After a term sheet is signed, the investor does due diligence — a structured review of your company's legal, financial, and operational condition before they wire the money. Most founders experience this as an overwhelming list of document requests with an unreasonably tight deadline. The requests arrive all at once, cover years of corporate history, and come at exactly the moment when you are also trying to run the company.
Understanding what investors are actually looking for — and why — makes the process manageable. Better still, it tells you what to set up now, before a term sheet exists, so that you are ready when the time comes.
Corporate Documents
Investors start with the basics: certificate of incorporation, bylaws, all board consents and minutes, any stockholder agreements, and voting agreements. The goal is to verify that the company is properly formed, that the governance structure is what the cap table says it is, and that there are no side agreements that did not make it into the data room.
Common problems here: board consents for equity issuances that were never actually signed (or signed after the fact), convertible notes or SAFEs that were issued informally and are not reflected in the corporate records, and charter amendments that were approved but never properly filed with the state. If any of these apply to your company, clean them up before a term sheet arrives.
Investors also look for consistency. If the cap table shows a grant to an advisor from eighteen months ago but there is no board consent authorizing it and no stock certificate or option agreement, that is a red flag — not because the grant was wrong, but because it suggests the company has not been keeping its records properly.
The Cap Table
A fully diluted cap table showing every share, option, warrant, SAFE, and convertible note currently outstanding. "Fully diluted" means including everything that could become equity — not just what has already converted.
Investors verify the cap table against the underlying corporate documents. They look for SAFEs that were not reflected, option grants that exceed what was authorized under the plan, warrants issued to service providers that were never documented, and convertible notes where the interest has been accruing but no one tracked it.
The cap table should match the corporate records exactly. If it does not, the investor's counsel will flag the discrepancies, you will spend weeks explaining them, and the deal may re-trade on price if the investor concludes the equity structure is messier than represented.
Intellectual Property and Technology
For technology companies, this is often the most intensive part of due diligence. Investors want to confirm that the company actually owns its technology and that no third party has a claim on it.
IP assignment agreements are the foundation. Every founder and every employee who contributed to the product must have signed an IP assignment agreement assigning all startup-related IP to the company. This includes code written before incorporation, algorithms developed while exploring the idea, and any patents or patent applications. A co-founder who wrote the core machine learning model and did not sign an IP assignment before leaving the company is a deal-stopper — or at minimum a deal-pauser while investors figure out how to structure around the risk.
Investors will also conduct an open-source software audit. If your product incorporates GPL-licensed open source code, the GPL's "copyleft" requirement may mean you are obligated to disclose your own source code under certain distribution scenarios. The actual analysis depends on the specific license, how the code is incorporated, and how the product is distributed — but the question will be asked, and you need to be able to answer it.
Patent filings, trademark registrations, and domain ownership round out the IP review.
Employment and Contractor Agreements
Every current and former employee should have a signed offer letter and, separately, a signed IP assignment and confidentiality agreement (sometimes combined in a single document). Every contractor who contributed to the product should have a signed independent contractor agreement that includes an IP assignment clause.
Contractors who contributed to the product without signing an IP assignment are a recurring problem. Under U.S. copyright law, independent contractors generally own the work they create unless they have assigned it in writing. That means a contractor who built a core module for your product may own the copyright to that module unless they signed a written assignment. Investors will flag this immediately, and correcting it after the fact — tracking down former contractors, negotiating assignments, dealing with those who cannot be reached — is expensive and time-consuming.
For current employees, investors check that there are no missing agreements, that the confidentiality provisions are adequate, and that any equity grants to employees are documented and consistent with the cap table.
Material Contracts
Customer contracts, vendor agreements, software licenses, lease agreements, exclusivity arrangements, and any partnership or distribution agreements. Investors read these for several specific issues.
Change-of-control clauses are the most important: many commercial contracts allow the counterparty to terminate or renegotiate if the company is acquired. In a SaaS business where customer contracts are a significant asset, a broad change-of-control termination right in your top three customer agreements is a material deal risk that investors will factor into their valuation.
Exclusivity provisions cut both ways — if you have granted a customer or partner exclusivity in a market or vertical, that restricts your ability to grow in that direction. Investors will want to know the scope and duration of any exclusivity you have given.
Revenue recognition issues sometimes surface in customer contracts as well: contracts with unusual payment terms, milestone-based revenue, or customer acceptance provisions can affect how revenue is recognized and whether the financial statements accurately reflect performance.
Litigation and Regulatory History
Any pending or threatened claims, regulatory inquiries, or disputes. This includes demand letters received, former employees who left on bad terms and have been in contact with counsel, and any regulatory inquiries or investigations.
Founders sometimes forget to include matters that are in early stages or where they believe the claim has no merit. Include everything and let the investor assess materiality. Investors are sophisticated; they understand that companies sometimes face nuisance claims. What they cannot tolerate is discovering a material dispute that was not disclosed — that raises questions about what else was not disclosed.
Financial Records
Recent monthly financial statements (profit and loss, balance sheet, cash flow), bank statements, accounts receivable aging, any outstanding debt or loan agreements, and any intercompany transactions. For more mature companies, investors may request audited financials or a quality of earnings analysis.
The financial review verifies that the business is operating as represented in the diligence meetings and that there are no undisclosed liabilities. Investors look at accounts receivable aging specifically to identify whether revenue recognition is clean — are customers actually paying, or is there a growing balance of old receivables that suggests some revenue may not be collectible?
How to Prepare
Set up a virtual data room before the term sheet closes. Organize it by the categories above. The companies that close fastest are the ones that can respond to any document request within forty-eight hours with a clean, organized response.
Companies that produce disorganized or incomplete records raise investor concern about management quality, not just legal compliance. Investors pattern-match: a company that cannot organize its own corporate documents probably has other operational gaps. A company that can produce clean records quickly signals that management has their house in order.
The issues that cause deals to stall or re-trade are almost always fixable — missing IP assignment agreements, unsigned board consents, a cap table that does not match the records. Fix them now, before the term sheet, when there is no deadline and no investor watching. By the time diligence starts, the window for cleanup is much smaller.
Due diligence is the investor's last look at your company before they commit. Make it easy for them to say yes.