Due diligence is the structured fact-checking process before an investment or acquisition—turning a pitch into verified evidence.

How it works

After term sheet signing, investors assign lawyers, accountants, and sometimes technical experts to review the company. Typical workstreams:

Financial: revenue recognition, burn, runway, cap table, debt, tax liabilities.

Legal: incorporation, IP ownership, employment agreements, litigation, regulatory compliance.

Commercial: customer contracts, churn, pipeline, competitive positioning.

Technical: architecture, security, scalability, open-source license exposure.

Founders populate a data room (virtual folder) with documents. Diligence lasts two to eight weeks for venture rounds—longer for acquisitions. Issues surface as red flags (deal-breakers) or yellow flags (price adjustments, indemnities, escrows).

Why it matters

• Founders: Organized diligence builds credibility. Surprises—undocumented IP assignments, pending lawsuits, misstated metrics—reopen terms or kill deals. Start the data room before the term sheet.
• Investors: Diligence is how you validate price and structure protections. Skipping it invites write-downs and LP questions later.
• Board: Fiduciary duty requires informed decisions; diligence feeds the investment memo.

Common mistake

Waiting until term sheet to gather documents. Cap table errors, missing 83(b) elections, and verbal customer promises without contracts are common slow-downs. Fix the room before you need it.

Related ideas

• Due Diligence Request List — the investor’s document ask
• Data room — virtual document repository
• Escrow — holdbacks when diligence finds risk
• Quality of earnings — deep financial review in M&A