We are about to go through due diligence for the first time and I wanted to actually understand common due diligence red flags before assuming everything in our company is fine just because nobody has raised a concern yet. Here is what I have pieced together so far, would appreciate anyone correcting me or adding context.
A messy cap table seems to be one of the biggest ones, things like undocumented verbal equity promises, inconsistent share allocations, or unclear ownership that does not match what founders describe verbally. IP ownership issues also come up a lot, particularly when code or key assets were built by a contractor or former employee without a proper IP assignment agreement in place, which can mean the company does not actually legally own its core product.
Inconsistent or unreliable financial numbers seem to be another major red flag, especially when revenue or growth figures presented in the pitch deck do not match what shows up in the actual financial records once investors dig deeper. Customer concentration also seems to worry investors more than founders often expect, a company that appears to have healthy revenue but actually depends heavily on one or two large customers is seen as much riskier than the headline number suggests. Founder related issues can be red flags too, things like unresolved disputes between co-founders, unclear vesting arrangements, or a founder who seems evasive rather than direct when answering difficult questions.
What I am still trying to understand is which of these red flags are typically deal killers outright versus issues that investors are willing to work through as long as founders are upfront.
Has anyone here actually run into a due diligence red flag, either as a founder going through the process or someone conducting it? Curious what actually happened, whether it killed the deal or just delayed it, and what you wish you had cleaned up beforehand.
Found a fairly clear explanation of this on Entrepreneur Plus while I was reading around the topic, helped me understand the founder side of it a bit better.
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