Due diligence is the investor checking that what you told them is true, and looking for problems that could hurt the investment. A well-prepared company gets through it in a few weeks. A messy one can lose the deal, or its leverage on price.
What investors check
- Commercial. Customer calls, pipeline, churn, pricing, market size and competitors. Expect them to speak to your customers, including ones you did not suggest.
- Financial. Management accounts, statutory accounts, forecasts and the assumptions behind them, cash position, VAT and PAYE, and any debts.
- Legal and corporate. Articles of association, shareholder agreements, the cap table, share issues and filings at Companies House, persons with significant control, and board minutes.
- Intellectual property. That the company, not the tech founders or contractors, owns the code, designs and brand. Missing IP assignments are one of the most common problems.
- People. Employment contracts, contractor agreements, the option scheme (such as EMI), and references on the founding team.
- Technology. Architecture, code quality, security, scalability, open-source licences and data protection compliance (UK GDPR).
- Tax schemes. If the round uses SEIS or EIS, evidence that the company qualifies, ideally with advance assurance from HMRC.
What goes in a data room
A data room is a shared, access-controlled folder. Keep it tidy and numbered:
- Company: certificate of incorporation, articles, shareholder agreements, cap table, Companies House filings, board minutes.
- Finance: last two or three years of accounts, monthly management accounts, the forecast model, bank statements summary, tax returns.
- Commercial: pitch deck, key metrics, customer list and top contracts, pipeline, pricing.
- Product and technology: product overview, roadmap, architecture summary, security policies.
- Intellectual property: assignments from tech founders, staff and contractors; trade marks; domain names.
- People: organisation chart, contracts, option scheme documents and grants.
- Legal and compliance: privacy policy, data protection records, insurance, any disputes.
Prepare before you raise
- Build the data room before you start talking to investors. It shows you are organised and saves weeks later.
- Fix problems early: missing IP assignments, out-of-date filings, informal promises of shares.
- Keep a single, accurate cap table. Model rounds with the cap table simulator.
- Be the first to raise any issue. Investors forgive problems; they rarely forgive surprises.
- Use our one year after incorporation checklist as a health check.
You should do diligence too
An investor may sit on your board for years. Ask to speak to tech founders they have backed, including ones whose companies failed. Check how much is left in their fund for follow-on investment, how they behaved in tough times, and who will actually sit on your board.
General information, not financial, legal or tax advice. Figures marked as rules of thumb vary by fund, sector and market conditions.