Almost every due diligence exercise finds something. Usually the issue is minor, such as a missing signed copy of a board resolution that everyone knows was passed, but occasionally it is serious, such as a former developer who never assigned their code and now claims to own part of it. In my view, the way founders respond to a finding matters as much as the finding itself.
When a round is urgent, the natural reaction is to promise the investor a quick fix. I would always suggest taking a day first to find out what actually happened and who is able to fix it, because only then can the company and the investor sensibly agree what must happen before the money comes in and what can wait until afterwards.
Get the facts before promising a fix
The starting point is the original transaction. For a share issue, that means looking for the approvals and the CAC filing, and for code, it means finding out who wrote it and what they signed. Those records show whether the company is simply missing a copy of a document that exists or is missing a right it never obtained, and the two problems need very different solutions.
Before giving the investor a date, the company should speak to the people whose help it needs. A former developer who is happy to sign a confirmation presents a paperwork task, whereas one who says the company never paid for the work presents a negotiation and possibly a dispute, and the update to the investor should describe the position accurately, including anything still being checked.
Any corrective document should carry its actual date and explain what it confirms or changes, and it should never be backdated. If the fix involves transferring a right, it also needs the proper approvals and a review of its tax position, so that the investor can see both the original gap and what the company now holds.
Explain what the problem affects
The next question is how the issue affects the business the investor is investing in. A gap in ownership of the core product is serious, while an incomplete file on a supplier dispute settled two years ago is much less so, and a missing licence becomes urgent if it would prevent the company from serving its largest customer.
The investor should be given a factual account of what is affected, together with a proposed fix and a realistic timetable. If the fix depends on someone outside the company whose cooperation is uncertain, the company should explain the alternative and what it would cost, bearing in mind that rewriting disputed code takes engineering time and testing and usually costs far more than the fee for a replacement developer.
The company's answers should be consistent with the documents in its data room, which I discuss in getting your documents ready for an investor. If further investigation changes an earlier answer, the investor should be told and given the reason, and for anything still being checked, the company should say when it expects to have an answer.
Agree what must happen before the money arrives
A condition precedent is something that must happen before completion, such as obtaining an important consent. The parties should agree what evidence will show that the condition has been satisfied and who decides whether it has been met.
A post‑closing undertaking is a promise to do something after the money has arrived. Each undertaking needs an owner and a realistic deadline, and both sides should understand the consequence of missing it. Where someone outside the company controls the outcome, the promise should be framed as taking specific steps, so that the company is not guaranteeing the cooperation of a third party.
Some issues are too serious to be fixed after closing. If there is doubt about whether the company is allowed to operate, or whether it owns its main product, the investor will reasonably want that resolved first. The parties can share the financial risk in whatever way they agree, but the licence or ownership gap still has to be repaired by whoever has the power to grant the missing right.
Risk allocation alongside the fix
Investment agreements include warranties about the company, and each warranty should be read against what the investigation has found, including any "so far as the founders are aware" qualification and whose knowledge it refers to. Placing a document in the data room only qualifies a warranty if the agreement says that disclosure works that way, and in most cases the company will need a disclosure letter that refers to the specific issue.
A specific indemnity covers an identified risk through a promise to pay. The company should read what loss it covers and how a claim is made, and check whether it has its own cap and time limit separate from those that apply to the general warranties.
Founders are often asked to give personal warranties, so they should understand how much could be claimed and how liability is shared between them. Joint and several liability means the investor can recover the whole amount from any one founder. Personal exposure should be kept separate from the company's own promises, and any warranty insurance should be checked for exclusions that would apply to the known issue.
The NVCA model documents show how risk is usually allocated in US transactions, but they should be adapted to the company and its governing law before being relied on for a Nigerian startup.
Finish the work after the round
The company should keep a completion log that links each fix to the evidence showing it has been done. For a code assignment, that means the signed document and confirmation that it covers the right work, as I explain in making sure the company has the rights to its software, so that the board and the investor can see what is still outstanding.
The timetable for fixes has to fit the company's runway and the planned completion date. If an important item is likely to delay completion, the board and the investor should be told early, with the information they need to consider alternatives, and after funding the company should continue working through the log until every undertaking has been completed or formally changed.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.