Investor due diligence is the review an investor conducts before funding a company to confirm that the business, its ownership and its legal foundations are what the founders say they are. For a startup, it usually means producing corporate records, a reconciled cap table, proof that the company owns its intellectual property, key contracts, employment documents and financial information. Companies that keep these records organized as they go tend to close faster and with fewer surprises in the final documents.
Once a term sheet is signed, founders are often surprised by the length of the request list that follows. Investors are not just checking boxes. What they find shapes the representations and warranties in the financing documents, the disclosure schedules the company must deliver, and sometimes the price or terms. Here is what investors typically review, why it matters, and what happens after the deal closes.
Why Due Diligence Matters to Both Sides
For investors, due diligence helps assess risk, verify the company’s story and identify issues that need to be fixed before or at closing. For founders, it is an opportunity to show that the company is well run. Gaps uncovered late, such as an unsigned invention assignment from a co-founder or missing board approvals for option grants, can delay closing, require cleanup work at the company’s expense, or lead investors to ask for special protections.
The Investor Due Diligence Checklist
Requests vary with the stage of the company and the size of the round, but most lists cover these areas.
Corporate organization and good standing
- Certificate or articles of incorporation, with all amendments, and bylaws
- Board and stockholder minutes and written consents
- Certificates of good standing from the state of incorporation, and evidence of qualification to do business in states where the company operates (for example, a Delaware corporation headquartered in California must register in California)
- Any stockholder, voting, right of first refusal or co-sale agreements
Capitalization
- A current, fully diluted capitalization table that reconciles to signed documents
- Founder stock purchase agreements with vesting terms, and copies of filed 83(b) elections
- The equity incentive plan, board approvals of every grant, and 409A valuations supporting option exercise prices
- All SAFEs, convertible notes and warrants, with a clear view of how they convert in the round
- Evidence of securities law compliance for prior issuances, such as Form D and state notice filings
Intellectual property
- Confidentiality and invention assignment agreements signed by every founder, employee and contractor who contributed to the product; see our article on CIIAAs
- A list of patents, patent applications, trademarks and domain names
- Inbound licenses, use of open source software and any third-party claims
- Any work done by founders before incorporation, and whether a prior employer might claim it
Material contracts
- Customer, supplier, partnership and licensing agreements above a set value
- Loans, leases, security interests and guarantees
- Provisions that restrict the business, such as exclusivity or most-favored-nation terms, or that require consent on a change of control
Employment and contractors
- Offer letters, employment agreements and the employee handbook
- Classification of contractors and exempt employees under California’s strict rules
- Pending or threatened employment claims
Financial, tax, regulatory and litigation matters
- Financial statements, budgets and key metrics
- Federal and state tax filings and any outstanding liabilities
- Privacy policies, data security practices and industry-specific licenses or approvals
- Pending or threatened lawsuits and government inquiries
How Diligence Connects to the Deal Documents
In a priced round, the stock purchase agreement contains representations and warranties about the company. The company lists exceptions in a disclosure schedule. If something material is not disclosed and turns out to be inaccurate, the investors may have claims. Accurate diligence responses and a careful disclosure schedule protect the company and its founders as much as they inform investors. For more on the round itself, see our article on Series A financing.
What Happens After the Deal?
Closing is not the end of the process. After a financing, companies typically need to:
- File securities notices. A Form D is generally due within 15 days after the first sale in a Regulation D offering, along with applicable state notice filings.
- Update the cap table and stock records to reflect new shares and any converted SAFEs or notes.
- Honor investor rights. Investor rights agreements often require periodic financial statements, budgets and inspection rights, and may give investors pro rata rights in future rounds.
- Follow new governance rules. Board composition may change, and protective provisions can require investor approval for certain actions.
- Complete any post-closing cleanup the investors required, such as obtaining missing IP assignments.
How to Prepare Before Investors Ask
The time to get organized is before fundraising begins. Hold and document board meetings or written consents, approve every equity grant properly, keep a single reconciled cap table, collect IP assignments at onboarding, and store signed documents in an organized virtual data room. A short legal checkup a few months before a raise can surface issues while there is still time to fix them on your own schedule.
The Takeaway
Investor due diligence tests whether a startup’s legal house is in order. Organized corporate records, a clean cap table, documented IP ownership and well-managed contracts make the process smoother, support accurate disclosure, and help founders focus on negotiating terms rather than repairing paperwork.
Frequently Asked Questions
What do investors look at in due diligence?
Investors typically review corporate records, the cap table and equity documents, intellectual property ownership, material contracts, employment matters, financial statements, taxes, regulatory compliance and litigation. The depth of review usually increases with the size of the round.
How long does investor due diligence take?
It varies with the size of the round and how organized the company is. A company with a complete data room and clean records can often move much faster than one that must locate or create documents during the process.
What is a disclosure schedule?
A disclosure schedule is a document the company delivers with the financing agreement that lists exceptions to its representations and warranties. Accurately disclosing known issues helps protect the company and founders from later claims.
What happens after an investment closes?
The company usually files a Form D and any state notices, updates its cap table, provides the information rights it granted investors, follows any new governance requirements and completes agreed post-closing items.
How Sutter Law Can Help
Sutter Law helps startups prepare for investor diligence, organize data rooms, clean up corporate and equity records and negotiate financing documents through our venture capital practice. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
