Due Diligence

What Is Due Diligence?

Due diligence (commonly abbreviated DD) is the structured investigation that an investor conducts before formally closing an investment. It is the process of verifying that the claims made during fundraising are accurate, the risks are understood, and the terms of the investment are justified.

Due diligence is triggered by a signed term sheet. Before the term sheet, investors may conduct light preliminary research — but the formal, comprehensive process begins once both parties have agreed to the headline terms and the investor is moving toward committing capital.

Think of it this way: the pitch earns the term sheet; due diligence closes — or kills — the deal.

DD Timeline

The duration of due diligence varies significantly by stage:

Stage	Typical DD Duration	Depth
Angel / Pre-seed	1–2 weeks	Light — primarily founder reference checks and gut feel
Seed	2–4 weeks	Moderate — financials, legal basics, product demo, customer calls
Series A	4–8 weeks	Thorough — full financial, legal, technical, market
Series B+	6–12 weeks	Exhaustive — may include third-party legal counsel, accounting firm, and technical auditors

Areas Covered in Due Diligence

Financial DD

• Revenue history and projections (MRR/ARR, growth rate, cohort data)
• Unit economics (CAC, LTV, gross margin, payback period)
• Burn rate, runway, and cash flow statements
• Historical P&L and balance sheet
• Cap table: who owns what, fully diluted share count, option pool size
• Outstanding debt, convertible notes, SAFEs with their terms

Legal DD

• Certificate of incorporation and corporate structure
• All equity agreements (SAFEs, convertible notes, stock purchase agreements)
• Intellectual property assignments — do employees and contractors have signed IP assignment agreements?
• Patent filings and trademark registrations
• Material contracts (customer agreements, vendor contracts, NDAs)
• Employment agreements and any non-compete or non-solicitation clauses
• Any litigation, disputes, or regulatory issues

Product and Technical DD (more common at Series A and later)

• Architecture review: scalability, security, infrastructure costs
• Code quality assessment (sometimes done by a technical partner or third-party firm)
• Product roadmap and engineering team capacity
• Security audit: compliance certifications (SOC 2, GDPR, HIPAA if applicable)
• Dependency risks: critical third-party services, open-source licenses

Market DD

• Total Addressable Market (TAM) validation
• Competitive landscape analysis
• Win/loss analysis from recent sales cycles
• Customer references: investors will call 3–5 customers directly

Team and Reference Checks

• Background checks on founders (prior companies, references, LinkedIn)
• Reference calls with former managers, colleagues, co-founders
• Assessment of team completeness: are there critical gaps?

What to Prepare: The Data Room

A data room is a secure, organized repository of all documents an investor will need during DD. Setting it up proactively signals operational maturity and speeds up the process.

A standard data room includes:

• Corporate documents (incorporation, bylaws, shareholder agreements)
• Cap table (typically in Carta or a clean spreadsheet)
• Financial statements (last 2–3 years, or since founding if younger)
• MRR/ARR dashboard or spreadsheet with monthly data
• Customer contracts (redacted where confidentially required)
• IP assignment agreements for all founders, employees, and contractors
• Investor updates (last 6–12 months of monthly or quarterly updates)
• Product roadmap and engineering documentation
• Team bios and org chart

Tools commonly used: Notion, Google Drive (with organized folder structure), Docsend, or dedicated data room platforms like Capshare or Ansarada.

Red Flags That Kill Deals

These are the findings that most commonly cause investors to withdraw or reprice after due diligence:

• IP ownership gaps — a contractor built core technology without signing an IP assignment; the company does not own its own product
• Cap table problems — a missing co-founder with unvested shares, a messy SAFE stack with onerous terms, or a prior investor with blocking rights
• Customer concentration — one customer represents >40% of revenue; losing them is an existential event
• Inconsistent financials — numbers in the deck do not match the actual financials
• Reference check failures — a founder has a documented history of dishonesty or team dysfunction
• Undisclosed litigation — active legal disputes that were not mentioned during the process

How DD Depth Differs by Stage

At the angel and pre-seed stage, due diligence is almost entirely qualitative. Investors are betting on the founder. They may call two references, spend an hour on a product demo, and review a simple cap table. The process may take a week.

At Series A, a professional venture firm will assign an analyst and an associate to lead DD, with a general partner overseeing. They will verify every material claim, call 5–10 customers, engage legal counsel for document review, and potentially bring in a technical advisor to assess the codebase.

At Series B and beyond, institutional investors may hire third-party accounting firms for financial audits, engage cybersecurity firms for technical assessments, and retain outside legal counsel to review all material contracts. This is not unusual and should not alarm founders — it is standard practice for checks of $20M+.

Key Takeaway

Due diligence is not an obstacle — it is a founder’s opportunity to demonstrate that the business is exactly what was described in the pitch. Founders who maintain a clean data room, keep their cap table organized, and have signed IP assignments from day one move through DD in weeks rather than months. The single most common deal-killer in DD is not a bad business — it is administrative negligence that creates legal ambiguity around ownership, contracts, or financial accuracy.