Due diligence for early-stage rounds: what investors check

Due diligence is the investor checking that what you have told them is true and that the company's legal and financial foundations will hold up. At pre-seed it can be a few conversations and a look at the cap table. By Series A it is a structured review by the lead investor's team and lawyers. The scope grows with the stage, but the problems that slow rounds down are remarkably consistent, and most of them can be fixed in advance.

Legal points in this guide describe U.S. corporations, mainly Delaware, and U.S. federal rules. Other countries have their own equivalents.

What investors check, by stage

Area	Pre-seed	Seed	Series A
Business	Founders, problem, early evidence	Traction, customer conversations, market size reasoning	Metrics deep-dive, cohorts, pipeline, unit economics, competition
Legal	Company properly formed; cap table; founder IP	Investor counsel review of formation, equity, IP, key contracts	Full legal review against a request list; disclosure schedule
Financial	Cash, burn, use of funds	Monthly accounts, model, runway	Historical financials reconciled to bank; revenue quality; tax
Technical	Founder walkthrough	Product demo, architecture conversation	Technical review, security and data practices, open-source use
References	Informal backchannel	Customer and founder references	Structured references plus backchannel on founders and executives

Business diligence

Investors test the story in the deck against evidence: talking to customers, checking how metrics are defined, and working out whether growth is repeatable or the product of a few special deals. Define every metric once, in writing, and use the same definitions everywhere. Inconsistent numbers between the deck, the model and the data room are a frequent and avoidable source of doubt.

Legal diligence

Investor counsel checks that the company exists in good standing, that every share and convertible instrument was properly authorized and documented, that the cap table matches the documents, that the company owns its IP, and that there are no contracts, disputes or regulatory issues that would affect the investment. In a priced round, the results feed into the representations and the disclosure schedule in the stock purchase agreement.

Financial diligence

At seed, the focus is cash, burn and whether the model is reasonable. At Series A, investors usually want historical monthly financials that reconcile to bank statements, revenue broken down by customer, and confidence that payroll and other taxes have been handled correctly.

Technical diligence

For technical products, investors may ask an expert to review architecture, code quality, security practices, dependence on third-party services, and open-source licenses whose terms could affect proprietary code.

References and backchannel

Investors call references you provide and, usually, people you did not: former colleagues, co-investors, customers. Assume it will happen. You can do the same in reverse: speak to founders the investor has backed, including ones whose companies struggled.

Red flags that delay or kill rounds

These are the issues investor counsel finds most often at early stage. None is unusual; what matters is whether you found it first and how cleanly it can be fixed.

Issue	Why it matters	Typical fix
IP not assigned to the company	The company may not own its core asset, particularly work done by a founder before incorporation or by contractors.	Signed assignment agreements from every founder, employee and contractor who created relevant IP; confirmatory assignments for past work.
Messy cap table	If counsel cannot reconcile who owns what, the round's price and ownership cannot be computed and closing stalls.	Reconcile against signed documents; obtain missing board approvals (ratification); paper verbal promises of equity or confirm they are void.
Missing 83(b) elections	A founder with vesting stock who did not file is taxed as shares vest on their value at that time, which can create a large tax bill and complicate the company's records.	Cannot be filed late. Tax counsel may suggest restructuring options; the earlier this is found, the more options remain.
Unfiled Form D or state notices	Required notices for Regulation D offerings were not made for earlier SAFEs or notes.	File now. States may charge late fees. See below.
Misclassified contractors	People treated as contractors who are legally employees can create back employment taxes and penalties, and their IP assignments may be incomplete.	Review against the applicable tests; reclassify where needed; confirm IP assignments.
No or unclear founder vesting	Investors want founders' unvested shares subject to repurchase if they leave, so a departed founder does not keep a large stake.	Put founder shares on a vesting schedule (often with credit for time served), with new 83(b) elections where required.
Unpriced or undocumented options	Option grants without board approval, or priced without a supportable fair market value, can create tax problems for employees under section 409A.	Ratify grants; obtain a 409A valuation; adjust grants where needed with counsel.
Undisclosed side letters or promises	Extra rights (pro rata, information, MFN) that the new investors did not know about can conflict with the new terms.	List every side letter and promise; disclose them; obtain waivers if they conflict.

Missing 83(b) elections

An election under Internal Revenue Code section 83(b) must be filed with the IRS no later than 30 days after the date the restricted stock is transferred. If the 30th day falls on a Saturday, Sunday or legal holiday, a filing postmarked on the next business day is timely (IRS Form 15620 instructions, Rev. 4-2025, checked 2026-10-26). The IRS now provides Form 15620 for the election, though a written statement meeting the Treasury regulation is still acceptable, and a copy must be given to the company. Keep proof of mailing; investors ask for it. See founder vesting.

Form D and state notices

A company selling under Rule 504 or 506 of Regulation D must file Form D with the SEC within 15 days after the first sale, and the date of first sale is when the first investor is irrevocably committed (SEC, "Filing a Form D notice", last updated March 17, 2026, checked 2026-10-26). Federal law preempts state registration for Rule 506 offerings, but states may still require notice filings and fees (SEC Rule 506(b) page, checked 2026-10-26). SAFE and convertible-note rounds are securities offerings and are covered too. Under the SEC's Rule 507, a company loses the Rule 504 and 506 exemptions if a court has enjoined it for failing to file Form D, so a missed filing should be made as soon as it is found. See U.S. securities law.

Contractor classification

For federal tax purposes the IRS looks at the degree of control and independence in three categories: behavioral control, financial control and the type of relationship (IRS, "Independent contractor (self-employed) or employee?", last updated May 19, 2026, checked 2026-10-26). States and other federal laws can apply different tests. Early companies often pay long-term, full-time contributors as contractors; investors will ask whether that is supportable.

Remediation checklist

Certificate of incorporation, all amendments and bylaws collected; company in good standing in its state of incorporation and qualified where it operates.
Every stock issuance, option grant, SAFE, note and warrant approved by the board, with signed documents on file; gaps ratified.
Cap table reconciled line by line to the documents, including each convertible instrument's cap, discount and amount.
Founder stock on vesting, with signed stock purchase agreements and proof of timely 83(b) filings.
IP assignment agreements signed by every founder, employee and contractor; pre-incorporation work assigned to the company.
Form D filed for each Regulation D offering, and state notices filed where investors are located, or a plan with counsel to file now.
Option plan adopted and approved; grants priced at fair market value supported by a current 409A valuation.
Contractor relationships reviewed; written agreements in place; reclassification decided where needed.
Side letters, MFN clauses and any informal promises listed and disclosed.
Material contracts reviewed for change-of-control, exclusivity and assignment clauses.
Financials reconciled to bank statements; tax registrations and filings current.
Metrics defined in one place, matching the deck, model and data room.
Any litigation, threatened claims or regulatory correspondence summarized for disclosure.

How long it takes

There is no standard duration. A SAFE round from angels may involve almost no formal diligence; a priced seed with investor counsel typically involves a defined review; a Series A takes longer because the review is wider and the documents are fuller. The biggest variables are within your control: how organized the data room is, how quickly you answer questions, and how many of the red flags above turn up.

Diligence and document drafting usually run in parallel after the term sheet is signed, often under a no-shop clause. That makes delays expensive: you cannot talk to other investors while the lead works through problems. Investors also tend to do some business diligence before a term sheet, so having the data room ready before the first meeting pays off twice.

Once diligence is done and the documents are agreed, the round moves to signing and funding. See closing a round for the mechanics and post-closing filings.

Sources

Form 15620, Section 83(b) Election (Rev. 4-2025), Internal Revenue Service. Public domain (U.S. federal government work).
26 CFR 1.83-2 — Election to include in gross income in year of transfer, Electronic Code of Federal Regulations (National Archives). Public domain (U.S. federal government work).
Filing a Form D notice, U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
Private Placements - Rule 506(b), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
17 CFR 230.507 — Disqualifying provision relating to exemptions under 230.504 and 230.506, Electronic Code of Federal Regulations (National Archives). Public domain (U.S. federal government work).
Independent contractor (self-employed) or employee?, Internal Revenue Service. Public domain (U.S. federal government work).
26 CFR 1.409A-1 — Definitions and covered plans, Electronic Code of Federal Regulations (National Archives). Public domain (U.S. federal government work).