Startup Due Diligence Checklist: The Short Answer
Startup due diligence is the structured review an investor runs after a term sheet is signed and before money is wired. They verify that what you told them in the pitch (your ownership, revenue, costs, product and legal position) matches the documents. A typical seed-stage review covers five areas: cap table, financials, metrics, legal and IP, and team.
Do you know what is in your data room right now? Most delays at this stage are not caused by bad businesses. They come from messy paperwork: a missing signed IP assignment, a cap table that does not match the legal records, or a revenue number that two spreadsheets report differently. A one-week cleanup before you open the room can save weeks of back-and-forth.
What Investors Actually Verify, Area by Area
Diligence is a consistency test. The investor is not looking for perfection; they are looking for surprises. Use this list as your preparation checklist:
1. Cap table: every shareholder, option grant, SAFE and convertible note, with dates and terms. Fully diluted ownership must reconcile with the company's legal share register.
2. Financials: monthly cash balance, net burn, bank statements, and a simple forecast. Runway should be computable from the files alone.
3. Metrics: MRR, churn, CAC and gross margin with the underlying data, not screenshots of a dashboard.
4. Legal and IP: company incorporation documents, founder IP assignment, key contracts, privacy compliance, and any open disputes.
5. Team: founder vesting terms, employment agreements, contractor arrangements, and who actually owns the code.
| Ready | Not ready | |
|---|---|---|
| Cap table | Reconciles with the legal share register | Spreadsheet only, handshake promises |
| Runway | Computed from bank statements | Estimated from memory |
| IP | Signed assignment from every contributor | Freelancers wrote core code, no paperwork |
| Metrics | Reproducible from raw exports | Screenshots with no source |
| Vesting | Documented, with a cliff | Verbal or missing |
Cap Table and Vesting: The Most Common Red Flags
Cap table problems are the fastest way to slow a deal. Typical red flags are undocumented promises of equity to early helpers, advisors without signed agreements, unconverted SAFEs that change the post-money math, and co-founders without vesting. If you have never modelled how outstanding SAFEs convert, do it before the investor does.
A concrete example: a founder believes they own 60% after a $1M round at a $5M pre-money valuation. A forgotten 10% option pool increase and two older SAFEs convert at the same time, and the real figure lands near 50%. Run the dilution math yourself, and read the guides on startup dilution and the option pool shuffle before you sit down with the term sheet.
60%
Founder's expected ownership
≈ 50%
Ownership after pool and SAFEs convert
10 pts
Gap found only in diligence
Financial and Metric Checks: Show the Math
Investors rebuild your numbers. They take bank statements, compute net burn, and divide cash by burn to get runway, then compare it to what you pitched. If you said 14 months and the statements say 9, the conversation changes from growth to trust.
Keep one source of truth. Define MRR once (for example, active subscriptions on the last day of the month), keep the export that proves it, and reuse the same definition everywhere. The same applies to churn, CAC and gross margin: write the formula next to the number so a stranger can reproduce it in ten minutes.
Legal, IP and Team: The Boring Files That Close Deals
The legal checklist is short but unforgiving. Confirm the company owns its code and brand: every founder, employee and contractor who touched the product should have signed an IP assignment. Collect incorporation documents, board or shareholder resolutions, key customer and supplier contracts, and privacy and data-protection compliance records where you handle personal data.
For the team, show the founder vesting schedule, employment and contractor agreements, and any pending hires with offered equity. If a co-founder left earlier, the paperwork for that exit matters. Unclear departures are a classic source of last-minute renegotiation.
How to Prepare a Data Room in One Week
Day 1-2: reconcile the cap table with the legal share register and list every SAFE, note and option. Day 3: pull 12 months of bank statements and rebuild cash, net burn and runway. Day 4: export raw metrics and write the formula beside each. Day 5: gather incorporation, IP and contract files in clearly named folders. Day 6-7: have someone outside the company read it and list the questions they would ask.
Be upfront about problems. A known issue disclosed early (a late tax filing, a missing signature) is a task. The same issue discovered by the investor is a trust problem. Disclose, explain the fix and give the date.
Practising Investor Scrutiny in Founder Runway
Founder Runway is a startup simulation where funding and ownership choices have consequences. A run is 20 rounds, each decision has 4 options, and you can start at Pre-Seed, Seed, Pre-Series A or Series A across B2B, B2C and B2G business models. The game does not simulate a formal diligence process, but it does show how cash, runway, cap table and investor trust react to the decisions you make.
Play one run where you keep tight control of burn and ownership, and another where you chase growth at any cost. Compare which one you would rather show an investor.
Frequently asked questions
What is due diligence in a startup funding round?
Due diligence is the investor's verification of your cap table, financials, metrics, legal documents and team after a term sheet is signed and before the money is wired. It checks that the pitch matches the paperwork.
How long does startup due diligence take?
For a seed round it commonly takes from two to six weeks, depending on how organised the data room is and how many outstanding legal or cap table questions exist. Clean records shorten it noticeably.
What documents go in a seed-stage data room?
A reconciled cap table, incorporation documents, founder vesting and IP assignments, bank statements, monthly financials, raw metric exports, key contracts and privacy compliance records.
What are the most common due diligence red flags?
Undocumented equity promises, founders without vesting, missing IP assignments from contractors, SAFEs that were never modelled in the cap table, and revenue or runway figures that do not match the underlying files.
Can a deal fall apart during due diligence?
Yes. A signed term sheet is usually non-binding on the main terms, so serious surprises can lead to a repricing or a withdrawn offer. Early disclosure is the best protection.
Test this decision in the game.
Apply the same assumption across one run and see which metric weakened three turns later.