Definition
Due Diligence (VC)
Due diligence is the investigation an investor conducts into a startup's finances, legal status, technology, team and market before investing.
After a term sheet, investors verify the company's claims — examining financial statements, cap table, contracts, intellectual property, regulatory compliance, litigation and the founders' backgrounds. Findings can confirm the deal, adjust the terms, or kill it. Diligence covers commercial, financial, legal, and increasingly technical and ESG aspects.
Thorough diligence protects investors from fraud and overpayment; lapses have led to high-profile startup blow-ups. In India, FEMA, tax and Companies Act compliance form an important part of legal diligence, especially for cross-border deals.
Related terms
- Cap TableA capitalisation table (cap table) is the record of who owns what in a startup — every shareholder, option holder and convertible, with their stakes.
- Term SheetA term sheet is the non-binding document that sets out the key terms of a proposed startup investment before definitive agreements are drafted.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.