A startup due diligence checklist looks like a financial exercise and is mostly not one, because an early-stage company has few numbers to examine and a great many things that could be wrong with its foundations. Two categories kill more deals than the financials do, and both are cheap to fix a year before anybody is looking. This page sets out the six categories and what each is really testing.
Corporate and equity, which is one of the two killers
Incorporation documents, the cap table, option grants, board consents and every promise of equity ever made in an email. Undocumented promises to early contributors are the classic finding, and they are unfixable at speed because they require finding and negotiating with people who left years ago.
Intellectual property, which is the other
Assignment from every founder, contractor and employee who ever wrote code, plus any university or previous-employer entanglement. A company that does not own its own code has nothing to sell, and the discovery usually arrives in week three of a process that started with a signed term sheet.
Commercial and customer, where the numbers actually are
Contracts, renewal terms, concentration and churn. This is where an acquirer models the business, and where a well-prepared seller can compress weeks by having the contracts organised with their assignment and change-of-control clauses already flagged.
Financial, employment and technical
Statements and the revenue recognition behind them, employment classification and any open disputes, and the technical review of what has actually been built. These are the routine three: time-consuming, rarely fatal, and the part a checklist is genuinely good at covering.
Questions people ask about startup due diligence checklist
What kills startup deals in diligence?
Corporate and equity problems and IP ownership gaps, far more often than the financials. Both are cheap to fix a year early.
How long does startup diligence take?
Longer than the numbers justify, because most of the time is spent establishing that the company owns what it says it owns.
What should a founder prepare first?
The cap table with every equity promise documented, and IP assignment from everybody who ever wrote code.