The four workstreams
Every serious DD splits into four parallel tracks running simultaneously:
Legal — cap table integrity, IP ownership chain, material contracts, pending or threatened litigation, regulatory standing, and any side letters that affect the incoming round.
Commercial — customer references (investors call 5–10 customers directly, not the ones you recommended), churn analysis against what you showed in the deck, pipeline credibility, competitive landscape assessment.
Technical — architecture review, security posture, key engineer interviews to assess retention risk, code quality sampling, and AI-specific concerns like model provenance and data compliance.
Financial — historical financials against bank statements, cohort-level unit economics, burn model against actuals, and a stress test of your runway assumptions.
Miss any one of them and the round can die in week 6 after you’ve already operationally committed to closing and communicated it internally.
What actually kills deals in DD
- Missing or sloppy IP assignments. If a co-founder contributed code before incorporation, or if early contractors built core IP without signed assignment agreements, the IP chain is broken. This is a hard stop for most institutional investors.
- Side letters with early investors that conflict with the incoming round’s terms — for example, an MFN clause that gives an angel the same terms as the Series A lead.
- Cap table errors: options promised verbally but never documented in a board resolution, SAFEs without proper signatures from both parties, missed 83(b) elections that create tax liability for early employees.
- Customer churn that wasn’t visible in the headline ARR figure. Investors look at cohort-level data; a company with good net new ARR but 30% gross churn is a fundamentally different business than it appeared.
- Unresolved co-founder disputes — any evidence that founding team alignment is fragile gets flagged as existential risk.
- Tax exposure from state nexus issues, employee misclassification (contractors who should have been employees), or missed sales tax obligations in states where you have customers.
The data room founders should already have
A Series A-ready data room covers: all corporate formation documents and charter amendments, fully reconciled cap table with every SAFE, note and option grant, IP assignment agreements for all founders and contractors, all material customer contracts and vendor agreements, historical financial statements with bank statement reconciliation, employment agreements with IP assignment for all employees, all board minutes since incorporation, and a clear runway model with assumptions documented.
How to prepare without burning out
Start 90 days before you go to market. Run an internal DD on your own company: hire a startup lawyer for 5–10 hours to spot-check your cap table and IP chain, ask your accountant to review any tax exposure, and pre-populate the data room in a VDR (Carta, Notion, Docsend or a dedicated legal VDR). Investors notice the quality of the data room in the first 30 minutes. A fast, well-organised data room signals operational maturity; a slow or incomplete one signals the opposite.
What this means for you
You will spend more total hours in DD than in all your pitch meetings combined. Treat the data room as a product with a launch date. The cleaner and faster your DD, the more leverage you maintain on price, terms and timing — and the lower the risk that something surfaces in week 6 that derails a signed term sheet.
Frequently Asked Questions
Q: How long does Series A due diligence typically take? A: Series A due diligence runs 4–8 weeks from term sheet signing to close, with four parallel workstreams — legal, commercial, technical, and financial — running simultaneously. The process often takes longer than founders expect because investor legal counsel, third-party technical reviewers, and customer reference calls do not run on the startup’s schedule.
Q: What is an IP assignment agreement and why do investors require it? A: An IP assignment agreement is a legal document signed by founders, co-founders, employees, and contractors transferring all intellectual property they created in connection with the company to the company itself — not retaining personal ownership. Without signed IP assignments from everyone who contributed code, designs, or inventions before or during their tenure, the company does not legally own its core technology, which is a hard stop for institutional investment.
Q: What is an 83(b) election and what happens if it’s missed? A: An 83(b) election is an IRS filing made within 30 days of receiving restricted stock, electing to pay income tax on the fair market value at grant rather than at vesting. Missing it means tax is owed at the higher value when the stock vests — sometimes years later — creating unexpected tax liability for employees and clean-up complexity in DD. For early employees who received shares at near-zero 409A valuations, a missed 83(b) election can generate a six-figure tax bill when the company raises a Series B at $50M+ valuation.
Q: How do investors verify customer metrics during due diligence? A: Investors conduct direct customer reference calls with 5–10 customers — including some not provided by the founder — and request raw cohort data showing ARR by customer, start dates, expansion history, and churn dates. A company showing 20% net ARR growth with 30% gross churn (offset by expansion) is a fundamentally different risk profile than a company showing 20% growth with 5% gross churn. Cohort data is often the single most revealing dataset in commercial DD.
Q: What should a Series A data room contain to pass due diligence? A: A complete Series A data room includes: all corporate formation documents and charter amendments, fully reconciled cap table with every SAFE, note, and option grant, IP assignment agreements from all founders and contractors, signed employment agreements with IP assignment clauses, all material customer and vendor contracts, board minutes since incorporation, historical financial statements reconciled to bank statements, a current runway model with documented assumptions, and any pending or threatened litigation disclosures. Missing any one of these categories creates a delay of 2–4 weeks while the company remedies the gap.
CTA: Run your company through the CrackTheDeck DD checklist and close the gaps before your first investor call — not at week 6 of the round.