Startup VC Due Diligence Checklist

Be Ready for Venture Capital Due Diligence - The ultimate finance and HR diligence checklist for startups; works for smaller M&A exits as well!

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Startup VC and M&A Due Diligence Checklist

Kruze Consulting clients have raised over $10 billion in venture capital funding, and on average one of our startup clients is acquired a month. We know how quickly investments and acquisitions can come together, and recommend that startups are ready for due diligence ahead of time.

Once your startups accounting and HR systems are in place, it makes sense to be aware of what materials you’ll need to complete a venture capital fund raising process.

Finance, Tax and HR Due Diligence Checklist for Startups

Every venture capitalist has their own due diligence process, but they typically share a due diligence checklist with the startup so that the management team can collect the requested information. We’ve compared finance, tax and HR due diligence checklists that our clients have received from top tier venture investors, and created a detailed checklist.

This due diligence checklist is quite detailed. It’s unlikely that you’ll receive a due diligence checklist that is as detailed as the one we’ve created. But, if you have these materials ready prior to starting a fund raise process - or at least know where to get them - you’ll be in better shape to sail through this part of the diligence process. Plus, you’ll look more organized as a management team if you are quick to produce these materials.

We strongly recommend working with an accountant who has experience with startups and the venture fund raising process. Only about 1% of “startups” go on to raise a Series A. You don’t want your startup to fail to raise venture capital because of some outsourced bookkeeper didn’t “get” how startup accounting works. There are a handful of CPAs, like Kruze Consulting, who specialize in helping funded startups - choose someone who knows what they are doing and who can be your partner in the venture process, not someone who will slow you down and make your team look unsophisticated!

One caveat to this due diligence checklist: VC’s will also conduct legal, sales and marketing, technology, market and other categories of due diligence - and they will want your capitalization table and other stock details - which we do not cover in this list.

Download the list here, or use the chart below.

Financial Due Diligence Checklist for Startups

Request Period requested Notes Priority
Income Statement Last 3 years by month and by year   High
Balance Sheet Last 3 years by month and by year   High
Cash Flow Statement Last 3 years by month and by year   High
Financial Projections (Income Statement, Cash Balance) Next 3 years by month and by year Explain the key KPIs and how they change as the company matures High
Bookings History / Projections Last 3 years next 3 years by month and by year For companies with sales teams High
AR Aging and Projections Current period Include and AR greater than 90 days past due Low
Deferred Revenue Details and Projections   Highlight the product or service associated with major deferred revenue positions Low
Schedule of bad debt and write offs Recent period, near-term projections If anyInclude any material projections Low
Inventory Current period Value by SKU Include aging and any amounts deemed obsolete Low
Accounts Payable Current period List of any employees or service providers that are unpaid, have not been paid in full to date, or are subject to any payment deferral arrangements Low
Name of Current Accounting System Current And the date started using the system Low
Name of Current Payroll System Current And the date started using the system, and payroll schedule (weekly, bi-monthly, monthly) Low
Contracts and Invoices for top 10 clients Current Period Not relevant if not an enterprise sales model High
Contracts and Invoices for any churned clients Last 6 months Only material clients High
Leases Current Period Any agreements concerning the purchase, lease or sublease of real property, any personal property leases. Medium
Material Contracts Current Any agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound which involve obligations of, or payments to, the Company in excess of $20,000 High
Cost to Acquire Customer Current and Previous Year Highlight expenses included and excluded High
Customer LTV Current and Previous Year Explain the assumptions behind the calculation High
Customer Churn Rate Current and Previous Year Explain any changes in churn rate High

Tax Due Diligence Checklist for Startups

Request Period requested Notes Priority
Federal Tax Returns Last 3 years   High
Local / State Tax Filings Last 3 years   High
Correspondence with tax authorities Since inception Federal, state and local - any correspondence between the Company and the IRS or any state or local tax bureau or any federal, state or local governmental authority High
409A valuations Last 2 Copies of Internal Revenue Code Section 409A valuation reports. High
R&D Tax Credit Reports Current Period   Medium

HR Due Diligence Checklist for Startups

Request Period requested Notes Priority
Organization Chart Current Who reports to whom High
Salary Schedule for All Employees Current Showing title, current base salary and bonus for all employees; include any obligations to terminated employees, highlight any changes to salaries, bonuses or compensation to employees after the transaction High
Consultants Current Period List of consultants, role and cost High
Projected Hiring Plans Next 3 Years Projected hires by month, with title and projected compensation High
Transactions with Officers Current Period Any existing or proposed agreements, understandings or transactions between the Company and any of its officers, directors, material stockholders or any affiliate including, without limitation, non-competition agreements, employment agreements and non-form offer letters High
Insurance Current Period Any insurance policies (including documentation regarding workers’ compensation insurance) held by the Company or of which the Company is a beneficiary and a summary of such policies, if available Medium
Offer Letter Current Period Copy of the Company’s standard offer letter Medium
Special Employee Agreements Current Period All employment agreements and other documents (such as offer letters) that contain change of control, severance provisions, bonus provisions or acceleration of stock or option vesting Medium
Employee Benefits Current Period Any employee benefit plans and arrangements, including, without limitation, stock option plans, bonus plans, pension plans, 401(k) plans insurance plans and forms of agreements (including copies of all form of option and stock agreements that are in use) Medium
Employee Accrued Expenses Current Period A list and breakdown of all outstanding accrued salary, paid time off, and reimbursable expenses. Medium
Foreign Employees Current Period If the Company has any foreign employees, a list (separated by country) of all benefits provided to foreign employees, and their locations Medium

What is a venture capital due diligence checklist?

A venture capital due diligence checklist is a list of questions that an investor will share with a company that they are evaluating. The VC’s due diligence checklist contains a list of questions and materials that the VC will want to see in order to understand the company’s operations, financials, market, legal/tax compliance, etc.

The level of complexity in a due diligence checklist tends to increase the greater amount of funding that the company is raising or the later the “round” is (i.e. a Series D checklist is typically more exhaustive than a Series A checklist).

How long does venture capital due diligence take?

VC due diligence can take as little as a single meeting to months and months. The best companies that we work with tend to have on-going conversations with potential venture capital investors well before they formally begin a fundraising process - and these companies typically can get through due diligence in two to four weeks. From a cold pitch, where there is no previously existing relationship, due diligence usually takes a bit longer, but hopefully less than six weeks.

How to Ace Diligence & Avoid Common Mistakes

Recently, Kruze Consulting’s COO, Scott Orn, was invited to be a guest on Jason Calacanis’ highly-ranked This Week In Startups Podcast. In part-one of the series, they discuss how to ace due diligence and how to avoid common mistakes. It is a must-watch for startup founders looking to raise venture capital. Of course, we recommend having a VC due diligence checklist in your back pocket well before you fundraise so that you know what materials to organize prior to entering due diligence!

“After 200+ investments, the one thing you have to get right is due diligence,” said Jason Calcanis.

On this episode of the Startup Fiance Basics series, Kruze’s COO Scott Orn and Jason Calcanis, angel investor, author and podcast host discuss:

Startups should practice presentations with a mock diligence session

Startup founders should make sure they’re putting their best foot forward when presenting due diligence information – and that means practice. It’s a good habit to have a mock diligence session where founders practice the presentation, review the materials, and walk through the financials and tax diligence. Remember, these meetings are high stakes, and you’re trying to make the best impression possible.

What is VC due Diligence?

VC due diligence is the process by which a venture capitalist will evaluate an investment opportunity. VC’s know that their investments are early-stage companies and therefore quite risky. However, in a due diligence process they seek to identify the key risks of a possible investment and evaluate them against the possible upside of the company.

The best investors have a standardized process that they follow for most (if not all) possible investments; these processes help them categorize possible risks and downsides against other investment opportunities.

Additionally, a well run due diligence process will help the VC engage with the startup’s founders to uncover possible mitigations to the risks, and understand the competence of the founding team to address the risks and grow the business.

Seed Stage Due Diligence Checklist

Seed-stage companies generally need less due diligence material than later-stage companies. This is not only because very early-stage companies have less corporate history, it is also because there is less useful data that can be used by an investor during diligence. Seed-stage companies that are generating revenue will have higher diligence requirements, as investors will want to understand the quality of the customers and revenue, and will try to dig into retention, repeat purchases, upsell potential, etc. 

Seed Stage Due Diligence Checklist

  • Historical income statement
  • Historical balance sheet
  • Historical cash flow statement
  • Projected financials - focus on next 3 years
  • Contracts with largest customers
  • Cohort client retention, churn, revenue retention
  • Customer LTV estimates
  • Material vendor contracts
  • Headcount by role, projected hiring plans
  • Tax returns (federal and state)
  • Insurance coverage
  •  

How to Avoid Common VC Due Diligence Mistakes

Being prepared for VC due diligence is the best way to avoid common mistakes - and it’s the same for M&A transactions as well. The list of questions that VCs come with is quite standardized, so there is no excuse for being unprepared! Read through the checklist above to see what materials you are most likely to need in your data room, and be ready to share them at the drop of a hat.

Ideally, you’ll make the generation of the operating due diligence metrics part of your regular course of business - knowing how much it is costing you to acquire customers, keeping your primary client contracts in a single location, dropping your tax returns into a folder every year - these are best practices that the top startup executives do regularly. 

How to prepare in advance for VC due diligence

Since many of the typical due diligence items listed on the checklist above are legal or accounting in nature, you should connect with your startup’s law firm and accounting firm to 1) make sure you have existing files like your articles of incorporation and tax returns stored in digital, sharable folders; 2) establish process to regularly update your critical files like financial statements and 3) get a point of contact who you assist you quickly should you need to begin diligence quickly. 

Of course, we suggest working with an experienced startup-focused accounting firm, like Kruze Consulting, well before your startup is in the due diligence phase of an important transaction.

We’d be happy to help you out. Just set up a time to talk with us.

Due Diligence Experts - This Page’s Authors

Healy Jones is Kruze's strategic finance leader. He was a venture capitalists and has invested in over 50 startups, and also has held executive positions at multiple VC-backed companies. Visit author page
Scott Orn, CFA, is Kruze Consulting's COO, and was a partner with an early-stage investment fund. He has led diligence on multiple startups, and now helps Kruze clients prepare for diligence. Visit author page

Recent interviews with VCs

Kruze regularly interviews leading venture capital investors. Hear from VCs about what they look for in investments, how they approach due diligence, and more.

Courtney McCrea
06/07/2022
Courtney McCrea Co-founder and Managing Partner
at Recast Capital

Courtney McCrea, co-founder and managing partner of Recast Capital, discusses how Recast Capital helps link investors to emerging managers in venture.

Read more
Marcelino Pantoja
03/29/2022
Marcelino Pantoja CEO and Founder
at Measurement

Marcelino Pantoja from Measurement discusses launching the first venture capital index fund that brings in investors at the beginning of Series A funding, allowing smaller investors, endowments, and foundations to access these investment opportunities.

Read more
Brian Sterz
03/22/2022
Brian Sterz Founding Partner
at Wavepoint Capital

Brian Sterz of Wavepoint Capital talks about launching the Wavepoint Fund, an equity hedge fund focused on disruptive opportunities in technology, media, healthcare, and financial services.

Read more

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A CPA Firm Specialized in Startup Accounting & Finance

A CPA Firm Specialized in Startup Accounting & Finance

Startups are our niche, and our passion. Our clients have raised over $10 billion in venture capital financing. We are one of only a few outsourced accounting firms that specialize in funded early-stage companies - we only offer financial and tax services to fast growing startups in the Seed, Series A, Series B and Series C stages.

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The Right Accounting Partner for Your Startup’s Next Round

We know how to de-risk your startup’s next venture capital round. Our team makes sure you are ready to fly through your next VC’s accounting, HR and tax due diligence. And when you use us as your bookkeeper, we set up and keep up-to-date a due diligence folder so you can get that next round of fundraising.

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What types of startups does Kruze Consulting usually work with?

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Startup CFO services, startup accounting and bookkeeping services, startup annual taxes, expense reports, payroll, benefits: we've got you covered. Our software provides custom tailored dashboards that can be provided weekly or monthly, depending on your preference and plan. Founders are often so busy building their company that they don’t have time to take care of their finances. Traditionally, these companies have had to work with a basket of people to get their work done, including bookkeepers, accountants, AP clerks, CFOs, consultants, and tax accountants. At Kruze Consulting, our founders have one point person, saving time and money.

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What is a due diligence checklist?

A due diligence checklist in a venture capital investment process is an organized request list of questions that the investors asks the startup founders. The checklist helps the investor understand the startup’s prospects, team, financials, legal compliance and more. 

Experienced VCs use standardized checklists to quickly confirm that the startup founders have not been making material mistakes in their compliance, accounting or legal activities. This includes asking for basic documentation around incorporation, tax returns, historical financials, but also includes important requests like information on critical client and vendor contracts, customer retention, sales and marketing metrics/trends and more. 

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