Due diligence is the investor’s review of your company’s legal, financial and commercial records before they invest. At pre-seed and seed it’s mostly a document check: formation documents, the cap table and every SAFE, founder stock and 83(b) elections, IP assignments from everyone who built the product, key contracts and financials. If those are signed, organized and in a data room before you start pitching, diligence takes days instead of weeks.
Key takeaways
- Investors are checking that the company exists properly, owns what it says it owns, and has the cap table it claims.
- Most diligence problems are paperwork problems: unsigned documents, missing consents, missing IP assignments and equity that was promised but never issued.
- Build the data room before you need it. Google Drive or Dropbox is fine at pre-seed and seed.
- Fix problems before an investor finds them, and disclose anything you can’t fix.
- In a priced round, the company drafts the disclosure schedule, and a current data room is the fastest way to do it.
- Diligence gets deeper with each round, but the core categories stay the same.
What are investors looking for?
Investors want to know three things. Is the company properly formed and in good standing? Does it actually own its product and IP? And is the cap table accurate, so they know exactly what they’re buying? Everything else, from customer contracts to financials, helps them judge the business, but those three questions are where deals slow down or fall apart.
At pre-seed and seed, diligence is usually light and focused on the legal basics. At Series A, investor counsel does a full review, often with a written request list, and expects answers fast. Investors increasingly use AI tools to review data rooms, so unsigned drafts, mismatched numbers and missing documents get flagged quickly.
What documents should be in a startup data room?
This is the core list for a pre-seed or seed round. Add to it as the company grows.
- Formation and governance: certificate of incorporation and any amendments, bylaws, action of incorporator, board and stockholder consents, Delaware good standing, and foreign qualifications in states where you do business.
- Cap table and financings: a current cap table, every SAFE and convertible note, any side letters, and the documents from any priced round.
- Founder and employee equity: founder restricted stock purchase agreements with proof of each 83(b) election, the equity incentive plan, all grant agreements and the board approvals for each grant, and your 409A valuation if you have one.
- People: a signed confidential information and invention assignment agreement (CIIAA) from every founder, employee and contractor who touched the product, plus offer letters, contractor agreements and advisor agreements.
- Intellectual property: patent and trademark filings, key licenses (including open source use), and proof the company owns its domain names.
- Commercial contracts: material customer, vendor and partner agreements, and any letters of intent.
- Financials: recent financial statements, the budget or model, and any debt.
- Legal and regulatory: any litigation, threatened claims, government correspondence, and permits or licenses the business needs.
Use one folder per category and only include final, signed versions. See How Do I Keep My Startup Legal Documents Organized? and What Is a Cap Table?.
Is Google Drive or Dropbox okay for a data room?
Yes, at pre-seed and seed. Use view-only sharing, set permissions at the folder level, and share with specific people rather than by open link. At Series A, or in an acquisition, a purpose-built data room is worth it because it gives you access logs, watermarking and the ability to revoke access. Many founders use DocSend or the data room features in their cap table or equity management software.
What are the most common red flags, and how do I fix them?
The same handful of issues come up again and again, and almost all of them are fixable if you find them early.
Missing IP assignments. If a founder, early employee or contractor never signed a CIIAA, the company may not own what they built. Get the agreement signed now, including from founders. See The CIIA Agreement.
Equity that was promised but never issued. An email or offer letter promising a percentage isn’t a grant. The board needs to approve it, at today’s fair market value, with vesting credit back to the person’s start date if that was the deal. See Promising Equity vs Issuing Equity.
Missing 83(b) elections. Investors will ask for proof that each founder filed one. If you can’t find yours, talk to your lawyer and tax advisor before the round. See 83(b) Election.
Missing board or stockholder approvals. Stock issued, options granted or SAFEs signed without board approval need to be approved after the fact. Your lawyer can prepare the consents.
A cap table that doesn’t match the documents. Every share, option and SAFE on the cap table should tie to a signed agreement and a board approval. Reconcile them before you share the cap table with anyone.
Domain names or accounts in a founder’s personal name. Move the registrar account into the company’s name and have the founder sign an assignment.
If something can’t be fixed before the round, disclose it and explain what you’re doing about it. Investors forgive messy paperwork far more readily than they forgive surprises.
Should we include a letter of intent that never closed?
Include it if any part of it still binds the company, such as exclusivity or confidentiality, or if it matters to the story you’re telling investors. If it has fully lapsed and creates no ongoing obligation, you can leave it out. Never leave out a live obligation.
How do I prove the company owns its domain names?
Show that the registrar account is in the company’s name, with a screenshot of the account or the registration record. If a founder registered the domain personally before incorporation, add a signed assignment from that founder to the company.
How should I run the diligence process?
Pick one person to own it, usually a founder, and have them coordinate with your lawyer. Ask the lead investor for their request list early and organize your answers to match it. Respond quickly and completely, and tell the investor in advance if something will take longer. Diligence is often the first project you and a new investor work on together, so it’s a good chance to show how your team operates.
Your lawyer’s job in diligence is to answer investor counsel’s questions, fix gaps in the corporate record, and help you prepare the disclosure schedule.
What is a disclosure schedule and who prepares it?
In a priced round, the stock purchase agreement includes a long list of representations, statements the company makes about itself: that it has no pending litigation, that it owns its IP, that its cap table is accurate, that it isn’t in breach of its material contracts. Think of the representations as the investor’s questions and the disclosure schedule as the company’s answers. Some representations are true as written and need nothing. Others ask for a list, such as every material contract or every registered trademark, and some are true only with exceptions, which the schedule spells out. Read together, the representations and the schedule have to be accurate.
The company drafts the schedule, because only the company knows its own operations. Your lawyer usually sends a shell with a section for each representation and a plain-English explanation of what each one asks, then reviews your answers. Most answers come straight from the data room, so a well-kept one saves days. A SAFE carries only a few short representations and no schedule, so a company’s first full disclosure schedule usually arrives with its first priced round, and at a Series A on NVCA documents it is often a bigger job than founders expect. In later rounds, you start from the last schedule and update it.
When in doubt, disclose. If a representation turns out to be wrong and the schedule didn’t cover it, investors may have a claim for damages or, in some deals, a right to adjust the price they paid. An exception listed on the schedule is one they accepted when they invested.
What changes for a follow-on round with the same investor?
Expect a refresh rather than a full review. The investor will want an updated cap table, current financials, any new material contracts or hires since the last round, and confirmation that nothing has changed in the company’s legal standing. If your data room has been kept up to date, this takes very little time.
Go deeper: For a full walkthrough, see our Founder’s Guide to SAFEs and Founder’s Guide to Series A.
For more on preparing for a round, see SAFE and Series Seed vs NVCA Documents. Getting diligence-ready is part of our General Counsel service. If you’d like help preparing for diligence, contact us.
