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A signed term sheet is not money in the bank. Between the term sheet and the wire, investors and their lawyers check that the company is what it says it is. That process is due diligence. For a small SAFE round it may be a few questions and a cap table. For a priced Series A it usually means a formal request list, an online data room and lawyers on both sides working through every corporate record the company has.
This page is general information, not legal, tax or financial advice. Every investor runs its own process. Your company's lawyer should guide your preparation and responses.
Business diligence and legal diligence
Investors split the work in two.
- Business diligence happens mostly before the term sheet. Partners talk to customers, test the product, check references on the founders and pressure-test the market. Our guide to pitching investors covers this stage.
- Legal and financial diligence happens mostly after the term sheet. The investor's law firm sends a request list and reviews documents while both firms draft the financing agreements.
Most term sheets include a no-shop clause that keeps the company from talking to other investors for a set period. Diligence runs inside that window, so delays cost the founders leverage. Being ready before you sign is the best defense.
What a typical request list covers
Cooley GO publishes a free Sample VC Due Diligence Request List. Its sections give a good picture of what a priced round requires:
| Section | Examples of what investors ask for |
|---|---|
| Actions and minutes | Board and stockholder minutes and written consents |
| Charter documents | Certificate of incorporation with amendments, bylaws |
| Capital stock | Stockholder and optionee lists with issue dates and prices, vesting summaries, transfer restrictions |
| Legal and regulatory | Pending or threatened litigation, settlements, regulator correspondence |
| Intellectual property | Invention assignment agreements signed by employees and consultants, patents, trademarks, licenses |
| Management and employees | Employment and consulting agreements, stock plans, officer and director lists |
| Debt financing | Loan agreements, credit lines, guarantees |
| Other agreements | Leases, partnership agreements, NDAs, letters of intent |
| Miscellaneous | Financial statements, business plan, environmental matters |
Software companies should expect extra questions about open source licenses, data privacy and security. Hardware and life science companies can expect questions on regulatory approvals and lab safety. Our patents and trademarks guide covers the IP basics.
Worked example: a cap table reconciliation
The cap table is where diligence most often finds gaps. The example below is hypothetical. The founders' spreadsheet is compared line by line with signed documents and board approvals.
| Item (hypothetical) | Spreadsheet says | Documents show | Gap | Usual fix |
|---|---|---|---|---|
| Founder shares | 8,000,000 | 8,000,000 | None | None needed |
| Options granted | 1,250,000 | 1,200,000 approved by the board | 50,000 promised but never approved | Board approval or ratification on counsel's advice |
| SAFEs | $1,500,000 | $1,750,000 signed | One $250,000 SAFE never recorded | Add it and rerun the pro forma table |
| 83(b) elections | Two founders | Proof for one founder | One proof of filing missing | Find mailing or IRS records; ask counsel |
| Invention assignments | All staff | Signed by 11 of 12 | One contractor unsigned | Get a signed assignment before closing |
The unrecorded SAFE matters most for the founders. If it has a $10 million post-money cap, it represents 2.5 percent of the company before the Series A. That dilution comes out of the existing holders, mostly the founders. The new investor will price around it. Finding it in month one is much better than finding it the week before closing.
Building a data room
- Mirror the request list. Use the same section names and numbering the investor's lawyers use.
- Post signed copies. Unsigned drafts create more questions than they answer.
- Keep an index. List every document with a short description and date.
- Control access. Give each viewer the access they need. Hold back highly sensitive items until later in the process.
- Track questions. Keep a running list of questions and answers so nothing is lost between calls.
Accountants matter here too. Investors may ask for monthly financials, a burn analysis and tax filings. Our accounting firms guide lists firms that work with Peninsula startups.
Securities filings and investor checks
Diligence runs in both directions on securities law. Most startup rounds rely on Regulation D. Companies generally file a Form D with the SEC within 15 days after the first sale in the offering. Rule 506 also bars companies from relying on the exemption if certain "bad actors," such as some directors, officers or large holders, have disqualifying events. That is why companies ask investors and insiders to fill out questionnaires. California typically requires a notice filing for sales to California investors as well.
Investors also confirm accredited status where the round requires it. Our angel investors guide explains the accredited investor tests.
Diligence on your investors
Founders should check investors as carefully as investors check them. Useful questions:
- Who will join the board? Will that partner stay at the firm?
- Can I speak with founders from companies that did not succeed?
- How does the firm handle follow-on rounds and pro rata?
- What did the firm do the last time a portfolio company missed its plan?
Our VC firm profiles, such as Kleiner Perkins and Accel, give background on firms with Peninsula offices. They are a starting point for your own reference calls, not a substitute for them.
What Palo Alto founders typically ask
Do we need a lawyer for diligence on a seed round?
For a priced seed round, yes. For SAFEs, investors may only ask for the cap table and charter, but a lawyer can still catch problems early. See our startup law firms guide.
Who pays for diligence?
In many priced rounds the company agrees to pay the lead investor's legal fees up to a cap set in the term sheet. Ask for the cap to be written down before you sign.
What if a problem cannot be fixed before closing?
Not every issue can be cured in a few weeks. The usual answer is disclosure. The stock purchase agreement contains the company's representations and warranties about its business. A disclosure schedule lists the exceptions. The NVCA model Stock Purchase Agreement, updated October 2025, follows this structure. A known issue listed in the schedule is far less dangerous for founders than one that surfaces after closing, when it could look like a broken promise. Investors may also ask for a covenant to fix the issue within a set time after the round.
Can diligence kill a deal?
It can, usually when it finds something that was not disclosed, such as unassigned IP or a dispute with a former cofounder. Disclose known problems early. Investors handle known issues far better than surprises.
Good to know
- Start a data room the day you start fundraising, not the day you sign a term sheet.
- Keep a clean cap table and signed board consents. They are the first things lawyers check.
Frequently asked questions
What do VCs look at in due diligence?
They review the business itself through customer calls, product demos and market work. Their lawyers review corporate records, the cap table, intellectual property, employment documents, contracts, litigation and finances. The goal is to confirm what the company has said and to find problems that need fixing before closing.
How long does due diligence take for a seed or Series A round?
It varies with the round and how organized the company is. A SAFE round may involve little formal legal review. A priced round usually involves a document request list and several weeks of review alongside drafting. Clean records shorten the process.
What is a data room?
A data room is a secure shared folder where a company posts documents for investors and their lawyers. It is usually organized to match the investor's request list, with sections for charter documents, the cap table, IP, contracts and financials.
Should founders do due diligence on investors?
Yes. Founders can ask to speak with the founders of companies the firm has backed, including ones that struggled. They can also ask who will sit on the board, how the firm handles follow-on rounds and how it behaves when things go wrong.
What securities filings follow a startup financing?
Companies that rely on Regulation D generally file a Form D with the SEC within 15 days after the first sale of securities in the offering. California usually requires its own notice filing for sales to California investors. Your lawyer normally handles both.