What Due Diligence Actually Looks Like

“The reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something; a comprehensive appraisal of a business undertaken by a prospective buyer to establish its assets and liabilities and evaluate its commercial potential.”

Oxford English Dictionary, Third Edition

Why This Matters

In my investing years, I could tell within the first hour of diligence whether a founder had built a company or just built a pitch. The ones who had their house in order before we asked had nothing to fear. Their data room was organised. Their responses were fast and complete. When problems existed — and they almost always did — they were flagged proactively with a resolution plan already attached.

The ones improvising were already behind. Slow to provide documents, surprised by questions they should have anticipated, defensive when gaps were identified. Diligence did not kill those deals. The founders’ unpreparedness did. Investors don’t expect perfection. They do expect that you understand your own business well enough to present it clearly under scrutiny.

Most UK tech founders approach due diligence with vague anxiety rather than practical preparation. That anxiety is almost entirely a function of not knowing what to expect. This article covers what diligence actually involves at pre-seed and seed, what a well-organised data room contains, what investors are actually looking for when they read each document, what kills deals, and how to use the process as a signal of competence rather than an ordeal.

What Due Diligence Covers at Pre-Seed and Seed

Pre-seed and seed due diligence in the UK typically covers six areas: legal and corporate, financial, technology and intellectual property, commercial and market, team and background, and regulatory compliance. Each area has a different job, and understanding what an investor is actually trying to establish in each one changes how you prepare for it.

Legal and corporate diligence verifies that the company exists in the form described, that shares have been properly issued and are recorded at Companies House, that there are no undisclosed encumbrances or outstanding claims, and that the corporate structure is consistent with the investment being made. The investor is not just checking boxes. They are looking for evidence that the founder has run the company properly — that resolutions have been passed when required, that the shareholder register is accurate and current, that there are no informal agreements that have never been documented, and that no prior employer or university has a latent claim on the technology. Cap table surprises discovered at this stage are one of the most common causes of deal delay or collapse.

Financial diligence at early stage is relatively light — management accounts, bank statements, any existing revenue, and a verification that the numbers in the pitch deck are accurate. What investors are actually looking for is consistency: do the numbers in your deck match your bank statements, your management accounts, and your financial model? Discrepancies between documents, even minor ones, trigger disproportionate concern because they signal that either the founder does not understand their own finances or, worse, that they have been selective with what they have presented.

Technology and IP diligence verifies ownership and freedom-to-operate. The investor is checking: does the company actually own what it says it owns? Has every founder, contractor, and employee who has contributed to the technology formally assigned their IP to the company entity? Is there any open source code in the product stack that carries a licence which could compromise the company’s ability to commercialise? For patent-protected businesses, is the patent properly assigned, what is the filing status, and has a freedom-to-operate opinion been obtained?

Team diligence includes background checks and reference calls. Investors are not just verifying credentials. They are assessing character, resilience, and whether the references given actually know the founder well enough to be meaningful. A reference from a professor who supervised a PhD and has not worked with the founder since is far less useful than a reference from someone who has seen them manage adversity or lead a team. Choose your references accordingly.

Commercial diligence verifies that the market claims in the deck are substantiated, that customer relationships are what they have been represented to be, and that letters of intent and pilot agreements mean what they appear to mean. Investors have seen founders describe “a strong interest from a major retailer” that turns out to be a single email exchange from eight months ago. They will call your customers. Make sure your customers know to expect the call and that what they say matches what you have said.

For EIS and SEIS deals, HMRC advance assurance status will also be confirmed. If advance assurance has not yet been received, the investor will want to understand the timeline and may condition closing on receipt of the letter.

The Timeline and What Happens When

Diligence typically begins after a term sheet is issued, though some investors conduct an initial light-touch review before issuing terms. With experienced UK angels, diligence can be two to three weeks if the data room is well prepared. With institutional investors at seed stage — a Seedcamp, Mercia, or Haatch-type investment — expect four to six weeks and a more structured process.

A well-run four-week diligence process typically looks like this.

Week one: the investor sends a document request list and you upload to a shared data room. The investor begins reading. Initial questions come back within a few days — these are usually straightforward clarification requests on documents already provided. This is the stage where disorganisation does the most damage. A data room with files named “deck final v3 ACTUAL FINAL” or a cap table that does not match the Companies House register sends an immediate signal about how the company is run. If your response time in week one is slow, the investor’s enthusiasm from the pitch meeting has already begun to cool.

Week two: follow-up questions on the initial documents, legal review of shareholder agreements and IP assignments, and the beginning of reference calls. This is usually where the substantive issues surface. Founders who have anticipated the likely questions and pre-loaded the answers — including proactively flagging known gaps with a resolution plan — move through this stage quickly. Founders who are responding reactively to each question as it arrives take two to three times as long.

Week three: deeper commercial diligence, customer calls, any specialist technical review if the product warrants it, and the resolution of outstanding document requests. By the end of week three, an experienced investor should have a clear picture of what they are buying and what the risks are. If significant unresolved issues remain at this stage, the deal is in trouble.

Week four: legal documentation, final confirmations, and closing. If diligence has gone well, this is largely administrative. If issues surfaced in weeks two or three that were handled well, the investor’s confidence should be higher than before diligence began because they have seen how the founder behaves under scrutiny.

Every day of delay extends this timeline and gives the investor time to find reasons to reduce their commitment or walk away. Founders who respond promptly and completely compress this process significantly. Founders who treat document requests as an interruption rather than a priority discover that deals which were warm at the term sheet stage can go cold before they close.

Build Your Data Room Before You Need It

The single most useful thing a UK tech founder can do before beginning a raise is to build a data room. Not when an investor asks for one. Before you send your first deck.

A pre-seed data room should contain: certificate of incorporation and any amendments; articles of association and any resolutions updating them; current shareholder register as filed at Companies House; fully diluted cap table showing all shares issued, all options granted, all convertible instruments and their conversion terms; all shareholders’ agreements and side letters; any convertible notes or ASA agreements; IP assignment agreements from all founders including pre-incorporation work; employment or consultancy agreements for all key team members; the current pitch deck; financial model with documented assumptions; any management accounts or bank statements for the past twelve months; any customer contracts, letters of intent, or pilot agreements; and your HMRC advance assurance letter.

What bad looks like is worth describing specifically, because most founders do not know they are presenting a disorganised data room until they watch an investor’s response time slow and their follow-up questions become more pointed. A folder of files with no consistent naming convention signals a company that does not have internal processes. A cap table presented as a screenshot rather than a live document signals that it may not be current. A financial model with cells that reference external files, broken formula links, or hardcoded numbers that do not match the deck creates more questions than it answers. Missing documents replaced with notes saying “available on request” when the investor is already in the data room asking for them creates friction at the worst possible moment. Documents that exist but have not been signed — IP assignment agreements with blank signature lines, employment contracts that were sent but never returned — are discovered and flagged as material gaps.

Organising this before you start raising takes a few days. Not having it ready can extend your diligence timeline by weeks and gives investors time to cool off or find reasons to reduce their commitment. Seedlegals, Notion, or a well-structured Google Drive folder all work. The tool matters less than the organisation.

The Five Things That Most Commonly Kill Deals in Diligence

After watching many deals at various stages of the investment process, the same issues surface repeatedly. None of them are inevitable. All of them can be identified and resolved before diligence begins if founders know what to look for.

IP assignment is the most common. A founder who built the initial version of the technology before the company was incorporated, a contractor who wrote a significant portion of the codebase under a standard freelance agreement that did not include IP assignment, a co-founder who left before the formal assignment was completed — any of these creates a gap in the company’s ownership of its core asset. The fix is almost always straightforward: a properly drafted IP assignment agreement signed by the relevant party. But discovered mid-diligence it delays closing and occasionally gives a departing co-founder leverage they should not have.

Cap table surprises are the second most common. An informal promise of equity made to an early advisor, a verbal understanding with a contractor that was never documented, an option grant that was announced to an employee but never formally approved by the board — all of these create discrepancies between what the founder believes the cap table to be and what can be verified from the documents. Investors are not just looking at how much equity each party holds. They are looking at who has rights that could affect the investment: pre-emption rights that were not waived, drag-along provisions that were not properly drafted, share classes with unexpected voting rights. Get a lawyer to review your cap table before you raise, not during diligence.

Undisclosed side letters or informal agreements are less common but more damaging when they surface. A side letter giving an existing investor information rights that were not disclosed to new investors, a comfort letter given to a customer that creates an implied liability, an informal agreement with a co-founder about a future salary increase or additional equity — any of these discovered by an investor during diligence without prior disclosure creates a credibility problem that is very difficult to recover from. The issue is rarely the substance of the agreement. It is the fact that it was not disclosed.

Missing founder agreements are surprisingly common at pre-seed. Two or three people started building together, they incorporated a company and issued shares informally, and nobody ever got around to a proper shareholders’ agreement with vesting schedules, IP assignment, and good leaver and bad leaver provisions. Investors investing at pre-seed without a shareholders’ agreement in place are taking on founder risk that is unquantified. Many will condition their investment on one being put in place. Some will use its absence as justification for a lower valuation or a larger equity ask.

EIS and SEIS eligibility problems are specific to UK fundraising but highly relevant at pre-seed. HMRC advance assurance is not automatic. Companies with any trading history that could be interpreted as non-qualifying, companies where a founder or director has a prior interest that triggers a connection test, companies in sectors where the qualifying trade is ambiguous, or companies that have taken on investment from non-EIS-eligible sources — all can face complications. The time to get specialist tax advice on EIS eligibility is before you begin raising, not when an investor has committed and is waiting for the advance assurance letter.

EIS and SEIS: The UK-Specific Layer

For the majority of UK pre-seed raises, EIS or SEIS eligibility is not optional. Most UK angels invest through EIS because the income tax relief, capital gains exemption, and loss relief make the risk-adjusted return significantly better than investing without it. Many EIS fund managers are legally prohibited from investing in companies that do not qualify. This means that for a large proportion of UK pre-seed fundraising, your ability to close is directly dependent on your EIS status.

SEIS applies to companies that are less than three years old, have fewer than 25 full-time employees, and have gross assets of less than £350,000 before the investment. It gives investors 50 percent income tax relief on investments up to £200,000 per year, which is substantially more generous than EIS. If your company qualifies for SEIS, it should be front and centre in your investor communications — it materially improves the return profile for the investors you are asking to take the most risk.

EIS applies to companies with fewer than 250 full-time employees and gross assets of less than £15 million. It gives investors 30 percent income tax relief, or 35 percent for knowledge-intensive companies — defined broadly as companies where a significant proportion of operating costs relate to research and development. For tech and deeptech companies with active R&D programmes, the knowledge-intensive classification is worth pursuing specifically because it unlocks a higher relief rate and higher annual investment limits for investors.

Advance assurance from HMRC is the letter confirming that your company and the proposed share issue qualify for EIS or SEIS relief. It does not guarantee relief — that is confirmed at the point each investor makes their investment — but it gives investors the confidence to commit. Most experienced UK angels will not invest without it. Getting it takes four to eight weeks and requires submitting a description of your company’s qualifying trade, your corporate structure, your articles of association, and details of the proposed share issue. The most common reasons applications are rejected or delayed are: the company’s trade is not a qualifying trade under the EIS rules (property development, financial services, and certain other activities are excluded); the company or a connected person has received previous non-qualifying investment; the share structure proposed does not meet the requirements for ordinary shares with no preferential rights; or the application is submitted with incomplete information.

Get specialist tax advice before submitting. A solicitor or tax adviser with specific EIS experience will cost a few hundred pounds and can save weeks of delay. FounderCatalyst (foundercatalyst.com) includes SEIS and EIS advance assurance as part of their fixed-price legal infrastructure package for early-stage companies and is worth considering as a bundled solution.

How to Behave During Diligence

Respond to requests promptly and completely. Same day if possible. A slow or incomplete response in a process specifically designed to assess your operational competence is one of the most expensive signals you can send. Every request that goes unanswered for 48 hours gives the investor time to think about what else might be missing.

Be transparent about gaps rather than defensive. “We are completing the IP assignment with our solicitor by a specific date — here is the email chain confirming the instruction” is far better than minimising the issue or hoping the investor does not notice. They will notice. Every investor has seen every version of this. The founders who handle gaps well — who identify them before they are found, explain them clearly, and present a resolution timeline — consistently fare better in diligence than founders who present a clean picture that turns out to have cracks.

Do not over-explain or over-qualify. Answer the question asked. If the investor wants more context they will ask for it. Founders who respond to a request for a shareholders’ agreement with three paragraphs of context about why it was structured a certain way, followed by an attachment that turns out not to be the current version, create more anxiety than founders who send the right document with a single sentence of relevant context.

Keep a log of every request and every response. Know at any given moment what has been provided, what is outstanding, and what the expected timeline is for anything still being prepared. This is basic project management but it makes a measurable difference to how competent you appear during a process that is, at its core, an assessment of your competence.

The founders who close rounds through diligence are not the ones with no problems. They are the ones who communicate clearly, anticipate questions, and proactively flag issues before investors find them. Diligence is not an interrogation. It is an extended interview. The behaviour you demonstrate in it is a preview of what it will be like to be your investor for the next five years.

Get a Lawyer Before Diligence Starts

This is not optional advice. A tech-specialist lawyer who understands early-stage investment should be in place before you begin raising, not when a term sheet arrives and diligence has already started. Legal surprises discovered mid-diligence cost time, money, and occasionally the deal itself.

What you need from a lawyer at pre-seed is specific: they should be able to review your corporate structure and cap table and identify anything that will be flagged in diligence; draft or review your shareholders’ agreement and ensure vesting schedules, IP assignment, and good leaver and bad leaver provisions are in order; advise on EIS eligibility and coordinate the advance assurance application; and review the investment documents when they arrive to ensure they are standard and flag anything that is not.

The realistic cost range for pre-seed legal support in the UK is between £2,000 and £8,000 depending on the complexity of the corporate structure and how much preliminary work has been done. Fixed-price providers like FounderCatalyst (foundercatalyst.com) offer a structured legal infrastructure package at £1,495 excluding VAT that covers company setup, shareholders’ agreement, employment contracts, IP assignment, and SEIS/EIS advance assurance application — a bundled approach that avoids the open-ended hourly billing that makes founders reluctant to engage lawyers early. For more complex structures, convertible instruments, or institutional investment, a full-service firm with a recognised tech practice —

Shepherd and Wedderburn, Burness Paull, or Brodies in Scotland; Founder Catalyst, Osborne Clarke, CMS, or Mishcon de Reya in England — will be more appropriate.

The key distinction is this: a lawyer engaged before diligence is a strategic adviser who helps you present your company in its best possible light. A lawyer engaged during diligence is a firefighter working against a clock. The former costs less and achieves more.

Checklist

Work through this before your next investor conversation. Be honest about the gaps. If you cannot answer any of these confidently, that is a signal. Fix the gap before the investor finds it.

Corporate and Legal

• Certificate of incorporation and any amendments
• Current articles of association
• Shareholder register matching Companies House exactly
• Fully diluted cap table showing all shares, options, and convertible instruments
• All shareholders’ agreements and any side letters
• Any outstanding convertible notes, ASAs, or loan agreements
• Board resolutions for all significant decisions since incorporation

IP and Technology

• IP assignment agreements from all founders, including pre-incorporation work
• IP assignment provisions in all employment and consultancy contracts
• Any patent applications or granted patents, with filing status confirmed
• Freedom-to-operate opinion if relevant to your sector
• Software licensing agreements for open source and third-party components
• University or employer IP clearance letters if applicable

Team and Employment

• Employment or consultancy agreements for all key team members
• Confidentiality and IP assignment provisions confirmed in all employment contracts
• Reference contacts for all founders — chosen carefully, briefed to expect a call
• Any equity agreements with employees or contractors
• Confirmation of which team members are full-time and which are part-time

Commercial and Financial

• Current pitch deck
• Financial model with documented assumptions — no broken formula links, no hardcoded numbers
• Management accounts or bank statements for the past twelve months
• Any customer contracts, LOIs, or pilot agreements — with customers briefed to expect a call
• Confirmation that the numbers in the deck are consistent with the documents

EIS and SEIS

• HMRC advance assurance letter, or timeline and instruction to solicitor if not yet received
• Confirmation of whether SEIS or EIS applies, and which investors qualify for which
• Advice taken on knowledge-intensive classification if relevant
• Any prior investment reviewed for impact on EIS eligibility

Takeaways

Build your data room before your first investor meeting, not when someone asks for it. Having it ready compresses the diligence timeline and signals maturity.

Understand what investors are actually looking for in each document, not just what documents to provide. The purpose of diligence is to verify that the company is what the pitch says it is.

IP assignment is the most commonly missed issue in UK tech company diligence. Confirm every piece of relevant IP is formally assigned to the company entity before you raise.

Cap table accuracy is non-negotiable. Every discrepancy between your cap table and Companies House records triggers concern disproportionate to its size.

EIS and SEIS are not administrative details. For most UK pre-seed raises they are prerequisites. Get advance assurance before you need it.

Get a tech-specialist lawyer before diligence starts, not during it. The cost of preventive legal work is a fraction of the cost of reactive firefighting.

Transparency moves faster than defensiveness. Investors will find gaps. Flagging them yourself with a resolution plan is far better than having them discovered.

Diligence is an extended interview. How you manage the process is a preview of what it will be like to be your investor. Responsive, organised, transparent founders close rounds.

Slow responses kill warm deals. An investor who was excited after your pitch can cool significantly over three weeks of delayed document responses.

Additional Resources

FounderCatalyst: foundercatalyst.com — Fixed-price legal infrastructure for early-stage UK companies including shareholders’ agreement, IP assignment, and SEIS/EIS advance assurance

Seedlegals Data Room: seedlegals.com — UK-focused data room and document management for early-stage raises

BVCA Standardised Documents: bvca.co.uk/standardised-documents — Standard early-stage investment document templates for UK deals

Docsend: docsend.com — Secure document sharing with access analytics for data room management

British Business Bank Finance Hub: british-business-bank.co.uk/finance-hub — Guidance on preparing for investment and navigating the diligence process

HMRC EIS Guidance: gov.uk/guidance/enterprise-investment-scheme-introduction — Official HMRC guidance on EIS eligibility and advance assurance

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