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Putting capital into a private company can unlock impressive returns—but only if you understand exactly what you are buying. Public-market investors rely on continuous disclosure and analyst research; private investors do not have that safety net. Due diligence is how you create it for yourself. For Ontario angels, family offices, and emerging funds, a disciplined due-diligence process reduces the risk of unpleasant surprises and strengthens your negotiating position.
This guide walks through the core areas every investor should examine before signing a subscription agreement or wiring funds. While each deal is unique, the principles below apply whether you are taking a small equity stake or leading a multi-million-dollar round.
Clarify the Deal Parameters First
Before you open a single data-room folder, confirm the investment basics: how much the company is raising, the pre-money valuation, the security type (common shares, preferred shares, SAFE, convertible note), and any special rights on offer. Without a clear term sheet, you risk performing weeks of analysis on a moving target. Aligning on the deal structure early ensures your diligence focuses on the facts that matter.
Corporate and Legal Housekeeping
A private company’s legal foundation should be tidy and transparent. Review:
- Incorporation documents and minute book – Confirm the company is validly incorporated in its stated jurisdiction and that articles, by-laws, and director resolutions are complete.
– - Share registry and cap table – Cross-check issued shares, options, SAFEs, and convertible notes against the minute book. Look for phantom shares or undocumented side letters.
– - Shareholders’ agreement – Make sure governance, information rights, and transfer restrictions match what management has represented.
– - Outstanding litigation or contingent liabilities – Even small disputes can derail a future exit or drain cash.
If anything is missing or inconsistent, seek clarification before progressing. Sloppy records often signal wider operational issues.
Financial Due Diligence
Solid financial diligence validates that the numbers behind the pitch deck are reliable.
Historical performance
Request at least three years of financial statements. Unaudited statements are common in early-stage companies; still, they should reconcile to bank statements and tax filings. Focus on revenue recognition policies, cost trends, and cash-flow burn.
Forecast realism
Management’s model should show assumptions—not just top-line projections. Test whether growth rates, gross margins, and customer-acquisition costs align with industry benchmarks. Ask for sensitivity scenarios and determine how much capital the business truly needs to hit its next milestone.
Working-capital health
Ageing receivables, slow inventory turnover, or ballooning payables can indicate looming liquidity problems. Understanding working-capital dynamics helps you evaluate whether the raise size is adequate.
Market and Competitive Landscape
Even a strong product will struggle in a shrinking or crowded market. Analyse:
- Total addressable market (TAM) – Validate the company’s TAM estimates with independent research.
– - Competitive positioning – Identify direct competitors, substitute products, and barriers to entry..
– - Customer concentration – Heavy reliance on one or two clients magnifies revenue risk.
- Regulatory trends – Upcoming policy changes can create headwinds—or tailwinds—for growth..
A frank view of market realities prevents you from overpaying for momentum that may never materialise.
Management and Governance
Backers often say they invest in people first. Test that principle by spending time with key leaders and directors.
- Track record – Look at prior exits, domain expertise, and reputation references.
– - Alignment – Confirm founders are sufficiently incentivised post-financing through equity or performance bonuses.
– - Decision-making processes – Formal board meetings, audited accounts, and KPIs signal maturity.
– - Succession plans – Key-person risk is high in small companies; understand who steps in if a founder leaves.–
A capable, transparent team is the best mitigant against market volatility and execution challenges.
Intellectual Property and Technology
For technology-driven businesses, IP can be the core asset you are buying.
- Ownership chain – Ensure patents, trademarks, source code, and trade secrets are assigned to the company, not to founders or contractors.
– - Freedom-to-operate – A quick search for conflicting patents or trademarks can spare future infringement headaches.
– - Third-party licences – Open-source code and software licences carry obligations; non-compliance can jeopardise commercial use.
– - Development roadmap – Assess whether timelines and budgets for new features or products are realistic.
When IP is unclear, investors shoulder legal and valuation risk that is difficult to quantify.
Regulatory and Compliance Review
Every sector has rules—some more onerous than others. Confirm the company:
- Holds necessary permits or licences.
– - Complies with federal and provincial privacy statutes if it handles personal data.
– - Meets employment standards, health-and-safety requirements, and environmental regulations.
– - Has a plan for forthcoming regulatory changes (ESG disclosures, consumer-protection updates, or industry-specific reforms).
Regulatory missteps can trigger fines, business interruption, or forced pivots that eat into returns.
Tax and Structuring Considerations
How an investment is structured affects your net return.
- Flow-through of gains or losses – Will profits be capital gains, dividends, or business income?
– - Eligibility for the Lifetime Capital Gains Exemption on Qualified Small Business Corporation shares.
– - RRSP or TFSA eligibility – Rare, but possible under strict “qualified investment” rules.
– - Withholding taxes on cross-border operations or royalties.
Early tax planning avoids surprises at exit and may enhance after-tax proceeds.
Valuation and Deal Terms
After collecting data, benchmark the company’s valuation against comparable transactions. Private comps are scarce, so triangulate from public multiples, adjusted for size and liquidity. In parallel, scrutinise term-sheet clauses:
- Liquidation preferences – Affect payout order on exit.
– - Anti-dilution protections – Determine impact of down rounds.
– - Information rights – Quarterly financials and annual budgets are minimum standards.
– - Exit provisions – Drag-along, tag-along, or redemption rights shape liquidity paths.
Favourable terms can offset a full valuation; poor terms can erode even a bargain price.
Documentation and Closing
When diligence checks out, move to final agreements:
- Subscription agreement detailing purchase amount, closing conditions, and reps and warranties.
– - Updated shareholders’ agreement reflecting new investor rights.
– - Board resolutions authorising the issuance.
– - Regulatory filings (Form 45-106F1) within ten days of closing.
Retain signed copies and organise them—future investors will review the same material.
How AMAR-VR LAW Can Support
Conducting thorough diligence demands legal, financial, and industry expertise. AMAR-VR LAW guides Ontario investors through every step: we audit corporate records, verify securities-law compliance, negotiate investor protections, and liaise with tax advisers on optimal structuring. Our team distils complex findings into clear, actionable recommendations, so you close with confidence—not surprises.
Conclusion
Due diligence is more than a box-ticking exercise; it is your best defence against hidden liabilities and over-optimistic valuations. By systematically examining corporate records, financial health, market dynamics, governance, IP, regulatory compliance, and deal terms, you turn opaque private-company data into informed conviction—or a well-justified decision to walk away.
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Contact us today for a consultation if you are evaluating a private-company investment. We will help you navigate the diligence process, secure the right protections, and invest with clarity in Ontario’s vibrant private market.
Frequently Asked Questions (FAQs)
- What is the purpose of due diligence before investing in a private company?
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Due diligence allows investors to verify key facts about a private company before committing capital. It helps you assess financial health, legal standing, management quality, intellectual property rights, and potential risks. In private markets where disclosure is limited, due diligence is essential to protect your investment and make confident, informed decisions.
– - What are the most important areas to investigate during due diligence?
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The most critical areas include the company’s corporate structure and legal records, financial statements and projections, market positioning and competitors, intellectual property ownership, and the experience and alignment of the management team. Investors should also evaluate regulatory compliance, tax planning, and the fairness of deal terms to uncover any red flags before closing.
– - How can I verify a company’s cap table and share ownership during diligence?
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You should compare the cap table against official corporate records such as the minute book, share registry, and any outstanding convertible securities like SAFEs or notes. Look for inconsistencies, side agreements, or undocumented shares that could affect your equity position or future dilution. A lawyer can help validate the integrity of the share structure.
– - Why is financial forecasting a key component of due diligence?
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Financial forecasting reveals how the company expects to grow, how much capital it truly needs, and whether those expectations are realistic. Investors should analyze whether assumptions align with industry standards, test different scenarios, and evaluate whether the forecasted milestones justify the proposed valuation. Overly optimistic projections are a common source of investment disappointment.
– - How does AMAR-VR LAW help Ontario investors with due diligence?
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AMAR-VR LAW supports investors by reviewing corporate and legal documentation, confirming securities compliance, analyzing deal terms, and coordinating with tax advisers. We provide plain-language risk summaries, flag critical issues, and ensure you enter the investment with a full understanding of your rights, obligations, and the company’s true standing.