What investors check before wiring, and the four things that most often kill a deal at this stage.
12 min read · Level 4
Diligence rarely kills a deal on the business — that was assessed before the term sheet. It kills deals on paperwork: missing IP assignments, undocumented equity, revenue that does not reconcile to the bank. Every one is preventable with an afternoon eighteen months earlier, and every one arrives during exclusivity when you have the least leverage and the least time.
After a term sheet, the investor verifies everything you said. Typically:
Corporate — incorporation, cap table, board minutes, shareholder agreements Financial — statements, bank records, revenue recognition, contracts Legal — customer and supplier contracts, employment agreements, IP assignments Technical — architecture, security, code review Commercial — customer references, churn, pipeline
Two to six weeks for an early round.
Because this is where deals die, and almost always for administrative reasons rather than because the business was bad.
The four classic killers: missing IP assignments, an undocumented cap table, revenue that does not match the bank, and a key contract that is unsigned or unfavourable. Each is a paperwork problem that becomes a deal problem under a deadline.
A company signs a term sheet. Diligence begins.
Week 1 — the investor asks for IP assignment agreements. The founders signed theirs. The contractor who built the original prototype did not. He is now at another company. Legally, he may own part of the codebase.
Week 2 — the cap table shows 8% to an advisor. There is an email promising it and no signed agreement. The advisor now believes it was 10%.
Week 3 — recorded revenue is $34k; bank deposits are $27k. The difference is invoiced-not-paid, which is fine, but nobody had explained it and it now looks like the numbers were overstated.
None of these mean the business is bad. All three cost weeks, legal fees and goodwill — and any of them can end a deal when the investor's enthusiasm was marginal to begin with.
All three were preventable with an afternoon of paperwork eighteen months earlier.
First-time founders often start assembling documents only after signing the term sheet. That is exactly when you have the least time and the most pressure, and when every gap looks worse than it is.
The second: being defensive about problems. Every company has some. Disclosing them yourself, early, with a plan, is far better than having them found. Discovered problems raise the question of what else is hidden.
Incorporation, cap table, financials, contracts, IP assignments, employment agreements. Assemble it calmly, months ahead.
Every founder, employee and contractor who touched the product. This is the single most common blocker.
Advisors, early contributors, anything agreed by email. Convert it into signed paper now.
Make sure you can explain any difference in one sentence before anyone asks.
A known issue with a plan is manageable. A discovered issue changes what the investor thinks about everything else you said.
Ask your best customers whether they would take a call. Being caught unprepared here looks careless.
Start preparing months before raising. Actual diligence runs after the term sheet.
Angel rounds on standard SAFEs often involve very light diligence. Do not build a 200-document data room for a $50k cheque.
The most common single blocker: a contractor who built an early prototype and never signed an IP assignment, now working elsewhere and under no obligation to sign one. They may sign immediately out of goodwill, or want paying, or be unreachable — and the round waits either way.
Get signed IP assignments from everyone who ever touched the product, now, while nothing is at stake and everyone is willing.
Every company has something. Disclosed early with a plan, a known issue is manageable. Discovered by the investor, the same issue raises the question of what else has not been mentioned — and that question is far more damaging than the original problem.
Volunteer the bad thing before diligence finds it. You are managing the inference, not just the fact.
Create a free account to read the rest and apply it to your own startup.