What Actually Happens During Venture Due Diligence

Diligence begins after a term sheet is signed and before money moves. Founders expect it to be an interrogation of the business. In practice, commercial conviction was reached before the term sheet; diligence mostly verifies that the company is what it claims to be legally and financially.

The corporate record

Counsel will want the formation documents, every share issuance, every option grant with board approval, every convertible instrument, and a capitalization table that reconciles to all of it.

This is where deals stall. Options granted verbally and never documented, a share issuance without a board consent, a co-founder who left with no signed separation — each has to be corrected before closing, and correcting them requires cooperation from people who may no longer be friendly.

Intellectual property

The company must own what it is built on. That requires assignment agreements from every founder, employee and contractor who wrote code or created designs.

The recurring problem is the contractor engaged early, paid informally, with no written assignment. Absent an agreement, the contractor may own that work. Fixing it means finding them and asking them to sign, with no leverage at all.

Employment classification

Expect scrutiny of whether people treated as contractors should have been employees. Misclassification creates liability for back taxes and benefits, and it is common in early companies that scaled quickly.

Customers and contracts

Investors will read major customer agreements, looking for change-of-control provisions, unusual termination rights and revenue concentration. They may ask to speak to customers, which is standard.

How to make it fast

Keep a data room permanently, not just when raising: formation documents, board consents, the cap table, IP assignments, employment agreements, material contracts, and financial statements.

Companies that maintain this close in weeks. Companies that assemble it under pressure take months, and every week of delay is a week for conditions to change.