Investor Checklist: What to Review Before Investing in a Start-up
- 1. Transparency of the Capital and Ownership Structure (Cap Table)
- 2. Intellectual Property Rights (IP)
- 3. Corporate Governance
- 4. Commercial Contracts and Key Relationships
- 5. Litigation and Disputes
- 6. Regulatory Compliance Risks
- 7. Financial Statements
- Conclusion
- Contact a lawyer for further information
Investing in a start-up is always risky. However, the level of that risk can be managed by conducting a thorough review of the project — due diligence (DD). There are different types of investors: from those investing small tickets under a SAFE (Simple Agreement for Future Equity) at the earliest stages, to large institutional investors participating in late-stage rounds prior to an IPO. With each new funding stage, the depth of the investor’s review will increase progressively.
In this article, we provide recommendations primarily for early-stage investors, without going into the detailed checks typical of later stages of start-up development. Below are the key aspects an investor should review in order to protect their interests and investment.
1. Transparency of the Capital and Ownership Structure (Cap Table)
It is important for an investor to understand how the company’s capitalisation table (cap table) is structured, who the true owners are, and on what terms their equity interests are documented.
Check for hidden instruments or informal arrangements that are not reflected in the corporate documents but may dilute your stake or create unexpected obligations:
- ESOP: Is the entire option pool properly documented?
- SAFE / Convertible Notes: What are the conversion terms under these instruments?
- Side letters (informal arrangements, ancillary agreements): Do other investors have special rights that are not reflected in the corporate documents?
- Claims by former partners: Have all potential claims by former employees or partners who may have been promised equity been settled?
- It is precisely these instruments that can dilute your stake or create unexpected obligations after you invest.
Pay particular attention to potential claims from former employees or partners of the project who may have been promised shares or options (for example, under an ESOP). Risk may also arise from contractors or consultants if their agreements provide for equity-based remuneration (“work for equity”), or from parties involved at an early stage who assert rights to an equity stake in return for their contribution to the project (time, ideas, money).
As part of the due diligence process, it is important to review all agreements with key contractors and partners, obtain a representation from the founders that there are no undocumented obligations to transfer equity, and require an up-to-date map of all obligations relating to options, SAFEs, side letters, and any other arrangements.
2. Intellectual Property Rights (IP)
Intellectual property is a key asset of a technology start-up; however, this is also the area where hidden issues are most frequently identified. An investor should verify whether the company owns all rights to the code, design, content and brand; whether IP assignment provisions are included in employment and contractor agreements; whether any key elements of the product (for example, code or design) were created by the founders before the company was incorporated and, if so, whether they were properly transferred to the company; and whether domains, repositories, trade marks and cloud service accounts are registered in the company’s name.
Particular attention should be paid to conducting an IP due diligence, under which the following should be requested and analysed:
- employment and services agreements, to confirm the presence of clauses assigning exclusive (proprietary) rights;
- IP assignment documents from the founders, if product development began before the company was formed;
- documents confirming registration of trade marks and domains in the company’s name;
- a list of all open-source components used, specifying the applicable licences, since copyleft licences (for example, the GPL) may require disclosure of source code and restrict commercial use.
In addition, it is advisable to obtain written confirmation from the founders — a representation — that the company holds all rights necessary to develop, use and commercialise the product, that no third parties assert rights to the IP, and that the product does not unlawfully incorporate misappropriated developments.
Ignoring these issues may result in a situation where the company is unable to fully control key components of the product, creating material investment risk. At the same time, certain steps to formalise IP rights are not always an obstacle to closing a transaction if the parties agree that they will be completed after closing, by including them in a list of obligations to be performed in the post-closing period.
3. Corporate Governance
Corporate governance is the foundation of a company’s resilience. An investor needs to understand how decisions are made, who actually controls the company, and what rights other shareholders have.
Review the corporate documents: the articles of association, the shareholders’ agreement (SHA), meeting minutes, and share issuance resolutions. These documents determine who makes key decisions and how, who can issue new shares, appoint directors, approve transactions, receive information, and initiate a sale of the company.
In practice, once an investor comes in, a shareholders’ agreement is usually entered into (or an existing agreement is amended), and the corporate governance structure may change significantly. However, understanding the current governance system is essential at the review stage: if the company has many shareholders and/or an SHA is already in place, we recommend paying particular attention to the points below.
Clarify the powers of the director(s). Can a director unilaterally decide to raise investment, approve a transaction, dismiss the team, or sell assets? Check whether the articles of association or the SHA grant directors extended powers without shareholder involvement — this may affect your control over the investment.
Confirm how rights are allocated among shareholders. Do existing investors have special rights: veto rights, the right to appoint directors, tag-along rights (the right of minority shareholders to join a sale on the same terms), drag-along rights (the right of majority shareholders to compel minority shareholders to participate in a sale)? Check whether such mechanisms can be implemented without your consent and whose interests they serve. This is critical for assessing the degree of your future control and your ability to exit the investment.
Also check whether there is a set of matters that require a special approval procedure (reserved matters). These are matters where the company cannot act without approval from a specific body, for example, the board of directors, the general meeting of shareholders, or an advisory board. Reserved matters typically include: issuing new shares, approving major transactions, amending the articles, and appointing or removing directors.
Make sure the decision-making structure is balanced and that, as an investor, you will not be deprived of influence over strategically important actions by the company.
Determine whether there are conflicting or undisclosed agreements. Sometimes a company signs separate side letters or agreements with certain investors that grant additional rights and may conflict with the public corporate documents. Require disclosure of all agreements affecting corporate governance.
4. Commercial Contracts and Key Relationships
Analyse the start-up’s commercial contracts. Pay particular attention to change of control provisions, which may require the counterparty’s consent to the transaction. Such provisions are often found in agreements with customers, suppliers or partners, especially where the relationship is strategic. Their existence may affect the structure of the investment transaction or even make it difficult to implement without additional consents.
It is important to check whether key contracts have expired, whether they contain unilateral termination rights, and to assess the risk of early termination. Review renewal terms, penalties and potential grounds for termination carefully. The company’s true business value is directly dependent on the condition of its customer base.
Do not forget bank accounts. In some cases, the bank must be notified of a change in shareholders. It is also important to check for loan or investment agreement covenants that may restrict a change of ownership or the admission of new investors. Ignoring these requirements may lead to account freezes or accelerated repayment demands.
5. Litigation and Disputes
Be sure to request information on litigation and pre-action disputes. Even minor claims may signal potential reputational, operational or financial problems that could develop into material risks or costs after closing. Early-stage start-ups often do not prioritise legal hygiene in relationships with partners, contractors and employees, which may later result in litigation.
Particular attention should be paid to disputes related to intellectual property (for example, disputes over rights to source code, domains or trade marks), shareholder and corporate rights (challenges to equity interests or corporate resolutions), as well as claims for non-performance (non-payment for services, breach of an NDA, etc.). The existence of such disputes may complicate the transaction, affect the investment terms, or even call into question lawful ownership of key assets.
Request a list of all current and potential disputes (for example, those raised at a pre-action stage), together with documents detailing their substance and status. Clarify the company’s position in each matter and assess whether steps have been taken to mitigate the risks (for example, settlement agreements, re-structuring contractual relationships, and so on).
6. Regulatory Compliance Risks
Assess how far the start-up’s activities comply with applicable laws, particularly labour, tax, licensing and other regulatory requirements. Ignoring these requirements may result in fines, account freezes, licence revocations and other sanctions, up to and including a prohibition on conducting business.
Check:
- Whether financial and tax accounting is maintained in accordance with the requirements of the local authorities.
- Whether returns are filed and taxes paid on time.
- Whether employment relationships are properly documented and mandatory insurance contributions are made (pension, health, social). Requirements differ by jurisdiction, but almost everywhere there are mandatory contributions to state funds.
Material or repeated breaches of regulatory requirements create serious business risks: from significant fines to restrictions on key operations. In extreme cases, personal liability for directors may arise, including disqualification or restrictions on holding managerial positions.
For start-ups operating in regulated sectors (FinTech, MedTech, EdTech, etc.), it is particularly important to hold all required licences and registrations and to comply with sector-specific standards. Non-compliance may lead to loss of customers, loss of market access and cross-jurisdictional consequences when scaling.
Pay separate attention to personal data and confidentiality (the GDPR and local equivalents).
Clarify:
- Whether the company has a lawful basis for processing (for example, user consent or contractual necessity).
- How data subject rights are implemented (access, erasure, rectification, etc.).
- Whether external data storage and transfer services are used (for example, cloud storage) and whether they comply with requirements.
Breaches in this area can lead to significant fines. After investment and business consolidation, the scale of investor liability increases: GDPR fines may be calculated by reference to the global turnover of the group of companies, not only the individual start-up.
7. Financial Statements
Request from the company full financial statements for recent periods (usually 12–24 months), including the balance sheet, profit and loss statement (P&L), cash flow statement, and explanatory notes. This will help assess the start-up’s actual financial position, understand its revenue and cost structure, and identify reliance on particular customers or revenue sources.
Red flags (hidden liabilities):
Check whether there are any hidden debts and off-balance-sheet obligations, such as:
- loans from the founders: the repayment terms;
- deferred payments to contractors;
- obligations under options or bonuses;
- financial covenants in loan or investment agreements.
Sometimes such obligations are not reflected in standard reporting but can materially affect the company’s financial stability. It is also important to ensure that the reporting is prepared in accordance with applicable standards (for example, IFRS) and has been audited or reviewed at least once by an external adviser — this increases confidence in the figures provided.
Download the Due Diligence (DD) Checklist for Investors
Conclusion
Investing in a start-up is always a balance between risk and potential return. Checking the company’s legal cleanliness, IP rights, corporate history and commercial contracts is not a formality but a protection of your capital.
An investor who asks the “uncomfortable” questions in advance and requires disclosure of key risks will not only protect their interests but also create a solid foundation for the business’s growth.
Authors: Irina Kuheika, Viktoria Markova.
Contact a lawyer for further information
Contact a lawyer
