After signing a term sheet, you'll enter a 2-4 week due diligence process. The key is a clean, comprehensive data room and a fast, professional process. Avoid surprises, fix your cap table and IP assignments before you start, and conduct your own 'reverse diligence' on investors to ensure you're choosing the right long-term partners.
Key takeaways
- Build your data room before you get a term sheet. Organization signals competence.
- Audit your cap table and IP assignment agreements now. These are the most common deal-killers.
- Conduct 'reverse diligence' on VCs. Talk to founders of failed companies, not just stars.
- Appoint one person to manage all diligence requests to ensure speed and consistency.
- Disclose any potential problems upfront. The cover-up is always worse than the crime.
- Your diligence process is a proxy for how you run your company. Aim for 'boringly clean.'
Investor due diligence isn't a test you passively take; it's a process you actively manage. It begins the moment you get a term sheet and typically lasts 2-4 grueling weeks. The investor's goal is simple: verify your claims and uncover any hidden risks. Your goal is to make this process boringly clean.
A fast, organized, and transparent diligence process signals that you run a fast, organized, and transparent company. A slow, sloppy process is the biggest red flag of all. It makes investors wonder what else is a mess. This guide will show you how to run a bulletproof process that builds momentum and gets you to the close.
Before an investor digs into your business, you must dig into theirs. Taking a check is a 10-year marriage. A bad partner is worse than no partner. Once you have a term sheet, you have earned the right to conduct “reverse diligence.”
Your goal is to understand how a VC behaves when things go wrong. The star founders in their portfolio will always be happy. You need to talk to the founders of companies that struggled, pivoted, or died. That’s where you’ll find the truth.
Don't be shy. Send a direct email to the partner leading your deal. Here's a script:
Excited about the prospect of working together. As a next step, could you connect me with 2-3 founders you've backed? I'd love to learn more about their experience with the firm.
Ideally, I'd appreciate a mix—perhaps someone who's had a huge outcome, but also someone who's had to navigate a tough patch or a pivot. Understanding how you partner with founders in challenging moments is really important to us.
When you get on the phone with a founder, go beyond the basics. These questions will get you the real story:
The Support Question: "Beyond the money, what is the single most helpful thing [Partner Name] has done for you? Give me a specific story." (Vague answers like "they're a great sounding board" are a yellow flag).
The Crisis Question: "Tell me about a time you almost failed or missed a plan badly.…
The…
Frequently asked questions
- When does due diligence start?
- It officially begins after you sign a term sheet. However, smart founders prepare their data room months in advance, before they even start pitching.
- How long does due diligence take?
- Typically 2-4 weeks for a seed round. A well-prepared data room and a responsive process can shorten it to 1-2 weeks. Delays are a red flag for investors.
- Can a deal fall apart during diligence?
- Yes, frequently. The most common reasons are 'diligence surprises' — undisclosed issues, a messy cap table, missing IP assignments, or key metrics that don't match the pitch.
- How much does it cost to get 'diligence ready'?
- If your corporate records are clean, it's just your time. If you need to fix a messy cap table or missing legal documents, expect to pay a startup lawyer between $5,000 and $25,000 to clean things up *before* the deal.
- What is 'reverse diligence'?
- It's you vetting your potential investors. Once you have a term sheet, you should ask to speak with 2-3 founders in their portfolio to understand how they operate, especially when things aren't going well.
