Due Diligence Questions Every Founder Should Expect

What Is Driver-Based Revenue Forecasting?

A revenue forecast is a projection of the money your business will earn over a defined future period. There are two ways to build one:

Top-down forecasting starts with the total addressable market and works down to a market share assumption: “The UK B2B software market is worth £10 billion. If we capture 0.1%, we generate £10 million in revenue.” Useful for sizing the opportunity, useless for operational planning. Investors have heard thousands of 0.1% market share projections and are rightly sceptical.

Bottom-up, driver-based forecasting starts with the specific activities that generate revenue: “We have capacity to run 20 outbound sales conversations per week. Our conversion rate is 10%. Our average contract value is £12,000 per year. That gives us 2 new customers per week, or roughly 100 new customers per year, generating £1.2 million in new ARR.” Every assumption in that chain is testable, improvable, and explainable.

Driver-based forecasting is also the input layer for your 3-statement model — your revenue drivers feed the income statement, which integrates with the balance sheet and cash flow statement.

Why a Revenue Forecast Startup Needs a Different Approach

Established businesses forecast revenue by extrapolating historical data. Startups do not have historical data. The entire forecast must be built on forward-looking assumptions rather than trend lines. A driver-based model built on transparent assumptions is actually more useful to an early-stage investor than a statistical extrapolation, because it makes the business logic explicit and discussable.

The Core Framework: Identify Your Revenue Drivers

What Is Due Diligence and When Does It Happen?

Confirmatory diligence traditionally happens after a term sheet is signed and before the wire, since a signed term sheet gives the fund exclusivity to verify what you've represented without competing for the deal. Increasingly, especially at Series A and beyond, funds run a partial or full diligence pass before issuing a term sheet at all, particularly on financials and customer references, to reduce the risk of a late-stage surprise killing the deal after terms are agreed.

Timelines vary by stage. Seed diligence typically runs 2 to 3 weeks. Series A diligence typically runs 4 to 6 weeks. The full term sheet to close timeline for a Series A, including diligence, legal drafting, and closing, usually lands somewhere between 6 and 10 weeks all in. Any diligence process running dramatically longer than that without a clear reason is worth a direct conversation about what's actually holding it up.

What Financial Questions Will Investors Ask?

Expect requests for trailing 12 to 24 months of historical financials (P&L, balance sheet, cash flow), your current cap table fully diluted, and your burn rate and runway. You will also be asked to walk through your forward-looking 3-statement model and defend the assumptions behind your growth projections, not just show the output. Be ready to reconcile any differences between your model's historical numbers and your actual bank and accounting statements too; investors will cross-check, and small unexplained gaps between the two are read as a signal about the rigor of your finance function overall, not just as a rounding error. Revenue quality gets specific scrutiny too: any single customer representing more than 10% to 20% of revenue is typically flagged as a concentration risk that needs a clear mitigation story.

What Will They Ask About Your Metrics and Retention?

Expect a request for a cohort-by-cohort retention table going back at least six to eight quarters, not a single blended churn number. This is one of the most common diligence red flags investors mention: a founder who can only produce one aggregate churn figure, with no ability to break it down by signup cohort, signals that the underlying data either doesn't exist or hasn't been looked at closely. Be ready to walk through gross and net revenue retention separately, show your churn calculation methodology cohort by cohort, and explain your Rule of 40 score trend over the last four to six quarters, not just the current number.

What Legal and Cap Table Questions Come Up?

This is usually where diligence takes the longest, because it touches the most documents:

• Cap table cleanliness. Is the option pool sized correctly, and is unissued equity accounted for accurately?
• SAFE or note stacking. If you've raised multiple SAFEs, investors will want to see exactly how each one converts and what the combined dilution looks like when they stack at the next priced round. Understanding the mechanical difference between a SAFE and a convertible note matters here, since conversion terms differ.
• 409A valuation history. Is your most recent 409A valuation current (generally within the last 12 months or after a material event)?
• ESOP and unallocated pool. How much of your option pool is allocated versus reserved, and does the round's pool top-up math check out?
• Founder vesting. Are founder vesting schedules standard, and are there any unusual acceleration triggers?
• Prior secondary sales. If any secondary sales have happened, investors will want the full terms and pricing history.
• Outstanding litigation, IP assignment agreements for every employee and contractor, and any related-party transactions.

What Customer and Commercial Questions Should You Expect?

Most funds request three to five customer reference calls during diligence, chosen partly from your list and partly from their own outreach to check for consistency. They will also review contract terms, revenue concentration, sales pipeline quality, and win/loss patterns from recent deals. Inconsistent stories between what you present and what customers say on reference calls is one of the fastest ways to damage trust mid-diligence, so make sure your internal team is aligned on the numbers before calls start.

How Should You Prepare Your Data Room?

Organize your data room into clearly numbered folders before diligence starts, not after the first request arrives:

1. Corporate documents (incorporation, bylaws, board minutes)
2. Cap table, SAFE and note agreements, ESOP plan documents
3. Financials and your financial model
4. Metrics dashboard (ARR/MRR, retention, churn, unit economics)
5. Customer contracts and reference list
6. IP assignment and employment agreements
7. Insurance policies
8. Prior board decks and investor updates

Use a tool with view-tracking (DocSend or Google Drive with access logs) so you can see which sections get the most attention. That signal is genuinely useful: heavy time spent on your cap table folder or your retention numbers tells you exactly what this specific fund is worried about, before they even ask the follow-up question. Keep the data room updated throughout diligence rather than treating it as a one-time upload; funds often circle back with follow-up requests as they get deeper into a specific area, and a stale data room slows down exactly the momentum you built in the first two weeks.

What Are Common Due Diligence Red Flags?

The issues that most often slow down or kill a round: revenue concentration in one or two customers, declining net revenue retention quarter over quarter, a cap table cluttered with too many small SAFEs at different caps, a 409A valuation that's stale or was never obtained, founder shares with no vesting cliff at all, unresolved co-founder equity disputes, undocumented related-party loans, active litigation, and verbal promises about equity or option grants that were never formally documented in the cap table. None of these are automatically deal-killers, but every one of them adds weeks to the timeline if discovered mid-diligence rather than disclosed and explained upfront.

Frequently Asked Questions

How long does due diligence usually take? About 2 to 3 weeks for a seed round and 4 to 6 weeks for a Series A, assuming your data room is organized and complete before the process starts.

What documents should be in a data room before diligence begins? Corporate documents, a clean cap table with all SAFE and note agreements, historical financials and your forward model, a metrics dashboard, customer contracts, and IP and employment agreements, at minimum.

Do investors do diligence before or after the term sheet? Traditionally after, which is what "confirmatory diligence" means, but increasingly funds run at least a partial pass, especially on financials and customer references, before issuing terms.

What's the biggest red flag in financial due diligence? Revenue concentration in a small number of customers and an inability to produce cohort-level retention data are the two that come up most often as serious concerns.

Should early-stage startups expect legal diligence too, or just financial? Both, even at seed. Cap table cleanliness, SAFE terms, and IP assignment agreements get reviewed at every stage, not just Series A and beyond.

Get your financial model and cap table in order before diligence starts using our financial model tool and runway calculator, so every question in this post has an answer ready before it's asked.

Further Reading

• What Is a Startup Financial Model?
• The Rule of 40 Explained
• Churn Rate Calculation and Cohort Analysis
• Runway and Burn Calculator
• Financial Model Pro