Are You Due Diligence Ready? A Founder’s Essential Guide

You’ve just received your first term sheet from a venture capital firm. Congratulations! But before you start celebrating, there’s one critical hurdle ahead: startup due diligence. This systematic evaluation by your potential investors can make or break your funding round, and being unprepared can cost you time, money, or even the entire deal.

What Founders Need to Know About Due Diligence

Venture capital due diligence typically occurs in the 2–4 weeks between term sheet signing and final funding. During this period, investors will evaluate your company’s legal, financial, and operational health. Think of it as a comprehensive business audit as the results can impact valuation, terms, and even whether a deal closes.

The Essential Due Diligence Checklist: What Investors Will Ask For

Corporate Foundation

Investors want to see your fully diluted cap table in Excel format, including a complete ledger of all outstanding SAFEs, convertible notes, and equity grants. Key documents include:

• Founder vesting agreements
• Employee Stock Option Plan (ESOP) allocations
• Constitutional documents, such as the certificate of incorporation and bylaws

Financial and Operational Documentation

Your startup financial due diligence documents should include:

• Historical and projected financial statements
• Monthly profit and loss (P&L) reports
• Burn rate analysis and runway forecast
• Key customer contracts and supplier agreements
• Insurance coverage: D&O, general liability, and cyber liability

Intellectual Property (IP)

If your startup has IP assets, they must be clearly documented. Include:

• Patent filings, trademarks, copyrights
• Confidentiality and invention assignment agreements (for founders and employees)
• Employment agreements for key team members

Compliance, Licenses, and Litigation

Be prepared to provide:

• Industry-specific regulatory licenses
• Litigation history (if applicable)
• Tax compliance documentation
• Background check readiness for founders and executives

Best Practices: Set Yourself Up for Due Diligence Success

Start Early

The most common mistake founders make is waiting until the term sheet arrives. Instead, create a virtual data room for due diligence 6–12 months before fundraising. Update it regularly so you’re always deal-ready.

Use Professional Platforms

Store documents using tools like Carta, DocSend, or Dropbox Business. Organize files by category with consistent naming conventions and folder structures. This signals professionalism and builds investor confidence.

Secure Your Data

Protect your data room with passwords and permission settings. Do not include sensitive trade secrets or proprietary code during early stages of due diligence. These items generally are not needed for VC due diligence review.

Skip the NDA Request (Most of the Time)

Unless there’s a clear conflict of interest or sensitive IP, avoid requesting NDAs from credible VCs. This is standard in the venture capital investment process, and demanding an NDA can create unnecessary friction.

Red Flags That Kill Deals

Founders should proactively identify and resolve issues that often derail deals:

• Unresolved founder disputes
• Missing IP assignments
• Undisclosed litigation
• Financial misrepresentations

Other concerns like missing employment agreements, incomplete records, or minor compliance issues are often fixable with legal support, if caught early.

The Bottom Line

Due diligence is your chance to prove you’re a high-quality investment. Prepared founders raise capital faster and on better terms. Start organizing early, maintain an up-to-date data room, and treat this process as a relationship-builder, not just compliance.

Preparation signals competence. Transparency builds trust. And the startups that view due diligence as a strategic fundraising tool are the ones that win in the long game.

Disclaimer: This article is for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. This article should not be used as a substitute for obtaining legal advice from an attorney. For personalized legal guidance, consult a qualified attorney.