Due Diligence

Due diligence is the investor's process of verifying your claims before closing an investment. Knowing what to expect helps you prepare.

Definition

Due diligence (DD) is the process investors conduct after a term sheet is signed and before closing an investment. It's a comprehensive investigation to verify the information provided by the startup and identify any risks or issues.

Due diligence can last 2–8 weeks depending on the deal size and investor process.

What Investors Review

Business and product: - Product demos and documentation - Customer references and feedback - Technology architecture and IP ownership

Financial: - Historical financials (P&L, balance sheet, cash flow statements) - Revenue and customer data (MRR, churn, CAC, LTV) - Financial model and assumptions

Legal: - Corporate structure and cap table - Existing contracts (customer, vendor, employment) - IP assignments from founders and employees - Any outstanding litigation or disputes

Team: - Background checks on founders - Reference checks with former colleagues and customers - Employment agreements

How to Prepare

Organize a virtual data room (Google Drive, Notion, or dedicated tools like Visible or Docsend) with all the above documents organized and labeled.

Key documents to have ready: - Incorporation documents and cap table - Last 12 months of financials - Customer list with revenue and churn data - IP assignment agreements from all founders and early employees - Any signed customer contracts

Respond quickly. Slow responses during DD signal disorganization and can kill deals. A founder who has their documents in order signals operational maturity.

Common Issues That Arise in DD

  • Missing IP assignments (common with technical co-founders who didn't formally assign IP)
  • Incomplete cap table records
  • Outstanding equity promises to early employees without formal documentation
  • Inconsistencies between pitch deck claims and actual financial data

Addressing these proactively — before you start fundraising — saves significant time and reduces deal risk.