Due diligence is the comprehensive investigation and verification process that investors conduct before committing capital to a company, examining financial records, legal documents, operations, and management to assess risks and validate claims made during fundraising discussions.
Due diligence is the comprehensive investigation that investors conduct before putting money into your company. It's essentially a thorough health check of your business, where potential investors verify everything you've told them, examine your financial statements, review legal documents, and assess whether your company is as promising as your pitch deck suggests.
The due diligence process serves to protect investors from making poorly informed decisions. Think of it as the homework phase after initial interest has been established. Investors want to confirm that the opportunity matches reality before signing a subscription agreement and transferring funds.
For founders, due diligence can feel intrusive and time-consuming, but it's an essential part of professional fundraising. Investors conducting thorough due diligence typically signal serious intent, whilst those who skip this phase might not be the sophisticated partners you want on your cap table.
Due diligence typically covers several key areas of your business. Financial due diligence examines your accounting records, revenue figures, cash flow patterns, and projections. Investors will scrutinise your balance sheet, income statement, and cash flow statement to understand your true financial position.
Legal due diligence reviews your company's legal standing, including your certificate of incorporation, company constitution, shareholders' agreement, and any existing contracts or litigation. Investors want to ensure there are no hidden legal issues that could affect their investment.
Commercial due diligence assesses your market opportunity, competitive position, customer relationships, and growth potential. This often includes reference calls with customers, analysis of your product or service, and validation of your market size claims.
The due diligence process typically takes between four to twelve weeks, depending on the complexity of your business and the thoroughness of the investor. Seed investment rounds often have lighter due diligence requirements, whilst Series A funding and later rounds involve more extensive investigation.
The timeline depends significantly on how prepared you are. Founders who maintain organised records, have clean financial statements, and can quickly produce requested documents will move through due diligence faster than those scrambling to locate paperwork.
Some aspects of due diligence can run concurrently. For example, legal review might happen alongside financial analysis. However, certain issues discovered during the process may trigger additional investigation, extending the timeline unexpectedly.
Investors typically request a comprehensive set of documents during due diligence. Financial documents include historical financial statements, tax returns, bank statements, and detailed financial projections. They'll want to see your cap table showing current ownership and any outstanding convertible loan notes or SAFE agreements.
Legal documents include your memorandum and articles of association, register of members, register of directors, board meeting minutes, and any existing shareholders' agreements. They'll also want to review material contracts, employment agreements, and intellectual property documentation.
Operational documents might include customer contracts, supplier agreements, technology architecture documentation, and information about your team. Investors often request details about your share option scheme and any employee shares arrangements.
Preparation is crucial for a smooth due diligence process. Start by creating a virtual data room—a secure online repository where you can share documents with potential investors. Organise files logically by category: financial, legal, commercial, and operational.
Ensure your statutory registers are up to date and filed correctly with the Companies Registration Office. This includes your register of members, register of directors, and register of beneficial owners. Missing or inaccurate filings create red flags during due diligence.
Address any known issues proactively. If you have outstanding compliance matters, incomplete documentation, or potential legal concerns, resolve them before entering due diligence. Investors appreciate transparency, and discovering problems they weren't warned about erodes trust quickly.
Investors watch for several warning signs during due diligence. Inconsistent financial records, unexplained discrepancies between reported and actual figures, or incomplete documentation all raise concerns. Similarly, unclear share capital structures or disputes over equity ownership can derail deals.
Legal issues such as pending litigation, unclear intellectual property ownership, or problematic contracts with customers or suppliers are serious red flags. Investors also scrutinise founder relationships and may be concerned by poorly structured founders' agreements or unclear vesting arrangements.
Missing compliance filings with the Companies Registration Office or Revenue can indicate poor governance. Late annual returns, missing financial statements, or incomplete register of beneficial owners filings suggest the company may not take regulatory obligations seriously.
Due diligence findings can significantly impact the final investment agreement. If investors discover issues that weren't disclosed earlier, they may adjust the valuation, require additional protections, or even walk away from the deal entirely.
Minor issues might result in specific warranties or indemnities in the investment documents, where founders personally guarantee certain facts or agree to cover losses if specific problems materialise. More significant concerns could lead to reduced valuations or changes to liquidation preference terms.
This is why transparency throughout the fundraising process matters. Investors expect to find some issues during due diligence—no company is perfect. However, discovering material problems that founders failed to disclose damages trust and often kills deals that might otherwise have survived with honest upfront disclosure.
Once due diligence is satisfactorily completed, the investment moves toward closing. Legal teams finalise the investment agreement and shareholders' agreement, incorporating any specific provisions arising from due diligence findings.
The completion process typically involves signing the legal documents, filing necessary paperwork with the Companies Registration Office, issuing new share certificates, and transferring funds. Your cap table and statutory registers will need updating to reflect the new shareholders.
After closing, maintain the good practices established during due diligence preparation. Future funding rounds will require similar scrutiny, and investors in later rounds will conduct their own due diligence on your company's complete history, including how previous rounds were conducted.
