Due Diligence

Due diligence is a detailed analysis of legal, financial, and technical risks before investing money in startup, in M&A (merger and acquisition), or any major business move. The term comes from “due obligation, diligent attention,” meaning investor or buyer should do all necessary checks before signing.

What’s checked during due diligence? (1) Legal status—is startup registered, does it have all needed licenses, is it in lawsuits? (2) Financial status—are finances accurately presented, are there hidden debts, what’s real profit? (3) IP (Intellectual Property)—does startup truly own patents, code, brands it claims? (4) Contracts—what long-term contracts are signed, are there hidden clauses? (5) Employees—are all employees properly employed, are there employee issues?

Practical example: VC fund wants to invest $10 million in startup. Before giving money, they deploy team of 10 who work 2-3 months on due diligence. They check finances, talk to customers, analyze code, interview employees. If they find major error (e.g., startup lied about customer count), investment is canceled.

Due diligence costs are significant—can be $50,000 to $500,000+ depending on startup size. But for investors, it’s investment in knowledge—if they miss something, they can lose millions.

For startups: If preparing for investment or sale, be ready for due diligence. Have all documents organized, be open with analysts, don’t hide anything because they’ll definitely find it if you try.