What Is Due Diligence?

Due diligence is the investigation an investor or buyer does before closing a deal, checking that a company's claims, records, contracts and finances are accurate.

Category: Funding and investors · Reviewed 11 November 2026 · 2 min read

How it works

After a term sheet is signed, the investor verifies what it was told. This usually happens in a shared online folder, called a data room, where the company uploads documents. The investor and its lawyers review them and ask questions. Findings can change the deal, delay it, or end it.

Areas commonly reviewed:

Corporate: formation documents, cap table, board and shareholder approvals.
Financial: statements, bank records, taxes, projections.
Legal: contracts, disputes, licenses, compliance.
IP: who owns the code and brand, assignment agreements, patents, trademarks.
Team: employment terms, contractor agreements, equity grants.
Commercial: customers, product, security and privacy practices.

Example

Suppose a startup is raising $3 million. During diligence, the investor's lawyer notices that a contractor wrote much of the code but never signed an agreement assigning the rights to the company. The investor asks the founder to get a signed assignment before closing. Fixing it is easy now but can be costly or impossible later if the contractor is unreachable.

Why founders care

Clean records speed up closing and protect your negotiating position. Surprises found late can lower the valuation or kill a deal. Founders should tidy their documents well before raising, and keep honest answers consistent with the pitch. Intellectual property is a frequent weak spot.

Common mistakes

Starting to organize documents only after the investor asks.
Missing signed IP assignments from founders and contractors.
Overstating metrics in the pitch, then facing the real numbers in the data room.
Leaving cap table errors uncorrected.

Frequently asked questions