignment tracker

Workflow 2: Corporate Governance Clean-Up

Audit major decisions since inception (funding, acquisitions, option grants, officer appointments)
Identify missing documentation (board minutes, shareholder consents)
Work with counsel to draft retroactive minutes and resolutions
Hold a board meeting to ratify all historical decisions
Update corporate record books with complete historical documentation
Obtain a good standing certificate from your state

Workflow 3: Contract Review & Organization

Gather all contracts (customer, vendor, partner, employment)
Create a contract database with key terms (term, value, renewal, change-of-control clauses)
Identify material contracts (top customers, critical vendors, long-term commitments)
Flag change-of-control provisions that require consent
Review for problematic terms (unlimited liability, unfavorable indemnities)
Organize in a data room structure for easy buyer access

Preparation Timeline

Recommended timeline to get legally ready before starting your exit process.

6-12 Months Out

Initial Audit

Complete the checklists in this guide
Identify all missing documents and agreements
Hire legal counsel experienced in M&A

4-6 Months Out

Gap Remediation

Execute missing IP assignments
Clean up corporate governance records
Update employment agreements

2-3 Months Out

Data Room Preparation

Organize all documents into a virtual data room structure
Create contract database and summaries
Prepare Q&A responses for common legal questions

1 Month Out

Final Review

Attorney final review of all documentation
Mock due diligence exercise
Ready to engage with buyers