Handbook
/
Fundraising
Surviving Due Diligence
Due diligence happens after the term sheet. Here's how to navigate it without losing the deal.
You have a term sheet. Celebration is premature. Due diligence is where deals die—or drag on for months. Being prepared and responsive is how you get to close.
What Due Diligence Is
Purpose
Investors verify their investment thesis:
•
Confirm what you told them
•
Find surprises or red flags
•
Assess risk
•
Complete legal requirements
When It Happens
After term sheet, before close.
Typical timeline: 2-6 weeks
Delay causes:
•
Unresponsive founders
•
Messy records
•
Legal issues discovered
•
Reference concerns
Who’s Involved
From investor side:
•
Partner (overall)
•
Associates (execution)
•
Lawyers (legal diligence)
•
Sometimes third parties (technical, financial)
From your side:
•
Founders
•
Key team (for specific areas)
•
Your lawyer
•
Accountant (if needed)
Types of Due Diligence
Business Diligence
Verifying the business case:
What they check:
•
Revenue and customer claims
•
Key metrics accuracy
•
Market analysis
•
Competitive positioning
•
Growth trajectory
What to provide:
•
Financial records
•
Customer list
•
Contracts
•
Metrics dashboards
•
Market research
Financial Diligence
Verifying the numbers:
What they check:
•
Revenue recognition
•
Expense classification
•
Cash flow
•
Tax compliance
•
Financial controls
What to provide:
•
Bank statements
•
Financial statements
•
Tax returns
•
Payroll records
•
Cap table
Legal Diligence
Verifying legal standing:
What they check:
•
Corporate structure
•
Equity and cap table
•
Material contracts
•
IP ownership
•
Litigation
•
Compliance
What to provide:
•
Incorporation documents
•
Stockholder agreements
•
Key contracts
•
IP assignments
•
Employment agreements
•
Any legal correspondence
Technical Diligence
For technical products:
What they check:
•
Code quality
•
Architecture
•
Security
•
Scalability
•
IP/innovation
What to provide:
•
Technical documentation
•
Architecture overview
•
Security audit results
•
Possibly code access
Customer Diligence
Verifying customer reality:
What they do:
•
Talk to customers
•
Verify relationships
•
Assess satisfaction
•
Confirm use cases
What you do:
•
Provide reference list
•
Make introductions
•
Prep customers briefly
The Data Room
What to Include
Corporate:
•
Certificate of incorporation
•
Bylaws
•
Board minutes
•
Stockholder agreements
•
Stock ledger / cap table
Financial:
•
Historical financials (P&L, balance sheet)
•
Bank statements (last 12 months)
•
Tax returns (if applicable)
•
AR/AP aging
Contracts:
•
Customer contracts (material)
•
Vendor contracts (material)
•
Partnership agreements
•
Lease agreements
IP:
•
Patent/trademark documentation
•
IP assignment agreements
•
Licensing agreements
HR:
•
Employee list
•
Employment agreements
•
Offer letters
•
Contractor agreements
Other:
•
Insurance policies
•
Litigation documents
•
Regulatory compliance
Organization
Organize clearly:
•
Folders by category
•
Clear naming conventions
•
Index document
Makes diligence faster and signals professionalism.
Tools
Data room options:
•
Google Drive (simple, free)
•
Dropbox (simple)
•
Notion (structured)
•
Dedicated data rooms (Carta, Digify)
Start with what you have. Upgrade if needed.
Reference Calls
What to Expect
Investors will talk to:
•
Customers (verify relationship, satisfaction)
•
Former employers/colleagues (verify track record)
•
Other investors (reputation, experience)
Preparing References
Choose carefully:
•
Customers who love you
•
People who know you well
•
Balanced perspective (not just cheerleaders)
Prep them:
•
“Investor X will call about our fundraise”
•
“They may ask about [topics]”
•
Not: “Here’s what to say”
Reference Call Tips
•
Provide context to references
•
Make warm introduction
•
Follow up with thanks
•
Don’t over-prep (sounds coached)
Common Issues
Messy Cap Table
Unclear ownership, missing documentation.
Impact: Delays, legal cost, red flag.
Prevention: Clean cap table from start. Use proper equity tools.
Missing Contracts
Key agreements never signed or lost.
Impact: Delay while recreating or finding.
Prevention: Document everything. Keep organized.
IP Issues
Unclear IP ownership, prior work claims.
Impact: Can kill deals.
Prevention: Clean IP assignment from day one.
Undisclosed Issues
Problems surface that weren’t mentioned.
Impact: Trust destroyed. Deal often dies.
Prevention: Disclose issues upfront. Surprises are worse.
Unresponsive Founders
Slow to provide documents, delayed responses.
Impact: Deals drag, investor loses confidence.
Prevention: Make diligence a priority. Assign dedicated time.
Moving Through Diligence
Speed Matters
Why:
•
Investor attention wanes
•
Market conditions change
•
Your runway burns
•
Momentum matters
How:
•
Prep data room before term sheet
•
Respond same-day to requests
•
Make it your priority
Stay Organized
Track:
•
What’s been requested
•
What’s been provided
•
What’s outstanding
•
Who’s responsible
Communicate Proactively
Keep investors informed:
•
“Here’s the item you requested”
•
“This will take a few days because…”
•
“I noticed we’re missing X, tracking it down”
Don’t make them chase you.
Escalate Issues Early
If problems surface:
•
Tell investors immediately
•
Explain context
•
Propose solution
Finding out through diligence is worse than hearing from you.
After Diligence
Document Review
Final legal documents:
•
Stock purchase agreement
•
Investor rights agreement
•
Voting agreement
•
Right of first refusal
•
Certificate of incorporation amendment
Signing and Close
•
Final document negotiation
•
Signature collection
•
Wire transfer
•
Stock issuance
Celebrate (Briefly)
Close is an achievement. Then get back to building.
Key Takeaways
•
Due diligence is where deals die—preparation and responsiveness are essential
•
Prepare data room before term sheet: corporate, financial, contracts, IP, HR
•
Organization signals professionalism and speeds the process
•
Common killers: messy cap table, missing contracts, IP issues, undisclosed problems
•
Reference calls will happen—choose good references and prep them lightly
•
Speed matters: respond same-day, make it a priority
•
Disclose issues proactively—surprises destroy trust
•
Track requests and communicate status proactively
•
Typical timeline: 2-6 weeks; poor preparation extends it
AIMake has access to all of this
Our AI has access to the entire Startup Handbook. Ask it anything about building your startup.
Get started →
← Previous
SAFEs and Convertible Notes Explained
Next →
Fundraising Fundamentals for Startups