Investor Due Diligence: What They Ask For and How to Be Ready

Why preparation is worth more than it sounds

Diligence rarely kills a good deal outright. What it does is create delay, and delay creates doubt.

A round that should close in six weeks takes fourteen because the cap table does not reconcile and two contractor IP assignments cannot be found. In that time the market moves, the investor's enthusiasm cools, and your runway shortens. Some rounds die of exhaustion rather than of a finding.

Preparing the data room before you begin raising is the single highest-return administrative task available to a founder.

What they ask for

Corporate

• Certificate of incorporation and constitutional documents
• Board and shareholder resolutions
• Statutory registers and filings, up to date
• Share certificates and allotment records
• Details of any subsidiary or related entity

Capitalisation

• Current cap table, fully diluted
• Every convertible instrument outstanding, with its cap, discount and conversion terms
• ESOP scheme documents, the grant register, and vesting schedules
• Any warrants or other rights
• Prior round documents - term sheets and definitive agreements
• Founder agreements including vesting

Financial

• Financial statements, audited where applicable
• Monthly management accounts for 24 months
• Bank statements
• Revenue by customer and by month
• Detailed expense breakdown
• The financial model, with assumptions
• Tax returns and filings
• Details of any debt

Commercial

• Customer contracts, particularly the largest
• Standard terms and conditions
• Supplier and vendor agreements
• Partnership or reseller agreements
• Pipeline, with stage and weighting

Metrics

• Cohort retention data
• Churn, logo and revenue, separately
• CAC by channel, fully loaded
• Unit economics with the underlying calculation
• Product usage data

People

• Employment agreements for all staff
• Contractor and consultant agreements
• IP assignment from every founder, employee and contractor
• Confidentiality agreements
• Organisation chart and hiring plan
• Any employment dispute, current or past

Intellectual property

• Trademark registrations and applications
• Patents, if any
• Domain names
• Open-source licences used in the product, and their terms
• Any third-party IP dependency

Legal and regulatory

• Litigation, current or threatened
• Regulatory licences relevant to your sector
• Data protection and privacy compliance
• Insurance policies

The problems they find

These recur, and every one is preventable.

The cap table does not reconcile. The founders' spreadsheet, the statutory register and the share certificates disagree. This is extremely common and it stops everything until resolved, because nobody can invest in a company where ownership is uncertain.

IP is not assigned. A founder built the initial product before incorporation and never assigned it to the company. Or a contractor wrote a core module under an agreement with no IP clause. The company does not own its own product, and this must be fixed before any investment.

Undocumented equity promises. An early employee or advisor was told they would receive equity, in an email, and it was never granted. Every one of these has to be found and resolved.

Dead equity. A co-founder left in month eight holding a large unvested-but-unrecovered stake. Investors will require this to be dealt with, and dealing with it requires the cooperation of someone who has already left.

Statutory filings behind. Annual returns not filed, registers not maintained, resolutions not recorded. Individually minor, collectively a signal about how the company is run.

Revenue does not reconcile. The number in the deck does not match the accounts. Sometimes an honest difference between booked, invoiced and recognised revenue - but it has to be explained, and the explanation should come from you first.

Customer concentration discovered late. One customer is 45% of revenue and it was not in the deck. Disclose this yourself.

Contracts with unusual terms. A large customer with unlimited liability, an uncapped indemnity, or a change-of-control clause that lets them terminate on an acquisition.

Preparing the room

Structure it the way they read it. Folders matching the categories above, numbered. An investor should find the cap table without asking.

One authoritative version of everything. Multiple versions of the cap table in the same folder is worse than one imperfect version.

Write an index. A single page listing what is in each folder and flagging anything unusual, with an explanation. Volunteering a problem with its context is far better than having it found.

Fix what you can before you open it. Missing IP assignments can be signed now. Filings can be brought current. Undocumented promises can be resolved. All of this is cheap in advance and expensive mid-process.

Use access controls and keep a log. Access granted per investor, revocable. You want to know who looked at what.

Keep it current during the process. A data room that stops being updated mid-diligence suggests the company runs the same way.

Reference calls

Frequently the part founders prepare least for, and where investors form strong views.

Customer references. They will ask for them, including for churned customers. Choose customers who will be honest rather than only enthusiastic - an investor who hears "the onboarding was rough but the product is now essential" believes it, and believes the rest of what they hear.

Founder references. Previous colleagues, co-founders, investors. Assume investors will speak to people you did not nominate.

Do not coach references. It is transparent and it damages credibility more than any honest criticism would.

Managing the process

Nominate one person to own it. Usually a founder. Requests arriving to different people get answered inconsistently.

Respond quickly. Speed of response is read as a signal about how the company operates. A 48-hour turnaround on requests keeps momentum.

Track every request and its status. A simple list of what was asked, when, by whom and whether it is closed. Requests get lost otherwise, and a forgotten request looks like avoidance.

Answer the question asked. Do not volunteer unrelated detail, and do not withhold what was asked for. Both are noticed.

Disclose problems early. Everything material will be found. Found by you and explained is a manageable issue; found by them in week five is a trust problem.

The one-line summary

Diligence rarely kills a good deal outright - it kills deals by delay, and delay comes from documents you cannot produce. Build the data room before you start raising, fix IP assignment and cap table discrepancies while there is no time pressure, and disclose your problems yourself with the context attached.