Signing a Term Sheet is a moment of celebration for any founder. It validates your vision and signals that an investor believes in your potential. However, the Term Sheet is not the cheque. Between that handshake and the bank transfer lies the most rigorous examination your business will ever face: Investor Due Diligence.
At SGI Consultants, we have guided over 2,000 entrepreneurs through the funding landscape. Having secured over £250 million in total funding with a 90% funding success rate, we have seen deals collapse not because the business idea was poor, but because the due diligence process revealed disorganisation, risk, or unverifiable claims.
87% of funding attempts fail due to poor execution of processes. Due diligence is where execution is tested.
Whether you are a tech startup preparing for a Series A with institutional investors or a growing SME seeking debt finance, this guide provides the ultimate investor due diligence checklist to ensure you are not just ready to answer questions, but ready to close the deal.
What is Due Diligence and When Does It Happen?
Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer or investor to establish its assets and liabilities and evaluate its commercial potential. In simple terms, it is the investor verifying that everything you said in your pitch deck is true.
The “Trust but Verify” Phase
Investors are not looking for reasons to say “yes”—they already did that with the Term Sheet. During due diligence, they are looking for reasons to say “no,” or to renegotiate the valuation.
When it Happens
The process typically kicks off immediately after the Term Sheet is signed and can last anywhere from 4 to 12 weeks, depending on the complexity of the business and the readiness of the documentation.
SGI Insight: Our Business Funding Service often reduces funding timelines by 40-60% simply by ensuring clients are “due diligence ready” before they even approach investors. Scrambling to find documents after an investor asks for them signals incompetence. Having them ready signals investability.
The Five Pillars of Due Diligence
Investors will deploy different teams (lawyers, accountants, technical experts) to audit specific areas of your business. You must be prepared across all five pillars.
1. Financial Due Diligence
This assesses the company’s past, present, and future financial health. Are the books accurate? Are the projections realistic? Is the unit economics sustainable?
2. Legal Due Diligence
This focuses on risk and ownership. Do you actually own your IP? Are there hidden lawsuits? Is the company incorporated correctly?
3. Commercial Due Diligence
This validates your market. Is the market size real? Do customers actually love the product? Is the Business Success Formula (Appeal + Profitability + Sustainability) evident?.
4. Technical / IP Due Diligence
For tech companies, this is critical. Is the code scalable? Is it secure? Do you rely on third-party software that creates a dependency risk?
5. Team / HR Due Diligence
Investors invest in people. This checks that your team is locked in, incentivised correctly, and legally employed.
Setting Up Your Data Room
In the modern investment landscape, you do not hand over physical files. You grant access to a Virtual Data Room (VDR).
What is a Data Room?
A secure online repository for storing all your due diligence documents. Common platforms include Dropbox (for early-stage), Box, Google Drive, or specialised platforms like DocuSign.
Structure and Organisation
A chaotic data room suggests a chaotic business. Structure your folders exactly as per the checklist below.
- 01 – Corporate & Legal
- 02 – Financials
- 03 – Commercial & Market
- 04 – Technology & IP
- 05 – HR & Team
Access Controls: Never give “Edit” access. Use “View Only” or “Watermarked” settings for sensitive documents.
The Ultimate Investor Due Diligence Checklist
Below is the comprehensive list of documents you must prepare.
Section A: Financial Due Diligence Documents
Investors need to see that your Engine Optimisation (EO)—the efficiency of your business operations—is reflected in the numbers.
- Management Accounts: Monthly profit and loss (P&L), balance sheet, and cash flow statements for the last 3 years (or since inception).
- Financial Projections: A detailed 3-5 year financial model. This must include the assumptions behind your revenue growth. (SGI specialises in creating investment-grade financial models for this exact purpose ).
- Bank Statements: Usually, the last 12 months are used to verify the cash position.
- Tax Returns: Copies of all filed corporate tax returns (CT600) and VAT returns.
- Cap Table: A fully diluted capitalisation table showing all shareholders, option pools, and convertible notes.
- Debt Schedule: Details of any outstanding loans, convertible notes, or grants.
- Aged Debtors/Creditors: Who owes you money, and who do you owe?
- Financial Policies: Documentation of your accounting policies and revenue recognition standards.
Section B: Legal Due Diligence Documents
This section proves that the entity you are selling equity in is legally sound.
- Certificate of Incorporation: The birth certificate of your company.
- Articles of Association: The current version filed with Companies House.
- Shareholder Agreements: Any existing agreements defining the rights of current owners.
- Director Agreements: Service contracts for all board directors.
- Material Contracts: Any contract worth more than 5-10% of your revenue or expenditure.
- Leases: Agreements for your office or premises.
- Insurance Policies: Evidence of professional indemnity, public liability, and key person insurance.
- Litigation History: Details of any past, threatened, or ongoing legal disputes.
- Regulatory Licenses: Any permits required to operate (e.g., FCA approval for fintechs).
Section C: Commercial Due Diligence Documents
Here, you prove the Appeal and Profitability components of the SGI Business Success Formula8888.
- Business Plan: A comprehensive document outlining strategy, market, and operations.
- Market Research: Data validating the Profitable Market (PM) size and accessibility.
- Sales Pipeline: An anonymised list of prospective customers and their stage in the funnel.
- Customer Contracts: Standard terms and conditions, plus signed contracts for top customers.
- Supplier Contracts: Agreements with critical suppliers (manufacturing, software, logistics).
- Churn/Retention Data: Cohort analysis showing customer retention.
- Marketing Strategy: Overview of your SOAR Marketing System implementation (Standout Branding, Orchestrated Connections, Attract & Amplify, Revenue Maximisation).
Section D: Technical and IP Due Diligence
If your Product or Service (PS) is technology-based, this verification is non-negotiable.
- IP Registrations: Certificates for Patents, Trademarks, and Design Rights.
- Product Roadmap: The strategic plan for future development (12-24 months).
- Technical Architecture: Documentation of the system stack, database schema, and APIs.
- IP Assignment Agreements: Signed documents from every developer (employee or contractor) assigning code ownership to the company. (Critical Red Flag if missing).
- Data Privacy: GDPR compliance policies and data handling procedures.
- Disaster Recovery Plan: Protocols for system failures or data breaches.
Section E: HR and Team Due Diligence
Investors back the jockey, not just the horse.
- Organisational Chart: Current structure and planned hires.
- Team CVs/Resumes: Bios for key management and technical leads.
- Employment Contracts: Standard templates and specific contracts for key staff.
- Consultancy Agreements: Contracts for non-employee contributors.
- Share Option Schemes: Details of EMI schemes or other employee equity incentives.
- Employee Handbook: Standard HR policies and procedures.
5. Common Due Diligence Issues and Red Flags
Through our Investment Readiness Assessment, we frequently identify and fix these common deal-killers before investors ever see them:
- The “Dirty” Cap Table: Missing share certificates, undocumented transfers, or mathematical errors in ownership percentages.
- IP Ownership Gaps: Using a freelancer to build your MVP without a contract, assigning the Intellectual Property to the company.
- Unrealistic Financials: Hockey-stick graphs with no logic behind the “up and to the right” growth. (SGI ensures models are “defensible” and realistic 14).
- Undisclosed Liabilities: Forgetting to mention a convertible note or a pending dispute. Honesty is the only policy.
- Dependency Risk: Deriving 80% of revenue from one client or relying entirely on one supplier.
6. How to Address Due Diligence Questions
You will be bombarded with questions (often called “Queries” or “RFIs”). How you answer matters as much as the answer itself.
- Be Prompt: Slow responses imply you are disorganised or hiding something.
- Be Accurate: Never guess. If you don’t know, say “I will verify and get back to you.”
- Be Consistent: Ensure your verbal responses align with the data room documents.
- Use Experts: Don’t answer complex tax or legal questions yourself. Lean on your advisors.
SGI Support: Our clients benefit from our Business Funding Service, where we actively manage relationship management and progress reporting, acting as the buffer and professional interface between you and the investor.
7. Due Diligence Timeline: When to Start Preparing
The ideal time to start preparing for due diligence is six months before you need the money.
If you wait until you have a Term Sheet to start compiling these documents, you will lose momentum. Deal fatigue is real; if the process drags on for months because your data room isn’t ready, investors may lose interest or market conditions may change.
The SGI Timeline Advantage
Our clients typically see funding timelines 40-60% faster. Why? Because our Startup Consulting and Growth Consulting packages build these foundational documents as part of the business development process, not as an afterthought17.
Conclusion: Turn the Audit into an Asset
Due diligence is stressful, but it is also an opportunity. A well-organised data room signals to investors that you are a professional, low-risk operator capable of managing their capital responsibly.
At SGI Consultants, we don’t just tell you what documents you need; we help you create them. From Institutional-grade financial models to Business Plans that secure funding, we ensure you pass the audit with flying colours.
Don’t let a missing document cost you millions.
Ready to Get Investor-Ready?
Book a Free Funding Readiness Assessment today. We will review your current status, identify gaps in your due diligence preparation, and provide a clear roadmap to securing your capital.
Related Posts
Kurt Graver is the founder and CEO of SGI Consultants, a business consultancy that has helped over 2,000 entrepreneurs establish successful startups using systematic business development methodologies. An accountant with an MBA and 25 years of commerce and consultancy experience, Kurt specialises in strategic planning, market analysis, and sustainable business growth