Due Diligence

Due diligence is the investigation an investor runs on a startup between term sheet and closing to verify claims and surface hidden risks. The scope covers business, financial, legal, and technical risk before any money is wired. It is what turns a non-binding term sheet into a closed deal, and it is also the phase where most deals that fall apart fall apart.

A standard early-stage diligence package covers commercial diligence (market size, competition, customer references, pipeline), financial diligence (cap table accuracy, historical and projected financials, runway, burn), legal diligence (incorporation documents, IP assignment from every founder and contractor, employment agreements, prior financing documents, any litigation), and technical diligence (codebase audit, security and infrastructure review, sometimes a third-party tech assessment). At seed, this typically takes one to three weeks. At Series A and beyond, four to eight weeks is standard, often including a formal [Management Presentation] as a key diligence milestone. Founders set up a virtual data room (Google Drive, DocSend, or a dedicated tool) with every requested document, and respond to follow-up questions in real time. The single most common deal killer at this stage is not a bad number but a cap table or IP problem that nobody mentioned: a missing 83(b) election, an unassigned contractor's IP, a verbal equity promise to a former cofounder, or a SAFE that conflicts with the term sheet's math.

Ryan's Take

Diligence is where confident founders get humbled and sloppy founders get caught. The investors are not trying to find a reason to walk; they have already signed a term sheet. But they are trying to make sure they haven't missed anything that bites them later, and every question they ask is one they have been bitten by before. Have your cap table, IP assignments, and incorporation docs clean and dated before the term sheet. The deal you save is your own.

What founders get wrong: Treating diligence as a formality after the term sheet. Term sheets are non-binding for a reason. A cap table that doesn't reconcile, an IP gap, or an undisclosed verbal promise can blow up a "done" deal in week three of diligence. Get the cleanup done before the round, not during it.

Related: [Term Sheet] · [Lead Investor] · [Cap Table] · [Founders Agreement]

FAQ

How long does due diligence take? Roughly one to three weeks at seed and four to eight weeks at Series A and later. Complex deals (regulated industries, large data rooms, international IP) take longer.

What documents do investors ask for in due diligence? The cap table, incorporation documents, all prior financing documents, founder and employee IP assignments, employment and contractor agreements, financial statements, key customer contracts, and any litigation history.

Can a deal fall apart in due diligence after a term sheet is signed? Yes, and it happens regularly. The term sheet is non-binding for most provisions. Cap table errors, missing IP assignments, undisclosed equity commitments, or material discrepancies between pitch claims and reality are the common causes.