Due Diligence

The investigation an investor conducts to verify a startup's claims and assess risk before finalising an investment, typically carried out after a term sheet is signed but before the definitive legal agreements close.

Diligence is where the deal can still fall apart even after a term sheet is signed — investors are looking for discrepancies between what was pitched and what the documents show. A messy cap table (undocumented share issuances, verbal promises to early team members never formalised), IP that was never properly assigned from a founder's previous employer or a freelance developer, or overstated revenue/customer numbers are the most common issues that either kill a deal or force a valuation renegotiation ("re-trade"). Legal diligence is usually the most document-heavy: investors' lawyers request the incorporation certificate, all board and shareholder resolutions, existing shareholder agreements, employment and consultant agreements (checking IP assignment clauses), and any regulatory filings. Clean, organised documentation from day one of the company's life makes diligence faster and reduces the risk of a re-trade.

1. Set up a data room (a shared folder of key documents) well before you start fundraising, not after a term sheet is signed. 2. Ensure every share issuance, ESOP grant, and founder agreement is properly documented and signed — verbal promises about equity are the single most common diligence red flag. 3. Confirm IP assignment agreements exist for every founder, employee, and contractor who has touched the product, especially anyone hired before incorporation or working as a freelancer. 4. Reconcile your financial statements and be ready to explain any unusual expenses or revenue recognition choices. 5. Be transparent about known issues — investors discovering something you hid is far worse than disclosing it upfront and addressing it together.

During Series A diligence, an investor's legal team discovers that a co-founder who left the company 18 months ago never signed a proper share transfer or IP assignment agreement, leaving ambiguity over who owns the code they wrote. The deal doesn't collapse, but closing is delayed six weeks while the company's lawyers track down the departed co-founder, negotiate a formal exit agreement, and clean up the cap table — a preventable delay that a properly documented departure would have avoided.