Startup Investment Readiness: How To Prepare For Investor Due Diligence

Introduction

Raising outside capital transforms a startup from a founder-led operation into a company that must be transparent, structured, and capable of meeting investor scrutiny. Many founders refine their pitch decks and focus on dilution models (see previous publication), but few prepare adequately for due diligence—the phase where investors verify whether your company is what it claims to be.

This edition of TechBrief by TALP explains what investment readiness means, what investors examine during due diligence, and how to prepare effectively before you start fundraising.

Build from the Ground Up: Start with Your Cap Table

Your cap table (capitalization table) is the foundation of your company's investment story. It shows who owns what, how much, and under what terms. A clean, accurate cap table signals professionalism and builds investor confidence. Before you approach investors, make sure your cap table fully captures the following:

1. Founders' Equity: Every founder's stake should be properly documented, not based on handshakes or mutual understanding, and should ideally vest over a period of time. Vesting reassures investors that each founder is committed for the long term and prevents situations where a founder exits the company early while retaining unearned equity.

1. Employee Stock Options (ESOPs): If you plan to offer equity to key employees, create an ESOP pool early (typically 5–10% of total equity). Formalize it through a shareholder resolution and a written ESOP plan, not just an outline in a slide deck.
2. Convertible Instruments and Equity Options: If you have raised funds through SAFEs, convertible loans, warrants, or similar instruments, investors would want to see how these instruments will convert during a priced round and how they impact dilution. Keep track of key terms (i.e., conversion triggers, valuation caps, and discount rates). Be prepared to explain how these instruments affect dilution and ownership once converted.
3. Third-Party Shareholders: Record every investor, even friends and family. Ensure all have subscription agreements, board approvals, and share certificates are in proper order. Undocumented investments often raise red flags during diligence.

Prepare Your Data Room: The Core of Due Diligence

Once you begin engaging investors, expect a request for access to your Data Room, a secure online repository of all company documents. This is where due diligence happens. Investors use this stage to confirm your company's structure, assess risks, and evaluate how well you manage information. During this phase, investors typically focus on the following key areas:

1. Corporate and Ownership Structure: Investors begin by examining how your company is set up, owned, and governed. They expect to see a clean structure and proper documentation. This includes your Certificate of Incorporation, Memorandum and Articles of Association, updated statutory registers (for directors, shareholders, charges, etc), minutes book, and formal board and shareholder resolutions. Your cap table must be consistent with all investment documents, such as subscription agreements, SAFEs, convertible notes, and shareholder agreements. Include short bios of directors to demonstrate governance strength and leadership credibility.
2. Financial Records: Sound financial management is one of the strongest indicators of investment readiness. Investors want to see where money has come from, how it has been spent, and how future capital will be managed. Be ready with your audited financial statements or management accounts (for early-stage startups), bank statements, tax filings, and evidence of compliance with statutory obligations such as PAYE, VAT, and company income tax. Investors will also expect to see your budgets, financial projections with clear assumptions, debt schedules, convertible instruments, and grant documentation. Maintain consistent accounting policies and disclose any outstanding liabilities early. Investors value transparency more than perfection.
3. Intellectual Property ("IP"): Your IP is often your most valuable asset as a startup. Investors need assurance that the company, not individual founders or contractors, legally owns the IP. Ensure all software, trademarks, patents, domain names, designs, and brand assets are registered in the company's name. Every founder, employee, and contractor should have signed IP assignment and confidentiality agreements. Store trademark certificates, patent filings, NDAs, and software licenses in the Data Room. Ownership clarity reduces legal risk and increases valuation confidence.
4. Regulatory Compliance: If your business operates in a regulated sector, compliance must be airtight. Obtain all required licenses, permits, and regulatory approvals and keep records of filings, reports, and payments. For example, fintechs may require a CBN license or partnerships with licensed financial institutions, while most tech companies must comply with the Nigeria Data Protection Act. Even minor compliance lapses can delay or derail funding rounds. Demonstrating proactive compliance management signals maturity.
5. Employment & Labour: How you manage your team signals both culture and operational maturity. Ensure all employees and contractors have properly executed agreements covering roles, compensation, confidentiality, and IP assignments. Maintain proof of statutory deductions and remittances. If you engage freelancers, clearly document their "contractor status" to prevent misclassification as employees. If you offer ESOPs or stock grants, ensure they are board-approved and properly structured. Increasingly, investors also look at diversity, inclusion, and gender representation as part of governance assessment.
6. Material Contracts: Investors examine the contracts that define your revenue streams and partnerships. This includes customer agreements, supplier contracts, partnership/MoU documents, SLAs, licensing, distribution and reseller arrangements. Investors will pay attention to termination rights, exclusivity, liability limits, and change-of-control clauses that could be triggered by an investment. If your startup relies heavily on a single customer or supplier, disclose it early and explain your mitigation strategy.
7. Technology and Product Evaluation: For tech-driven businesses, investors often conduct a technical audit. This covers your product architecture, technology stack and development practices. They may review your product roadmaps, technical documentation, and details of any third-party dependencies. The goal is to confirm that your product is scalable, secure, and is being built by a competent team.

Conclusion

Investment readiness is not just about having documents; it is about alignment. Every part of your startup's structure, finances, and operations should tell a consistent and credible story. Due diligence is not a checklist; it is how investors test whether your structure supports your vision. Startups that demonstrate clarity, discipline, and transparency earn investor trust faster and often on better terms. Investors don't just fund potential, they back founders who run their startups like real, investable companies.

To view original Tope Adebayo article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.