What Investors May Review About HR During Due Diligence
People documentation and operating practices may come up during financing diligence. Here are common topics to prepare for and questions to resolve.
People documentation and operating practices may be included in investor due diligence. Questions about worker classification, offer letters, handbook policies, and equity records can prompt follow-up work; the scope varies by transaction and reviewer. Here are topics company leaders may want to organize before a financing review.
Why investors care about HR
People practices can raise financial, operational, or legal questions during a financing review. The diligence scope depends on the transaction, investor, company, and advisers involved.
Questions may arise at different points in a transaction. If a documentation or classification issue is identified near a deadline, follow-up may need to happen quickly; the timing, cost, and effect on a transaction vary.
Many operational gaps can be addressed, but remediation depends on the records, agreements, work locations, and specialist input involved. Identifying questions before a deadline may leave more time to review them; it does not guarantee a lower cost or a particular transaction outcome.
Worker classification
Worker classification is one topic that may be reviewed. Depending on the transaction, advisers may ask about contractor agreements, work practices, and how the company assessed its arrangements.
Applicable classification tests depend on the agency and jurisdiction. Company leaders should not determine a worker's status from a single factor; consult qualified tax or legal advisers.
A reclassification finding can create back payroll taxes, interest, penalties, and potential benefits liability. The amount depends on the facts, applicable rules, and period involved, so quantify exposure with qualified tax or legal advice during diligence.
Offer letters and employment agreements
Diligence may include requests for offer letters, compensation terms, and records of equity promises. Organize current documents and ask counsel to review missing, unsigned, or inconsistent records.
Reviewers may ask about intellectual-property assignment documents for employees or contractors. Whether a document is required and what it accomplishes depend on the agreements and applicable law; seek qualified counsel.
Equity records may also be part of diligence. Keep grant approvals and agreements organized, and ask corporate counsel to confirm what records are needed for the company's plan and grants.
Employee handbook and core policies
You do not need a 100-page handbook, but you need a document that establishes at minimum: at-will employment, anti-harassment and anti-discrimination policy, a process for reporting complaints, and the basic terms of employment including pay periods and PTO policy.
Diligence may include questions about workplace policies and how employee concerns are handled. A handbook can communicate processes, but requirements and appropriate content depend on the organization and jurisdiction; consult qualified counsel.
If a workplace complaint is within the diligence scope, advisers may ask how it was handled. Preserve relevant records and consult qualified counsel about confidentiality, retention, and response obligations.
Payroll compliance
A diligence request may ask for payroll and tax records. Confirm filing and registration questions with the payroll provider and qualified tax or legal advisers.
Work locations may raise state registration or payroll questions. Requirements depend on the employer, employee work, and jurisdiction; confirm them with qualified providers or counsel.
Records about paid time off or accrued vacation may be requested. Whether balances are treated as wages and how they are handled depend on applicable law and policy; ask qualified counsel or payroll advisers.
What to do before you start fundraising
If a financing process is anticipated, consider reviewing People records well ahead of the expected diligence window. The time needed depends on the questions, documentation, and legal or tax review involved.
Topics that may prompt follow-up include unsigned offer letters, missing IP assignment records, contractor relationships that need review, state payroll registrations, and handbook policies. Whether an issue applies and how long it takes to address depend on the facts and the specialists involved.
A scoped People review before fundraising may help leadership identify questions while there is time to investigate them. It cannot guarantee lower legal fees, reduced deal risk, or a particular financing result.