What is due diligence? How startups should prepare

After a term sheet is signed and before the investment closes, the due diligence phase begins. The investor wants to confirm what was said in meetings with documents and make sure there are no hidden risks. A well-prepared startup can finish in a few weeks; an unprepared one may take months.

Scope of the review

Legal

• Incorporation documents, articles of association, trade registry records and share ledger
• Shareholder agreements and previous investment agreements
• Employee and contractor agreements, confidentiality and IP assignment clauses
• Proof that brands, domains, software and patents belong to the company
• Key customer and supplier contracts
• Ongoing or potential litigation
• Personal data protection (KVKK) compliance

Financial

• Financial statements and income and expense breakdowns
• Taxes and social security paid on time
• Debts, loans and contingent liabilities
• Assumptions behind the budget and projections

Commercial

• Customer list and revenue concentration (is there dependence on one customer?)
• Source data for metrics: MRR, churn, cohorts. See startup metrics.
• Calls with customers the investor selects
• Market and competition analysis

Technical

• Architecture, scalability and technical debt
• Security practices and backups
• Open-source licence compliance
• Who owns the code and infrastructure

Building a data room

A data room is a secure online folder where the investor can access documents in an orderly way.

1. Organise folders by the headings above.
2. Upload current, signed versions of each document.
3. Grant access per person and track who views what.
4. Prepare an index and note anything missing.

Preparing the data room before investor talks start speeds up the round and builds trust.

Common issues

• IP still held personally by founders
• Unwritten partnership and employee arrangements
• An outdated share ledger and registry records
• Metrics in the deck that do not match the source data
• Late tax and social security payments

Most of these are easy to fix if spotted early. Our founders' agreement and company type guides help.

Checklist

1. Are the share ledger and ownership structure up to date?
2. Have all employees and contractors signed IP assignments?
3. Are financial statements and tax records in order?
4. Is the source data for your metrics ready to share?
5. Are KVKK notice and registration obligations met?

Conclusion

Due diligence is not an exam but a process of building trust. Being open and organised makes it easier to find solutions with the investor even when issues come up. For the overall flow of a round, see our seed round guide.