What Investors Actually Look For in Due Diligence Before Writing a Check

A term sheet is an intention. Due diligence is where that intention gets tested against the actual state of the company, document by document.

Published August 23, 2026·StartGrid Editorial·General education, not legal advice

Due diligence is the process an investor goes through to verify that a company is what it appears to be, before money actually changes hands. It happens in stages: a lighter review before a term sheet is issued, focused on the big picture, and a deeper, more formal review after the term sheet is signed but before the round officially closes. Founders who understand what investors are actually checking, and why, can prepare far better and avoid unnecessary delays.

Corporate and cap table cleanliness

Investors want to see a clean, accurate, and fully documented capitalization table: every shareholder, every option grant, every SAFE or convertible note outstanding, and every right attached to each class of stock. Gaps here are common and serious, especially undocumented verbal equity promises, missing signatures on old agreements, or SAFEs that were never properly tracked. This is closely tied to how dilution compounds across rounds, since an inaccurate cap table makes it impossible to know what percentage the new investor is actually buying.

Financial records

Investors review revenue, expenses, burn rate, and runway, typically asking for bank statements, accounting records, and any existing financial statements. At earlier stages, this review is lighter and more about understanding the trajectory. At later stages, it often becomes more formal, sometimes including independent verification of revenue figures rather than relying on summary numbers provided by the company.

Legal and contractual exposure

This covers material contracts with customers, vendors, and partners, any pending or threatened litigation, employment agreements, and confirmation that intellectual property, especially code and product design created by early contractors or co-founders who have since left, was properly assigned to the company rather than remaining with the individual who created it. Missing IP assignment agreements from early contributors are a surprisingly common and serious finding.

Product, technology, and data practices

For technology companies, this can include a review of the codebase, infrastructure dependencies, security practices, and how the company handles user data, particularly if it operates in a regulated industry or handles sensitive personal information. Investors are checking not just that the product works, but that it was built in a way that will not create liability later.

Team and background

Investors commonly run background checks on founders and key executives, verify education and prior employment claims, and speak with references. This is standard practice, not a sign of unusual suspicion, and founders should expect it as a normal part of any serious fundraising process.

Customer and market validation

Beyond the numbers a company reports, investors sometimes seek independent confirmation of customer relationships and satisfaction, which can include reviewing actual customer contracts rather than a summary list, or speaking directly with a handful of customers, generally with the founder's involvement and consent.

How this connects to what needs to be ready in advance

Nearly everything diligence covers maps directly onto a well-organized data room, and companies that have this material assembled before diligence begins move through the process noticeably faster than those scrambling to produce documents on request. We cover exactly what that data room should contain in our guide to what actually needs to be in a startup data room. It is also worth understanding what specific terms an investor is likely to negotiate once diligence wraps up, covered in what actually matters in a term sheet beyond valuation, and, if the diligence reveals a valuation the company cannot support, what that means covered in what a down round does to existing shareholders.

Why a signed term sheet is not a guaranteed deal

Term sheets are typically non-binding on the actual investment commitment, precisely so that a serious diligence finding, undisclosed debt, a cap table that does not match what was represented, or a legal dispute that was not previously mentioned, gives the investor room to renegotiate terms or walk away entirely before funds are wired. This is exactly why founders benefit from doing their own internal diligence before a term sheet is even issued, catching and resolving problems on their own timeline rather than an investor's.