When you reach the stage of attracting outside investment, you will almost always go through an investor due diligence process. It’s the point where potential investors look closely at your business before deciding whether to invest. How you prepare for investor due diligence can make a big difference to the speed of the deal, your negotiation power, and even the value they place on your company.
This article explains what investors look for, what information you should prepare, and how to handle the process confidently.
What Investor Due Diligence Involves
Investor due diligence is a detailed review of your business carried out before investment. It allows investors to verify what you’ve told them about your company and to identify any risks or gaps that might affect their decision.
They will usually look at areas such as:
- Your company’s structure, ownership, and shareholdings.
- Your financial records and forecasts.
- Material contracts, including client and supplier agreements.
- Employment arrangements and share options.
- Intellectual property rights and registrations.
- Compliance with company law and regulatory obligations.
You should expect investors to ask for supporting documents, explanations, and clarifications. The process can feel intrusive, but it’s a normal part of closing an investment deal.
Start Organising Your Information Early
You should start preparing for investor due diligence long before you enter serious discussions. Early preparation allows you to identify issues in advance and fix them on your own terms rather than under time pressure.
A good first step is to create a central folder (often referred to as a data room) containing up-to-date versions of key company documents. This should include:
- The Articles of Association and any amendments.
- Shareholders’ and investment agreements.
- Employment contracts and consultancy agreements.
- Intellectual property registrations and licences.
- Key customer and supplier contracts.
- Financial statements and management accounts.
When you have these documents organised and accessible, it will make the process smoother for everyone. You’ll also be able to spot missing or inconsistent information that could cause delays later.
Review Your Company Structure and Records
Investors will expect your company filings at Companies House to match the information you provide. You should review your statutory registers, share certificates, and filings to confirm that everything is accurate and up to date.
If you have issued share options or convertible loans, make sure these are recorded correctly. Many founders overlook small administrative errors, such as missing share transfer forms or inconsistent share certificates, which can cause investors to question how the company is being managed.
You should also review your Articles of Association and shareholders’ agreements to make sure they reflect the current ownership structure and any previous investment terms.
Check Your Financial Records
Financial information is always a huge focus of investor due diligence. You should be ready to provide clear, accurate records showing your income, expenditure, and forecasts. Investors will want to see evidence that your accounts have been prepared properly and that your business has a clear understanding of its cash flow and growth projections.
If there are any one-off expenses or irregularities in your accounts, you should be ready to explain them. It’s better to address these points upfront than to wait for investors to raise them.
You should also check that your tax filings, VAT returns, and PAYE records are in order. Outstanding tax liabilities or compliance issues can make investors cautious, even if the amounts involved are small.
Protect Your Intellectual Property
If your business depends on unique technology, designs, or branding, investors will pay particular attention to your intellectual property rights. You should confirm that all your IP is owned by the company and that no former employees or contractors retain rights to it.
Make sure your trademarks, patents, and domain names are registered in the company’s name, not under individual founders. If any rights are licensed, you should have written agreements in place setting out the terms.
Investors are often reassured when a company has taken proactive steps to protect its IP, as it reduces the risk of disputes later on.
Review Your Contracts
Investors will want to know that your key contracts are legally sound and that you can rely on them for future revenue. You should review your major customer, supplier, and service agreements to check for terms that could affect the business if ownership changes, such as termination clauses or change-of-control provisions.
If you have informal arrangements or unsigned agreements, you should formalise them before the due diligence process begins. This avoids the impression that your operations rely on unwritten understandings or personal relationships.
Tidy Up Employment and Share Option Records
Employment and share-based arrangements can be a source of concern for investors if they appear unclear or incomplete. You should review all employment contracts, consultancy agreements, and non-disclosure agreements to confirm that they include the necessary terms on confidentiality and intellectual property.
If you operate an employee share option scheme, check that all option grants have been properly authorised and documented, and that you have board minutes approving them. Investors often look closely at equity incentives, as errors here can affect the company’s cap table and valuation.
Anticipate Common Investor Questions
Once you have your documents ready, it’s worth thinking about the questions investors are likely to ask. They might want to know about:
- The ownership of key technology or data.
- Any ongoing disputes or potential claims.
- Your growth plans and revenue model.
- Existing debt or loan agreements.
- Any regulatory risks affecting your industry.
You should be ready to explain these points clearly and honestly. Trying to hide problems almost always backfires once investors start digging deeper.
How Solicitors Can Help
You should involve a solicitor early in the process. A solicitor experienced in investment transactions can review your documents from an investor’s point of view and identify gaps that might cause problems. They can also help you prepare a clear disclosure letter, which sets out any issues in the business that investors need to be aware of.
Your solicitor can assist with setting up the data room, managing document requests, and responding to investor queries. This support saves time, reduces stress, and helps present your company in the best possible light.
Speak To JPP Law
JPP Law’s commercial and corporate solicitors work closely with growing businesses to help them prepare for investor due diligence and negotiate investment terms confidently. The team can help you review your company structure, tidy up documentation, and guide you through the disclosure process.
To discuss how JPP Law can support your next investment round, contact us today.
