Due Diligence

After a US$750 million acquisition, the parties ran the usual post-closing true-up that adjusts the price based on the target’s actual financials at closing. It turned out the seller had misapplied a revenue-recognition accounting standard in its pre-closing books, and once the standard was applied correctly the buyer owed roughly US$38.3 million more. The buyer paid, then sued separately for indemnification, arguing the seller had promised its financial statements complied with accounting standards and that promise was false. The Delaware Court agreed and let the buyer recover the extra payment.

The Court rejected the seller’s arguments that the buyer should have caught the error in due diligence, that the claim belonged in the earlier case, or that a contract clause barring double recovery blocked it. Diligence is not an audit, the claim was not ripe until the true-up concluded, and the anti-duplication clause was meant to prevent collecting twice, not to eliminate indemnity claims. The Court determined that a price true-up fixes the number, but does not by itself decide who bears the cost of an inaccurate representation.

One of the most common legal missteps among emerging companies involves the classification of the people doing the work. In the earliest days of a startup, founders often bring on talented individuals as “consultants” or “independent contractors,” compensating them primarily or exclusively with equity. This arrangement feels natural when cash is scarce and everyone is pitching in to build something from the ground up. But what begins as a practical solution can quickly become a significant legal liability if the company does not revisit these classifications as it matures and secures funding.

This article provides a high-level overview of the risks associated with worker misclassification, the key legal frameworks that govern these determinations, and the steps founders should take to clean up classification issues before they become costly problems.

The Common Pattern: Early “Consultants” Who Are Really Employees

It is extremely common for pre-revenue startups to engage early team members as independent contractors or consultants. The logic is straightforward: The company cannot yet afford salaries, payroll taxes, or benefits, so it issues equity in exchange for labor. On paper, the individual signs a consulting agreement, invoices the company (or doesn’t), and is treated as a 1099 worker for tax purposes.

The problem is that many of these individuals are, as a matter of law, employees regardless of what the agreement says. Classification is not a matter of mutual agreement between the parties. It is determined by the nature of the working relationship under applicable federal and state law. If the engagement looks and feels like employment, then government agencies and courts are likely to treat it as such.

When these individuals are never reclassified, the company accumulates exposure over time. That exposure includes unpaid wages, overtime, employment taxes, penalties, and potential liability under both federal and state law. These issues often surface at the worst possible moment: during due diligence for a funding round, an acquisition, or in response to a complaint filed by a disgruntled former worker.

Why Reclassification Should Be a Priority After Funding

Securing any meaningful financing event should serve as a trigger for the company to revisit every worker classification. There are several reasons for this.

First, the original justification for the consulting arrangement, namely the inability to pay cash compensation, has likely changed. Once the company has capital, it has the resources to bring workers onto payroll and provide the protections required by law. Continuing to classify a worker as an independent contractor when the company now has the means to pay wages and withhold taxes weakens any argument that the arrangement was legitimate.

Second, investors and their counsel will scrutinize the company’s employment practices during due diligence. Misclassification issues are a well-known red flag. Unresolved classification problems can delay or even derail a financing, reduce the company’s valuation, or result in specific indemnification obligations imposed on the founders.

Third, as the company grows, the risks multiply. More workers mean more potential claimants. Longer periods of misclassification mean larger back-pay and tax liabilities. And the shift from a small, informal team to a structured organization makes it increasingly difficult to argue that any given worker was genuinely operating as an independent business.

The bottom line is that reclassification is not merely a housekeeping exercise. It is a critical step in putting the company on sound legal footing for its next phase of growth.

Federal Law: The Key Frameworks

At the federal level, worker classification is governed by several overlapping tests, depending on the statute at issue.

The Fair Labor Standards Act

‍The FLSA uses an “economic reality” test to determine whether a worker is an employee or an independent contractor. The inquiry focuses on whether the worker is economically dependent on the company or is in business for themselves. Factors include the degree of control the company exercises over the work, the worker’s opportunity for profit or loss, the worker’s investment in equipment or materials, the permanence of the relationship, the degree of skill required, and the extent to which the work is an integral part of the company’s business. The Department of Labor has historically taken a broad view of employment under this test, and the consequences of misclassification include liability for unpaid minimum wages and overtime, liquidated damages, and attorneys’ fees.

The Internal Revenue Code

‍The IRS applies a common-law test that examines the degree of control and independence in the relationship. The IRS groups relevant factors into three categories: behavioral control (whether the company directs how the work is done), financial control (whether the company controls the business aspects of the worker’s role, such as how the worker is paid and whether expenses are reimbursed), and the type of relationship (including written contracts, benefits, and the permanence of the engagement). Misclassification under the tax code can result in liability for unpaid employment taxes, penalties, and interest. In some cases, officers of the company may face personal liability under the trust fund recovery penalty.

Exempt vs. Non-Exempt Classification

‍Once a worker is properly classified as an employee, the company must also determine whether the employee is exempt or non-exempt under the FLSA. Exempt employees are not entitled to overtime pay, but they must meet specific salary and duties tests. The most commonly applicable exemptions for startups are the executive, administrative, professional, and computer employee exemptions. Each requires that the employee be paid on a salary basis at or above a specified threshold and that the employee’s primary duties satisfy specific criteria. Founders should not assume that simply paying a salary or giving someone a managerial title is sufficient. The analysis turns on the actual duties performed, not the job title.

State Law: Where the Rules Get Stricter

Many states impose classification standards that are more restrictive than federal law, and compliance with federal standards alone does not guarantee compliance at the state level.

California’s ABC Test

‍California applies a particularly stringent standard under its ABC test, codified by Assembly Bill 5. Under this test, a worker is presumed to be an employee unless the hiring entity demonstrates that the worker (A) is free from the company’s control and direction in performing the work, (B) performs work that is outside the usual course of the company’s business, and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Prong B is often the most difficult to satisfy for startups, because early workers are typically performing tasks that are central to the company’s core business. California law also provides for significant penalties for misclassification, including penalties under the Private Attorneys General Act, which allows employees to bring representative actions on behalf of the state.

Other Notable State Frameworks

‍Several other states have adopted or are moving toward ABC-style tests, including Massachusetts, New Jersey, and Illinois. New York applies a similar multi-factor test and has aggressive enforcement mechanisms. States vary considerably in their approaches, and companies with remote workers in multiple states must ensure compliance in each jurisdiction where a worker is located, not merely where the company is headquartered. Founders should be particularly attentive to any state in which the company has workers, as the applicable test is generally determined by the worker’s location.

Cleaning Up Past Misclassification

For companies that have already been operating with misclassified workers, there are several steps to consider when undertaking a remediation effort.

The first step is to conduct an honest internal audit. Identify every individual who has been engaged as a contractor or consultant and evaluate each engagement under the applicable federal and state tests. Determine which individuals are likely misclassified and assess the duration and scope of the exposure.

The second step is to consult with experienced employment counsel. Remediation strategies vary depending on the jurisdiction, the number of affected workers, the duration of misclassification, and the company’s financial position. In some cases, the IRS Voluntary Classification Settlement Program may be available, which allows companies to prospectively reclassify workers with limited look-back liability in exchange for a modest payment. Similar programs or settlement frameworks may exist at the state level.

The third step is to transition misclassified workers to employee status going forward. This includes placing them on payroll, withholding applicable taxes, providing required benefits, and ensuring compliance with wage and hour laws, including proper exempt or non-exempt classification.

The fourth step is to address the equity arrangements already in place. Early equity grants made to individuals who should have been classified as employees may have been structured as contractor grants, which have different tax treatment than employee equity awards. Companies should work with both employment counsel and tax advisors to evaluate whether corrective filings or revised equity documentation are necessary, particularly with respect to Section 409A of the Internal Revenue Code, which governs deferred compensation and imposes significant penalties for noncompliance.

Finally, companies should implement classification policies and procedures that will prevent these issues from recurring as the company continues to hire. A brief intake process for every new engagement, whether employee or contractor, can go a long way toward ensuring that the correct classification is applied from the outset.

For private companies backed by venture capital investors, acquisition is frequently the most likely path to liquidity. Founders are often laser-focused on product development, market expansion, and fundraising, without devoting the same early-stage discipline to ensuring the company is well-positioned for a future exit via a merger or acquisition.

M&A preparedness is not a late-stage exercise, but an operational strategy to position your company as an attractive, high-value target to potential acquirors.

Corporate Governance

Some of the most common obstacles to efficient M&A processes stem from issues related to corporate governance. Complex capitalization tables, unclear chain of equity ownership, and unresolved governance issues can create transaction delay and, depending on the structure of the transaction, loss of leverage.

Companies should consider focusing on three key areas of corporate governance to be prepared for future M&A processes: capitalization table discipline, stockholder rights, and board and stockholder alignment.

Capitalization Table Discipline

Maintain clear documentation of all equity issuances with proper board and stockholder approvals; confirm board minutes are complete, approved by the board, and signed; verify that 83(b) elections have been timely filed with respect to restricted stock grants to founders and early employees; and ensure 409A valuations are updated following major events that may impact valuation (such as a financing) and, absent such events, at least annually.

Stockholder Rights

Ensure all stockholders have signed the relevant stockholder agreements and that the company’s management team understands the protective provisions embedded within such agreements; similarly, ensure that the company’s management team is familiar with relevant provisions of any investor side-letters (think drag-along mechanics, rights of first refusal, and co-sale rights).

Board and Stockholder Alignment

Understand what approvals are required to approve a sale or merger of the company and whether any investor has blocking rights.

Contracting Discipline

Material contracts, such as key vendor and customer agreements, collaboration agreements, and licensing arrangements, are some of the first diligence requests in an M&A process. These contracts often contain assignment or change-of-control provisions that can require third-party consent, accelerate payment obligations, or trigger termination rights or other contractual rights that could significantly impact the trajectory of a deal. Accordingly, it is important for companies to maintain clear records of all material contracts, ensuring that all contracts are fully executed and include all attachments, exhibits, amendments, and restatements. Companies should track whether any material contracts have upcoming renewals or expiration dates. Additionally, tracking key provisions in such material contracts that may be triggered by an M&A (such as third-party consent requirements) will help streamline the M&A diligence and consent process.

Intellectual property is another value-driver for life sciences companies and technology companies, making it vital for companies to have documentation that clearly delineates intellectual property ownership. Companies should verify that all employees and contractors have signed Proprietary Information and Inventions Assignment Agreements (PIIAAs), review consulting agreements to confirm that intellectual property created by consultants/contractors has been validly assigned to the company, and obtain confirmatory assignments from founders and early contributors, if needed, and at the appropriate time. For companies with affiliated entities, confirm that the company’s core intellectual property assets sit within the target entity and not within any affiliated entities.

Being proactive can save time and expense during the M&A diligence process.

Regulatory Compliance

Depending on industry and geography, regulatory risk can become a gating diligence issue. Companies should identify areas of risk and preemptively resolve any outstanding compliance risks (e.g., data integrity, marketing, industry-specific licensing, etc.). In particular, life sciences companies should consider pursuing regulatory planning with the assistance of healthcare and/or FDA counsel (as needed) to ensure, among other things, that regulatory filings, communications, and approvals are complete and accessible.

Deal Team Preparation

Once the company has decided to start a sale process, identify at the outset who will be part of the core deal team, which will typically consist of a select number of employees and outside advisors. Members of executive management and other key internal personnel with specialized knowledge about the company’s corporate governance, labor and employment practices, employee benefits structure, assets (IP, real estate, etc.), litigation exposure, and regulatory compliance are typically included within the core deal team. Further, at the appropriate time, companies should engage outside advisors, such as outside legal counsel, financial/tax advisors, and investment bankers, all of whom can help quarterback the transaction and efficiently drive the deal process.

After the deal team is in place, consider implementing deal confidentiality procedures to maintain the integrity of the sale process:

• assign code names to the project and company participants;
• limit working group size and access; and
• consider antitrust issues and the use of “clean team” agreements and data rooms.

Data Room Readiness

Prepared companies treat diligence readiness as an ongoing process and not an exercise triggered by a letter of intent or term sheet. First, select a virtual data room that provides strong security and activity tracking. Second, build the company’s data room with organizational discipline, using logical folder structures (corporate, IP, finance, regulatory, benefits, etc.) and uploading documents in a searchable, digital format with consistent document naming conventions. Lastly, in connection with building the data room, flag with the guidance of deal counsel any confidentiality concerns and access restrictions that need to be put in place. For example, are there any documents that need to be redacted or anonymized? Does the transaction present antitrust sensitivity requiring documents to be shared through a “clean room”?

In all, a well-maintained and categorically organized data room significantly accelerates a sale process and signals sophistication to potential acquirors.

The most successful exits rarely begin when a banker is engaged. Ideally, they begin years earlier with strategic and operational foresight. Companies that understand the value of M&A preparedness can preserve negotiation leverage and act more decisively when M&A opportunities arise. After all, engineering an exit is more than closing a deal — it is positioning the company so that the right deal finds you.

Whether a company is gearing up for an acquisition, a growth equity financing, or an IPO, a due diligence review will be an inevitable part of that transaction, and that review will test not only the current business but also the integrity of a company’s historical records. Readiness for that review is critical, as once a diligence process begins, gaps in corporate approvals, equity records, contract management, intellectual property ownership, and regulatory compliance can quickly become leverage for purchase price adjustments, closing conditions, and/or special indemnities. At best, diligence gaps can consume management attention at a time when a company has little bandwidth to spare. At worst, they can detract from a company’s credibility and can have a meaningful impact on deal speed and certainty. Most issues are fixable, but the available solutions often narrow after a deal is already on the table. This article provides an overview of actionable steps leadership at mid- to late-stage private companies can take to make transaction readiness an ongoing discipline rather than a pre-signing scramble.

Set Up and Maintain a Virtual Data Room

Rather than waiting until a letter of intent is signed, companies should stand up and maintain a virtual data room (VDR) early, using records they already keep locally, and treat it as a living repository of critical corporate documents. Management teams that prepare to address anticipated diligence focus areas and maintain organized virtual records early are better positioned when a process launches than teams that start flat-footed. Companies can get a head start by asking outside counsel for a standard due diligence request list, which serves as an organizational and gap-identification tool, as well as an organized table of contents for their VDR. This ensures that documents are comprehensive and indexed by categories prospective investors and acquirers will expect.

The VDR should contain current, fully executed, and dated documents together with all amendments, statements of work, and side letters. Superseded and terminated agreements should be archived, not deleted or mixed with operative versions. One small but time-saving step in setting up a VDR is using a consistent and intuitive naming convention as documents are uploaded, which will help not only management but also third-party reviewers quickly navigate the VDR’s contents. Once a diligence process begins, access should be staged and subject to tiered permissions, with additional controls for competitively sensitive information, compensation data, and litigation files; privileged materials should be withheld or handled through a process designed to preserve privilege. Particularly when a potential buyer is a competitor, or when the underlying material is subject to confidentiality restrictions that do not permit sharing with a potential acquirer or investor, counsel should advise prior to upload and contemplate redactions, clean-team arrangements, and restrictions on downloading or printing. When in doubt, leave it out; it is easier to pause early and evaluate permissions and other protections than to pull back a document after it has been shared.

A word of caution: prospective investors now run AI review tools that can scan an entire data room in minutes, and while that process can generate false positives, it can also magnify every internal inconsistency across the VDR, including in the cap table, contracts, and other materials. As a best practice, keeping the VDR updated quarterly helps identify issues early and positions the company and management to earn credibility from the moment that transaction diligence begins.

Maintain a Corporate Record Book and Organizational Documents

M&A buyers and growth equity investors will expect clean and current corporate governance records. This means prospective investors will review: current versions of the certificate of incorporation (including all amendments) and bylaws; board and stockholder minutes; and fully executed, dated written consents. An improperly compiled consent with a missing signature page or date can cost the company meaningful time and resources to track down or, worse, require corrective action to cure. Every material corporate action should tie out to a corresponding board and/or stockholder approval, including equity issuances, option grants, director and officer elections, and subsidiary formations.

Companies should also at least annually confirm good standing in their state of incorporation and in every jurisdiction in which they are qualified to do business. Outside counsel can obtain verbal good standing confirmations from third-party service providers, often for a nominal or no cost to the company. Good standing lapses can trigger fees, taxes, and penalties and, in many states, can bar the company from bringing suit in local courts until the lapse is cured, although a lapse does not typically invalidate contracts executed while the company was not in good standing. For an additional layer of caution, companies can consider ordering lien and litigation searches from third-party service providers in the same set of jurisdictions.

Ensure Vigilant Capitalization Table Hygiene

The company should expect buyers or investors to request a current copy of the capitalization table and, in the case of an equity financing, a pro forma cap table reflecting the completed round. Most cap table hygiene issues exist well before a contemplated transaction and surface in the diligence process. Common hiccups include unsigned option grants, undocumented stock issuances, unrecorded convertible note draws, and inconsistencies between vesting schedules and employment terms. Cap table accuracy is key: a company’s representations about its capitalization are often treated as fundamental representations, giving buyers or investors the ability to claim breach even for minor discrepancies. Moreover, a messy cap table can be perceived as poor ownership discipline by the company or its management.

With assistance from outside counsel, the company should reconcile the cap table against the stock ledger and equity grant documentation, ensuring that every stock and option issuance is supported by board resolutions, grant agreements, evidence of payment of the exercise or purchase price, and, if applicable, an approved, unexpired equity incentive plan. Each option grant should also be supported by a current 409A valuation that supports the board’s determination of the fair market value of the underlying shares.

Importantly, companies should develop a clear understanding of how antidilution provisions operate and how change-of-control acceleration clauses (single-trigger and double-trigger) may affect the equity/distribution waterfall in a transaction. Modeling these scenarios in advance allows management to communicate the deal economics clearly to all stockholders and avoids last-minute surprises that can derail negotiations.

Understand Key Provisions in Material Contracts

Counsel for buyers and investors will expect the opportunity to review each contract that is material to the business. These typically include: contracts with key customers and suppliers above certain revenue or expense thresholds; license agreements; leases; employment and severance agreements with key personnel; and other contracts that are important to the business. These contracts often contain change-of-control consent triggers, rights of first refusal, out-licensing restrictions, most favored nation provisions, exclusivity, non-solicit, non-compete, and other restrictive covenants. In certain circumstances, a counterparty may have a notice, consent, or termination right in connection with a transaction. Accordingly, with the help of outside counsel, a company should be generally aware of which key agreements contain those provisions and should have a plan for obtaining consents or providing timely notice in advance of entering into a transaction process. Seeking consent late in the process can give leverage to the counterparty, which can increase overall costs and decrease deal certainty.

Confirm Intellectual Property Ownership and Assignment of IP

Depending on the company’s core business, clean IP title is often a significant driver of the diligence process. One consideration that comes up time and again is whether every founder, employee, and contractor who contributed to the company’s IP portfolio has executed an invention assignment agreement that assigns all intellectual property rights to the company. It isn’t uncommon for advisors and early contributors in early-stage companies, often compensated in equity, to miss the assignment paperwork altogether, or to execute, but not date, the assignment. Any gaps in assignment should be addressed ahead of the buyer or investor diligence process, which can be done with the help of outside IP counsel. Companies should also routinely conduct an audit of open-source software usage to confirm compliance with applicable license terms.

Maintain Compliance with Industry-Specific Regulatory Requirements

Companies operating in regulated industries, such as healthcare, financial services, energy, and government contracting, should confirm that all material licenses, permits, and registrations are current and in good standing. Identifying regulatory approvals or notices that would be required in connection with a change-of-control or assignment of a license can avoid an additional layer of investor diligence caused when gaps are identified later in the deal negotiation process. Regulatory non-compliance discovered during diligence can significantly delay closing or reduce deal certainty.

In an IPO, due diligence is best understood as the working group’s disciplined effort to (1) identify and assess potentially material issues in the company’s business, history, and financial reporting, (2) translate those issues into accurate and appropriately balanced disclosure in the prospectus and related offering communications, and (3) pressure-test factual assertions so the offering record can be supported if challenged later.

A thorough due diligence investigation is designed to identify not only “problems,” but also facts that could disappoint investors if they emerge later without having been fairly described. Because an IPO is often the first time a company describes its business, results, and risks in significant detail, investors rely heavily on the prospectus as the principal disclosure document when evaluating the company and the investment.

The Due Diligence Investigation Runs from Day 1 Through Pricing and Closing

Companies should begin preparing their documentary data room in advance of kicking off an IPO process by identifying employees with subject matter ownership and assigning responsibility for collecting the relevant materials. Documents should flow to a single point of contact who will ensure materials are loaded into an organized virtual data room.

At the organizational meeting, having a substantially complete data room enables the working group to begin immediately and complete initial document review earlier, allowing diligence to run in parallel with drafting. This helps avoid a common frustration: marketing-forward disclosure drafted early in the process later must be rewritten based on diligence findings. Ideally, the working group incorporates diligence input as the disclosure is developed.

While the most intensive diligence typically wraps up around the initial SEC submission or filing, the work needs to continue through pricing and closing (including effectiveness and any bring-down diligence). New disclosure added in subsequent filings should be vetted, and new information and documentation should be added to the data room on a rolling basis. Maintaining an open issues log, with clear owners, next steps, and deadlines, helps avoid last-minute diligence scrambles that can disrupt the timing of amendments and the overall IPO schedule.

No Surprises

While it may not be enjoyable to share all of the company’s more challenging issues, companies should strive to ensure that underwriters’ counsel is not learning about issues for the first time late in the process. Early identification and resolution also avoids a common dynamic: issues are significantly easier to manage if the company or its counsel shares relevant details early, along with appropriate context, so that matters can be evaluated and framed appropriately from the outset.

This approach also protects against “over-reactions,” where diligence counsel believes it has identified a significant issue and therefore expands review and follow-up. That dynamic can devolve into time-consuming exercises and unnecessary “all-hands” calls, often avoidable where the issue was presented proactively rather than discovered.

Create a Record and Document Support

A thorough diligence record maintained by counsel helps to track progress, monitor efficacy, and create an audit trail in case of a later challenge.

Counsel should maintain a back-up book linking factual statements in the prospectus to supporting sources. Subject matter owners at the company should prioritize responsiveness to support requests and avoid treating the process as a check-the-box exercise.

The process itself should also be documented. Counsel can circulate written questions for diligence calls in advance and cover those questions on the call. A memo should capture attendance, and follow-up items should be tracked to resolution. The open issues log should be shared among the company, its counsel, and underwriters’ counsel and updated regularly.

Don’t Rely on the “Belief” Crutch

One of the most repeated phrases in an IPO prospectus is “we believe.” A statement of belief can be an appropriate way to express judgments or expectations that cannot be definitively verified, and it can help avoid overstating certainty. However, a belief qualification is not a free pass to make claims that are not supportable. Where management expresses a belief, there should be a reasonable basis for that belief and the diligence process should confirm that basis exists and that the disclosure is appropriately calibrated.

For example, a biotechnology company developing a new drug may state in the prospectus: “We believe our product candidate may offer clinically meaningful benefits to patients.” While there may not yet be clinical data demonstrating that outcome, there should be a sound scientific rationale and supporting pre-clinical evidence that provides a reasonable basis for the statement as framed.

Check with Experts

Counsel will review large volumes of material as part of the investigation, but that does not guarantee the working group will fully understand highly technical, specialized, or cutting-edge topics. In appropriate cases, diligence should include calls with relevant subject matter experts (whether technical, regulatory, cybersecurity, accounting, tax, or otherwise) to ensure the record supports the disclosure.

Diligence is More Than Lawsuit Avoidance

A properly conducted due diligence investigation can reduce the likelihood of securities claims for IPO participants. It cannot eliminate the possibility of litigation, but a thorough process can create a defensible record for those who may need it.

The credibility of the working group is also at stake. Underwriters care deeply about successful offerings. Their reputation is their biggest asset and missed diligence issues can cause real reputational harm.

More broadly, accurate IPO disclosure is a long-term asset. Companies will live with their disclosure regime as public companies, updating it regularly under ongoing investor scrutiny. Strong diligence helps public company executives spend more time executing their strategy and less time responding to avoidable surprises.

Moving ahead with an IPO is a major commitment of time and resources. The companies that execute efficiently are the ones that start managing the process well before the organizational meeting by building a realistic base-case timeline, staffing internal owners, and making a small set of initial decisions that drive the critical path.

Construct the Base-Case Timeline Around Key Milestones

A useful approach is to anchor the company’s IPO timeline around three broad windows. At the outset, establish a target IPO pricing date and construct the rest of the timeline to make that achievable. Once determined, establish a target date for the initial confidential submission of the registration statement and a date for the organizational meeting.

1. Readiness planning: preparing for the organizational meeting. The company’s approach to readiness planning can either pave the way for a more efficient process or inadvertently create bottlenecks that cannot be fixed on the back-end. The length of the readiness stage can vary, and more time means better preparation. Completing the key readiness workstreams before the organizational meeting is critical to staying on schedule. As part of readiness planning, companies should identify any third-party consents, waivers, or contractual constraints that may require outreach and turnaround time, because those items can create non-negotiable lead times that compress the schedule later.
2. Confidential execution: organizational meeting to initial confidential submission. This is typically the most drafting-intensive period and often drives internal resourcing needs. The company’s internal IPO team will be heavily engaged in the process and the IPO demands effectively create a second job for them on top of their day-to-day responsibilities. It’s critical that the company’s internal and external staffing is fully engaged and prepared following the organizational meeting.
3. SEC process: initial submission to public filing, launch/roadshow, and pricing. Companies have the least amount of control over this period as it depends heavily on SEC comment cadence and market performance. In practice, a slower or more complex SEC comment cycle can require additional confidential submissions and can also create financial statement update pressure as quarters roll, which can affect both timing and workload. Addressing challenging SEC comments is often best handled in the confidential submission process, which typically means additional confidential submissions and more time, putting pressure on hitting a financial statement staleness window. External factors are rarely predictable in advance, so the best planning will get the company to the public filing on time and enable business leaders to make a go-forward decision on the planned schedule.

Even in a well-run process, timelines move. Treat the company’s base case as a model that gets updated as the process evolves from factors that the company can control toward factors that the company cannot control.

Assign Ownership

Effective IPO execution requires effective organization. The plan and a company’s ability to hit its milestones become manageable with clearly defined internal roles and assignments given to those with the time and resources to properly manage them. A few readiness decisions tend to pay outsized dividends:

• Create a small internal IPO working group. This should include key decision-makers and functional leaders with responsibilities that touch upon the IPO process. The working group should stay in close contact through regularly scheduled meetings with internal and outside counsel to ensure accountability and focus on key workstreams.
• Identify subject matter owners for each workstream. Identify an individual to take ownership of each specific subject matter workstream, including communications, data room management, finance, accounting, legal, compensation, IP, tax, and regulatory, and then make them responsible for the day-to-day management of their workstream.
• Designate a lead draftsperson and a master-document process. Working with the company’s outside counsel, determine a drafting plan for the registration statement with an initial focus on the business section, the management discussion and analysis (“MD&A”), and financial statements. Company counsel can draft much of the registration statement, but someone at the company who has (i) an in-depth knowledge of the company’s business and mission, (ii) drafting and management skills, and (iii) time, should take the lead on overseeing the drafting of the business section. Assigning an owner enables narrative coherence that is not possible with multiple people drafting independently.
• Corporate housekeeping. Assign a tech-savvy person to oversee the due diligence document collection system to ensure the data room is complete and organized. This individual can also serve as a documentation coordinator for cap tables, stockholder consents, lockup signatures, public company policies, and employee education materials.

The practical theme: clarity on ownership of workstreams and tasks prevents the “everyone is responsible, so no one is responsible” dynamic that turns into schedule compression later. Each workstream owner should have clear escalation paths and decision rights (or access to decision-makers) to avoid bottlenecks and ensure key decisions are given the right attention and made at the right time.

Hire Advisors

Companies often treat the banking process as a separate track from readiness planning. It is not. Several early choices directly affect the company’s ability to run a controlled timeline:

• Underwriter selection and coverage strategy. Underwriter selection is one of the most important early decisions because it shapes execution roles, staffing, and investor positioning. In evaluating banks, companies should focus not only on senior coverage, but also on (i) sector fluency, (ii) the experience and availability of the day-to-day execution team, and (iii) the bank’s ability to support the company’s investor narrative through launch and aftermarket. A strong execution bench matters because it directly affects cadence, responsiveness, and how efficiently the working group can run.
• Outside Counsel. The IPO is also an opportunity to confirm that the company will have an IPO-ready legal team with the capacity and continuity to run a fast, iterative drafting and diligence process. Regardless of whether the company uses existing counsel or adds new counsel, the key is to ensure the team has deep IPO experience, the right specialist bench, and the ability to maintain a disciplined process from the organizational meeting through pricing and closing.
• Compensation Consultants. Public company executives are compensated differently than private company executives. Compensation committees will insist on getting high-quality input from experienced compensation advisors before making any compensation decisions. Additionally, structuring public company equity compensation plans is a significant and strategic undertaking. These plans require stockholder approval, which becomes significantly more challenging as a public company, so designing and implementing a plan to take effect alongside the IPO is essential and getting the details right will make life as a public company substantially easier. Lining up the company’s compensation advisors early enables them to give the right guidance at the right time.
• Communications/Investor Relations. While much of the IPO process is governed by what companies cannot communicate, developing a public company story and hitting the ground running as a public company with a functioning Investor Relations (“IR”) infrastructure will make the transition significantly easier. Companies will want IR professionals who are familiar with the story and involved in crafting it so that they can communicate consistently and clearly once public.

A good planning posture is to treat “advisor selection” as a gating item: once selected, the team can finalize the calendar, set drafting cadence, and schedule key events (including analyst education and investor-facing prep).

Financial Statements, Accounting, and Controls

The biggest internal constraint on an IPO timeline is the availability of audited financial statements. The SEC has strict rules regarding the inclusion of audited financial statements in registration statements, and missing a filing window before a staleness date can have significant consequences for execution of a timeline.

Key decisions and actions that typically belong in the earliest phase of readiness planning include:

• Audit readiness and Public Company Accounting Oversight Board (“PCAOB”) planning. It’s never too early to have financial statements audited under PCAOB standards. If a company thinks an IPO in the next two years is a possibility, then there should be a plan to produce the financial statements.
• Identify and resolve complex accounting issues. Complex accounting issues will require careful analysis and likely involve working with the national office of the auditor. It’s a time-consuming process both to analyze and resolve the issue and then complete the audit and draft financial statements. For discrete, high-risk accounting judgments, companies, in coordination with auditors and counsel, should consider early on whether SEC consultation or pre-clearance may be appropriate, as unresolved accounting issues can materially disrupt an IPO timeline.
• Internal controls and Sarbanes-Oxley Act (“SOX”) planning. Developing internal controls is an intensive process that requires an experienced staff and implementation of complex enterprise reporting systems that need to be deployed across the organization. Having a team ready to handle the rigors of public company reporting before going public is essential, and the earlier they are involved, the better.

The practical point: if finance readiness lags, everything becomes reactive. The financial statements and controls work cannot be “crammed” without creating risk.

Plan the Drafting Strategy

The best registration statement drafting processes are the ones where the company arrives at the organizational meeting with (1) a solid draft of the business section that will enable productive drafting sessions, (2) draft financial statements, and (3) a clear drafting plan. A few decisions matter disproportionately:

• Business section planning. This is the most time-consuming drafting exercise and will be the focal point of a substantial portion of the drafting sessions. Arriving at the organizational meeting with a draft that has a clear narrative will make those drafting sessions significantly more productive. It is substantially easier to refine a message in a drafting session than to write new text in a group setting.

There are different approaches to producing the first internal business section draft, and it’s a useful exercise to discuss the company’s plans with outside counsel. The main point is to formulate a plan and see it through all the way to the organizational meeting.

• Material contracts and redaction planning. The company will likely need to file certain material contracts with the registration statement and will likely want to redact commercially sensitive or confidential information from those contracts. This requires coordination with the contractual counterparty for review. As this requires divulging IPO plans to a third party, the timing of this outreach needs to be carefully considered, but it cannot be left until the last minute because it can become a negotiation process.
• Collect source material. If the company expects to cite third-party sources (market data, industry reports) or discuss internal, non-financial metrics, the company should start collecting those sources and consider how they will be used and supported. These are all key diligence materials, and maintaining sources while drafting can go a long way toward running diligence in parallel with drafting to avoid rewriting the business section if later diligence doesn’t check out.

Drafting is time-consuming and is often more challenging than expected. Private companies do not have prospectus-ready disclosure, so a significant amount of content needs to be created, and that content needs to live up to intense scrutiny that comes along with strict disclosure liability in an IPO. Early effort makes it less painful.

The timeline benefit is straightforward: once the narrative architecture and key performance indicator definitions stabilize, drafting cycles compress; until then, each diligence issue and SEC comment is more likely to trigger downstream rewrites that consume time and management bandwidth.

Plan Ahead for Communications

IPO communications restrictions and “quiet period” discipline are schedule issues, not merely legal issues. The company’s communications calendar (conferences, investor touchpoints, press, social media, internal communications) can create avoidable friction if not planned early. Communications discipline is a timeline issue because avoidable public statements, inconsistencies, or unsupported claims can force last-minute disclosure revisions or create heightened scrutiny at exactly the point in the process when timing is most sensitive.

A disciplined approach typically includes:

• Build a communications schedule. The schedule should cover all planned external events during the IPO period and the first months as a public company.
• Calibrate investor communications. Work closely with counsel to only communicate what is permitted and supportable, with particular care around the risk that public statements get amplified by analysts. Be mindful of investor and third-party consents and plan outreach that is not too early and not too late.
• Tighten internal communications. Provide appropriate guidance at key milestones to employees (including the first confidential submission and the first public filing). How early to inform the whole company is a judgment call that can vary depending on the size of the company, but in the pre-organizational meeting stage, it is generally advisable to keep IPO plans to those with a need to know.

The planning theme: communications discipline reduces the risk of last-minute issues that force drafting changes or create unnecessary SEC sensitivity.

A Note on AI in the IPO Process

Generative AI can be useful in producing some of the “boilerplate” sections of the registration statement and can be useful in incremental drafting (paragraphs, not pages) using structured source materials in an iterative manner. Any AI-generated drafting should be verified against source materials and the company’s actual records, because speed without substantiation can create avoidable disclosure risk and rework later in the process. For example, uploading one slide from the company’s pitch deck into an LLM and using a thoughtfully constructed prompt can produce one or two paragraphs of prospectus-style disclosure that can serve as a useful starting point for human-powered drafting.

“Conversion” drafting is also becoming increasingly used. For example, summary financial sections or MD&A tables can be populated from completed financial statements using AI tools. These uses build drafting efficiency, but they are not yet (as of early 2026) revolutionary.

Companies should be mindful of confidentiality when using AI and should ensure that employees are using a closed enterprise system and not a public-facing generative AI tool.

IP will be a core focus for a biotech company and its investors through its entire lifecycle. While the company’s IP strategy can and should evolve over time, there are certain steps that an early-stage company can take at the outset to establish a strong foundation. This article identifies several key principles that, in addition to an intelligently crafted IP portfolio, will help set an emerging company up for future success.

Document Ownership

Too many deals — licenses, acquisitions, or otherwise — stumble due to questions about ownership of a company’s core inventions. Fortunately, a few simple documents can avoid most issues. Founders and other employees should have straightforward agreements assigning (using “present tense” assignment language) relevant inventions to the company. Companies should also understand whether key personnel have parallel or prior obligations to academic institutions, and be able to clearly explain those obligations, and ensure that CROs, consultants, and other service providers also appropriately assign IP generated for the company.

Document these arrangements when relationships begin — not several years later when an investor or potential acquirer asks for the paperwork and it may be logistically difficult or expensive to reconstruct a chain of title for IP.

License for the Long-Term

When a company is in its very early stages, there can often be a lot of time pressure to secure any third-party IP rights, such as a foundational IP license from a university. It is also important, however, to keep in mind that licenses are long-term instruments and the same document may be scrutinized several years later in a due diligence process when the company’s situation is very different. While perfection can often be the enemy of good, foresight does not have to be the enemy of speed. Negotiating the material license or collaboration with an eye towards future-proofing in a few key areas can even increase the value of the agreement to the company.

Patent then Publish

Once out of stealth, scientific publications, conference presentations, and other disclosures can be integral to a young biotech company’s success. They can also have irreversible consequences for patent protection if not timed properly — i.e., a publication prior to patent filing can preclude the issuance of the patent.

Early training for employees and a simple process can go a long way in mitigating this risk. A one- or two-hour IP 101 training from counsel can be very effective, and can also roll out a straightforward process to ensure that both technical and other personnel know to check with patent counsel before submitting a manuscript for publication or disclosing proprietary information in a pitch without a confidentiality agreement in place.

The rule of thumb is simple: when potentially patentable technology is about to leave the building, determine whether to file a patent application first.

Joint Ownership Does Not Simplify

Negotiating a transformative IP agreement can sometimes take considerably longer than initially thought, and it can often be tempting to take the negotiation path of least resistance. When it comes to IP ownership, this path equates to “joint ownership” of inventions. On its face, joint ownership sounds like a great solution. It is fair, equitable, and does not require a complex analysis of each party’s contributions to the invention. It is jointly owned, no matter what. The problem lies in operationalizing the joint ownership.

The rules governing jointly owned IP vary by jurisdiction and can create complications around licensing, patent prosecution, enforcement, and commercialization. Joint ownership can also become particularly cumbersome in future transactions — e.g., an acquirer is a competitor of a joint owner. While it may take a little extra negotiation, there are many ways to allocate ownership of IP other than just inventorship that can suit both parties, including ownership based on relation to background IP, subject matter, or type of IP.

Data Is a Key Asset

A biotech’s most valuable assets increasingly extend beyond patents and traditional know-how. Preclinical results, clinical data, biomarker datasets, manufacturing data, and datasets used to develop or validate computational tools may all have substantial strategic value. Data rights and restrictions should be given the same level of focus as the development of an IP strategy. Particular attention should be paid to distinctions among raw data, processed data, derived data, and analytical outputs — and to privacy, consent, or contractual restrictions that may constrain future uses.

In an article for Life Science Leader, partners Sally Wagner Partin, Sharon Flanagan, and Torrey Cope examine how artificial intelligence is reshaping life sciences M&A by changing the pace and economics of drug development. They explore how AI’s growing role in target identification, clinical development, and regulatory decision-making is influencing valuation, due diligence, milestone structures, transaction timing, and risk allocation, and outline key considerations for dealmakers as AI continues to transform the life sciences industry.