What Are Investors Really Looking for in Due Diligence? Key Insights for Startups

Securing funding is a major milestone in any startup’s journey — but before the checks are signed, every investor will want to conduct a comprehensive review of your company. This process, known as due diligence for startups, is more than a formality. It’s a high-stakes evaluation that can determine whether your business secures funding, gets a favorable valuation, or misses out altogether.

Understanding what investors truly seek during due diligence for startups gives founders a critical edge. It’s not just about showing numbers — it’s about showing readiness, reliability, and risk awareness. If you're not prepared to answer their questions with confidence and documentation, you could inadvertently raise red flags that jeopardize your funding round.

In this blog, we’ll explore what investors are really looking for during due diligence, common pitfalls that derail startups, and how tools like General Counsel Audit™ (GCA) can give founders the insights they need to pass this process with flying colors.

The Real Purpose of Due Diligence

At its core, due diligence for startups helps investors answer one fundamental question: “Is this a sound investment?” But what that question really means includes a host of sub-questions:

• Does this company have a solid legal and operational foundation?
• Are there any hidden liabilities?
• Are the claims made by the founders accurate and supported by documents?
• Is the team aligned, committed, and contractually tied to the business?
• Is the intellectual property owned and protected?
• Is the regulatory landscape understood and managed?

If a startup can’t provide clear, clean answers, investors may hesitate — or walk away entirely.

What Investors Evaluate During Due Diligence

1. Corporate Structure and Governance

This is often the first stop in due diligence. Investors want to see that the startup is incorporated properly (often as a Delaware C-Corp in the U.S.) and that key governance documents are in order. A clean corporate structure gives confidence that the business can scale and that future financing or acquisitions won’t be hindered by foundational issues. What they’ll look for:

• Certificate of incorporation
• Bylaws and board resolutions
• Stockholder agreements and consents
• A clean and up-to-date cap table

2. Intellectual Property (IP)

IP is often the crown jewel of a startup — and investors want to be sure it’s fully owned and protected. If there’s any doubt over who owns the code, designs, trademarks, or patents, the deal could stall. What they’ll want:

• Invention assignment agreements from all founders and employees
• Trademark, copyright, or patent filings
• Non-disclosure agreements with contractors and third parties
• Clear documentation proving IP isn’t encumbered by prior work or outside claims

3. Contracts and Liabilities

From customer agreements to supplier contracts, investors will evaluate how you’ve formalized relationships. They’re checking not only for risk but also for signs of traction and trust with your market. Documents typically reviewed:

• Key customer and vendor contracts
• Terms of service and privacy policies
• Partnership agreements
• Lease agreements, if applicable

4. Employment and Compensation

Founders often overlook HR documentation until it’s too late. But investors want to know your team is solid, properly classified (employee vs. contractor), and aligned with the company’s success through equity. Key items include:

• Employment and contractor agreements
• Confidentiality and IP protection clauses
• Offer letters and onboarding documentation
• Stock option plans and grant records

5. Financials and Fundraising History

Investors will scrutinize how money has been managed and how previous funding rounds were structured. Clean books, honest accounting, and clearly documented SAFE or convertible note agreements are essential. Expect to provide:

• Balance sheets and income statements
• Bank statements and projections
• Historical fundraising documents (SAFEs, notes, term sheets)
• A clear and updated cap table with full dilution analysis

6. Regulatory Compliance

If your startup operates in a regulated industry (like fintech, healthtech, or edtech), compliance becomes a priority. Even for less-regulated industries, privacy and data protection are non-negotiable areas. Investors will want to confirm:

• Licenses and regulatory approvals
• Data privacy policies (especially if dealing with consumer data)
• Terms of use that protect against liability
• Cybersecurity protocols

The Stakes: What Happens if You’re Not Prepared?

Startups that enter due diligence unprepared risk:

• Delaying funding rounds while they scramble to find or fix missing documents
• Lower valuations due to perceived risks or liabilities
• Lost deals as investors move on to more prepared companies
• Reputational damage that could affect future funding opportunities

This is where General Counsel Audit™ (GCA) can make all the difference.

How General Counsel Audit™ (GCA) Supports Due Diligence Readiness

General Counsel Audit™ (GCA) is the first-of-its-kind legal and governance readiness tool designed specifically for startups, startup counsel, and investors. Whether you're just launching or preparing for a funding round, GCA helps you identify critical gaps before investors do. Here’s how General Counsel Audit™ (GCA) empowers founders:

• Confidential and Anonymous: Founders can assess legal, governance, and compliance risks without exposing sensitive information. No user-provided data or reports are stored unless the user chooses to do so.
• Comprehensive Legal Audit: GCA reviews your startup's legal readiness across key categories — from IP and contracts to equity and regulatory compliance.
• Actionable Roadmap: GCA provides a clear, prioritized list of issues to fix, helping founders prepare for investor scrutiny in advance.
• Designed for Startups: Unlike generic legal checklists, GCA is tailored for seed to pre-Series A companies.

For counsel, GCA serves as a strategic starting point for guiding clients through legal clean-up. For investors, it streamlines due diligence by offering early visibility into a startup’s legal health.

What Investors Love to See

Startups that stand out in due diligence often share these characteristics:

• Documentation is centralized and well-organized: This shows that the team respects process and is prepared for scale.
• Legal risks are proactively identified and addressed: Transparency earns trust — hiding issues erodes it.
• Cap table clarity: No mystery shareholders, unconverted SAFEs, or phantom equity promises.
• IP is properly assigned and protected: No guesswork, just signed agreements and ownership proof.
• Regulatory foresight: Founders have a strong understanding of the legal frameworks in which they operate.

When investors see these signals, they’re more likely to feel confident about moving forward — and possibly even increasing their investment.

Tips to Get Ready for Investor Due Diligence

• Start Early Don’t wait for an investor to request due diligence. Begin organizing your documents and reviewing legal risks as soon as you consider raising funds.
• Use a Tool Like GCA Let General Counsel Audit™ (GCA) guide your internal audit. It’s faster, more private, and tailored to startup needs.
• Organize with a Virtual Data Room (VDR) Store all your legal, financial, and operational documents in a secure online folder that can be shared with investors during diligence.
• Work with Counsel A startup-savvy lawyer can help resolve red flags, ensure you’re compliant, and create a positive impression during investor reviews.
• Document Fixes If you find issues — like unsigned IP agreements or misclassified workers — fix them and keep a record. Showing that you’ve proactively addressed concerns can actually boost investor confidence.

Preparation Builds Confidence

Due diligence for startups isn’t just a test — it’s an opportunity. It’s your chance to demonstrate that your company is not only innovative but also built on a strong, sustainable foundation. Investors know that early-stage businesses come with risks. What they want to see is that you’re aware of those risks and have taken thoughtful, transparent steps to manage them. With General Counsel Audit™ (GCA), startups can confidently face due diligence, uncover and address legal issues early, and position themselves as attractive, trustworthy investments.