You’ve pitched, sparked investor interest, and now things get serious. This stage separates “talking about raising” from actually raising. Most founders are underprepared here — and deals fall apart. This guide helps you close confidently.
1. Understand What Due Diligence Really Is
Due diligence = Investors verifying that everything you claimed is real, legal, and scalable.
They’ll evaluate three areas:
Product & Tech
- Product architecture
- IP ownership & patents
- Security & data compliance
- Tech roadmap
- Scalability
Red flag: Outsourced development with unclear IP ownership.
Business & Financials
Investors will check:
- Revenue, expenses & burn rate
- Customer contracts & LOIs
- Cap table (ownership breakdown)
- Projections & assumptions
- Unit economics (CAC, LTV, churn)
Golden Rule: Numbers must match your story.
Legal & Compliance
They’ll verify:
- Company registration docs
- Founder agreements
- Employment contracts & ESOPs
- Vendor agreements
- Licenses/industry compliance (GDPR, HIPAA, PCI, etc.)
Pro Tip: Clean paperwork = faster deal.
2. Prepare a Due Diligence Data Room
A data room is a shared folder (Drive, Dropbox, DocSend) with all required documents.
Include:
- Company Docs
- Pitch Deck & Financial Projections
- Product & Tech Documentation
- Market Research
- Customer Contracts/Pilots/LOIs
- Cap Table
- ESOP Plan
- Legal Agreements
Investors love organized founders.
3. Term Sheet Basics (Know the Language)
A term sheet outlines the key terms of the investment — not legally binding, but sets the foundation.
Key terms to understand:
Valuation
- Pre-money: Value before investment
- Post-money: Value after investment
Equity Offered
How much ownership are you giving?
Rule of thumb:
Seed round: 10–20%
Series A: 15–25%
Liquidation Preference
Determines who gets paid first if company exits.
Standard: 1x non-participating preference (founder-friendly)
Board Seat / Control Rights
Investors may ask for:
- Board seat
- Voting rights
- Veto rights on major decisions
Don’t give control too early.
Vesting
Founder shares typically vest over 4 years with a 1-year cliff — protects the company if a founder leaves.
ESOP Pool
Investors may ask to create or expand ESOP — often 8–15%.
Anti-dilution
Protects investors if valuation drops later.
Founder-friendly: Broad-based weighted average
Founder-unfriendly: Full ratchet
4. Negotiation Strategy
Investors expect negotiation — it’s part of the process.
Do:
✔ Negotiate from data, not emotion
✔ Compare multiple offers if possible
✔ Push back politely on harsh terms
✔ Protect control & long-term flexibility
Don’t:
✘ Give big equity for small capital
✘ Accept full investor control
✘ Rush into signing out of fear
Golden Rule:
A slightly lower valuation with a supportive investor is better than a high valuation with a controlling one.
5. Legal Counsel Matters
Don’t sign a term sheet alone.
Hire a startup lawyer who understands:
- Venture capital norms
- Founder-friendly clauses
- ESOP frameworks
- IP protection
Cheap legal mistakes become expensive later.
6. Post-Term Sheet: The Closing Process
Once terms are agreed:
Final due diligence
Legal agreements drafted
Shareholders’ agreement signed
Funds wired
Cap table updated
Compliance filings completed
Expect 4–12 weeks depending on complexity.
7. Communicate With Transparency
Keep investors updated during this phase:
Product progress
Customer wins
Hiring updates
Confidence rises → risk perception drops → faster close.
Never hide bad news. It destroys trust.
8. Celebrate — But Stay Focused
Funding is not the finish line. It’s fuel.
Your real job starts now:
- Hit milestones
- Scale responsibly
- Extend runway
- Build a winning team
Investors bet on execution — now you must deliver.
Fast Summary
| Stage | Your Goal |
|---|---|
| Due Diligence | Prove legitimacy & traction |
| Term Sheet | Agree on fair terms |
| Negotiation | Protect equity & control |
| Closing | Complete legal + receive funds |
