Due diligence
A compelling founder and an exciting pitch generate interest. Due diligence tests whether the facts underneath support the investment case. This month covers what to check, how to check it at the earliest stages, and what the answers tell you.
What is due diligence?
Investing in an early-stage company involves uncertainty. At pre-seed, the business may have limited revenue, an unfinished product and only a small amount of customer data. The decision cannot rest on a long trading history, so you assess the quality of the evidence available, identify what is still unproven, and decide whether the potential return justifies the risk.
Due diligence is the process of investigating and validating what founders tell you before you invest. It means looking beyond the pitch deck to understand whether the company exists as described, whether the founders can credibly execute, and whether the terms reflect the opportunity and its risks.
Verify the claims
Test what was said in the deck and in conversation against the evidence.
Understand the company
Its ownership, finances and legal position.
Assess the team
The strength and commitment of the founders.
Validate demand
The problem, product, market and early customer interest.
Surface the risks
Material risks, inconsistencies and unanswered questions.
Check the terms
Whether the valuation and investment terms are reasonable.
The challenge of pre-seed diligence
Many documents and metrics that exist for a mature business will not yet exist here. Forecasts rest on assumptions, traction may be thin, and the product may still be evolving. That does not mean diligence should be less rigorous. It means it should be proportionate to the stage.
You should not expect a pre-seed startup to run like an established company. You should expect the founders to understand their business, explain their assumptions, and be honest about what has and has not yet been proven.
Common challenges at this stage
- Limited financial and operating history
- Forecasts built on assumptions rather than established revenue
- Incomplete legal, governance or employment documentation
- Uncertainty over market size and customer demand
- Technology or IP that has not been fully tested
- Key-person risk where the business leans on one founder
- Limited time and resources for an individual angel
- The pull of excitement, personal connection or fear of missing out
Diligence gives structure without replacing judgement. The point is not to collect documents, but to understand what they show, what questions they raise, and whether the story holds together when tested.
What to ask for
The documents below help you validate a startup. Not every one will exist at pre-seed, and the detail should match the company’s maturity. Where something is missing, founders should be able to explain why and how they will close the gap.
Corporate and financial
- Certificate of incorporation – proof the company is legally established
- Articles of association – the rules for how it is owned and run
- Cap table – shareholders, ownership, share classes and options
- Budget or projections – revenue, spend and cash needs for 12 to 24 months
- Cash position and burn rate – available cash and monthly spend
- Use of funds – how the raise is spent and what it should achieve
Legal
- IP documentation – patents, trademarks, designs, proprietary software
- IP assignment agreements – proof IP created by founders or contractors belongs to the company
- Customer contracts or letters of intent – evidence of commercial interest
- Partnership agreements and MOUs – deals with suppliers, customers or collaborators
- Legal issues – any disputes, claims or regulatory matters
- Data protection and regulatory – evidence the company understands the rules that apply
Product and technology
- Product roadmap – planned development and milestones for 6 to 12 months
- Prototype or MVP – a working version, demo or other evidence of progress
- Technology overview – how the product works and what makes it different
- Partnerships and integrations – key platforms, licences or providers relied on
- Trial results and metrics – data from testing or pilots
- Scalability plans – how the product handles rising demand
- Research and coverage – independent research or media that helps validate it
Market, team and ownership
Market and customer
- Testimonials or beta feedback – how customers experience and value the product
- Sales pipeline and conversion – prospects and their progress through the funnel
- Market research – surveys, interviews or third-party reports supporting the need
- Acquisition channels – the channels the company will test or build
- Go-to-market strategy – the plan for launching and selling
- Customer feedback – findings from interviews, pilots and beta testing
- Order book – confirmed orders or committed demand, where available
Team
- Founder and team CVs – relevant experience and sector knowledge
- Roles and responsibilities – how work is divided across the team
- Employment and contractor agreements – documentation for the people working there
- Time commitment – who is full or part-time, and when part-timers will switch
- Incentives – salaries, equity and share options
- Recruitment plan – key hires and how they map to use of funds
- References – from employers, colleagues, investors or customers
Ownership and fundraising
- Previous funding documents – earlier angel, founder, grant or convertible funding
- Shareholders’ agreement – rights and obligations of shareholders, if in place
- Current cap table – all shares, options and convertibles that affect ownership
- Fundraising history – amounts, dates, valuations, investors and instruments
- Current investment terms – proposed valuation, share class and investor rights
- Tax-relief documentation – SEIS or EIS advance assurance or eligibility
The presence of these documents does not, on its own, make a company investable. What matters is whether the information is accurate, consistent and backed by evidence. Transparency, preparation and a willingness to acknowledge uncertainty tell you a great deal about the people you would be backing.
Quiz · Due diligence
Question 1 of 5
Purpose
What is the main purpose of due diligence when considering an angel investment?
Correct: B. Diligence cannot remove the uncertainty of angel investing. It helps you validate the information, identify material risks and decide with more information.
Quiz · Due diligence
Question 2 of 5
Stage
How should an investor approach due diligence on a pre-seed startup?
Correct: C. A pre-seed company may have limited revenue, customer data and history. Diligence stays rigorous but reflects the early stage.
Quiz · Due diligence
Question 3 of 5
Ownership
What does a capitalisation table (cap table) show?
Correct: C. The cap table shows who owns the company and how options, share classes or convertibles could affect future ownership.
Quiz · Due diligence
Question 4 of 5
Legal
Which document provides evidence that IP created by founders, employees or contractors belongs to the company?
Correct: B. An IP assignment agreement confirms the IP has been legally transferred to the company rather than staying with an individual founder, employee or contractor.
Quiz · Due diligence
Question 5 of 5
Gaps
If a pre-seed startup cannot provide every document requested, what should an investor expect?
Correct: C. Not every document will exist at pre-seed. Founders should be transparent about what is missing, explain why, and show how they will close the gap.
Month 3 complete. Nice work.
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