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Legal Due Diligence: Documents Every Investor Will Request

Legal due diligence is the most detailed and document-intensive part of investor due diligence. Investor counsel will request dozens of documents, and you need to either provide them or have a good explanation for why you don't have them. This guide walks through the documents investors request, why they matter, and how to prepare.

The key insight: organizing legal documents before you're in due diligence is exponentially easier than scrambling to find them during investor review. Many founders are surprised at how many documents they're missing or how disorganized their records are. Fixing this proactively saves weeks during due diligence.

Formation and Corporate Documents

Articles of Incorporation: The founding document that creates your corporation. It includes company name, purpose, stock structure, and board composition. Every founder should have this. If you haven't incorporated, do it immediately.

Bylaws: Internal rules governing your corporation: how board meetings work, how shareholders vote, how shares are issued. Most founders use a template from their lawyer. Bylaws should be up-to-date with any amendments.

Board Resolutions: Minutes from board meetings authorizing actions like hiring the CEO, issuing equity, or approving the budget. Investors want to see that major decisions were authorized by the board, not just decided unilaterally by founders.

Certificate of Good Standing: From the state confirming your company is in good standing with the Secretary of State. This is simple to obtain (usually online from your state's SOS website) and investors always request it.

Cap Table: A spreadsheet documenting all equity issued: founder shares, employee option grants, investor SAFEs or convertible notes, and any other equity. Your cap table should be complete, accurate, and should reconcile with your stock ledger (the official company record of equity issued).

Intellectual Property Documents

IP is critical. Investors want absolute clarity that your company owns all the IP, that there are no third-party claims, and that all founders and employees have assigned their inventions to the company.

IP Assignment Agreements: Signed by all founders confirming they assign to the company any IP they've created related to the company. Should be signed before the company issues equity. If you have founders who haven't signed IP assignments, this is a major issue to resolve immediately.

Employee IP Agreements: Signed by all employees confirming they assign to the company any IP created as part of their work. Standard boilerplate in offer letters; make sure all employees have signed.

Trademark and Patent Records: If you've filed trademarks or patents, provide the filing documents and current status. If you have a business name but haven't trademarked it, that's fine, but be aware it's not protected. If someone else has a similar trademark, that's a potential issue.

Code Repository Verification: For software companies, investors might ask to verify that all code is owned by the company or properly licensed. Do you have a GitHub repo? Are all contributors company employees or contractors with IP assignment? This verifies that your IP is yours.

Third-Party IP and Licensing: If you use open-source libraries, third-party APIs, or licensed software, provide documentation. Investors want to ensure you're not using IP without permission and that there are no license violations (e.g., using GPL code in a proprietary product can be an issue).

Equity and Capitalization Documents

Cap Table and Stock Ledger: Already mentioned but critical. Your cap table should include every share issued, every option granted, and every convertible instrument (SAFEs, notes). Should reconcile with your official stock ledger.

Shareholder Agreements: If you have any agreements between shareholders (co-founders, investors), provide them. This includes voting agreements, drag-along rights, or any special terms for particular shareholders.

Equity Incentive Plan: If you've issued options to employees, you should have a formal equity plan documenting how options are granted, vested, and exercised. Many early-stage companies use the SAFE Primer option pool, which is simple and standard.

Option Grant Documents and Vesting Schedules: For each employee or advisor who holds options, provide the grant agreement and documentation of their vesting schedule (typically 4-year vesting with a 1-year cliff). Investors want to see that options are properly documented and that vesting is structured appropriately.

SAFE and Convertible Note Documents: All SAFEs and convertible notes issued to investors. Include original executed copies and summaries of terms (cap, discount, pro rata, etc.).

Employment and Advisory Documents

Offer Letters and Employment Agreements: For all employees, provide offer letters and any formal employment agreements. Should include role, compensation, start date, and any special terms (equity, benefits, non-compete).

Non-Compete and Non-Solicitation Agreements: If you've required employees or founders to sign non-compete or non-solicitation agreements, provide them. These are sometimes required and sometimes controversial, but investors want to see them if they exist.

Consultant and Advisor Agreements: For any contractors, advisors, or consultants who've worked on the product, provide agreements. Should include IP assignment clauses confirming IP belongs to the company.

Current Headcount and Compensation: A list of all current employees, contractors, and their compensation. Investors want to understand your payroll and headcount.

Material Customer and Vendor Contracts

Customer Contracts and Agreements: Major customer contracts, service agreements, or SOWs. Investors want to understand your customer relationships, contract terms, and revenue stability. You don't need to provide every small customer contract, but material contracts (representing 5%+ of revenue) should be included.

Vendor Agreements: Major vendor or supplier contracts. This includes cloud computing agreements, software licenses, or critical vendor relationships.

Terms of Service and Privacy Policy: Your public-facing terms of service and privacy policy (if you have a customer-facing product). Shows that you've thought about legal compliance.

Tax and Financial Compliance Documents

Tax Returns: Federal and state tax returns for all years of operation. For new companies, this might be just one or two years, but provide what you have.

EIN Letter: Confirmation of your federal Employer Identification Number from the IRS. Simple to obtain; most companies have this.

Sales Tax Registrations and Filings: If you collect sales tax, provide registrations and recent filings. If you haven't registered for sales tax and you're required to, that's an issue to address.

Payroll Tax Records: Payroll tax filings and records confirming you've been properly reporting and paying employee payroll taxes. Missing payroll tax filings are a major red flag.

Legal Compliance Documentation: Any evidence of compliance with relevant regulations for your industry. For healthcare, HIPAA compliance documentation. For finance, any relevant regulatory filings. Varies by industry.

Insurance and Liability Documents

Insurance Policies: General liability, professional liability, and any industry-specific insurance. Provide certificates of insurance.

Outstanding Litigations or Claims: Any lawsuits, disputes, or claims against the company (or founders). If there are none, state this explicitly. If there are, explain the status and likelihood of resolution.

Property and Real Estate Documents

Office Lease or Sublease Agreements: If you have office space, provide the lease. Include any sublease arrangements. Investors want to understand your property obligations and costs.

Equipment and Asset Agreements: Any leases for equipment, furniture, or other assets. Provides complete picture of your obligations.

Data Room Best Practices

Organizing all these documents in a data room (typically a shared folder or cloud-based platform) makes due diligence efficient. Here's how to structure it:

Folder organization: Create folders for each category (Formation, IP, Equity, Employment, Contracts, Tax, etc.). Within each folder, organize by date or relevance. Include an index or summary for each folder.

Naming conventions: Use clear, consistent file names. "IP_Assignment_Founders_Signed_2024.pdf" is better than "IP_signed.pdf". This makes searching and understanding easy.

Redaction and confidentiality: Consider which documents are sensitive (customer contracts with pricing, employee personal information). You might redact certain parts or mark as confidential to restrict investor access during review.

README or index: Create a master index explaining what's in the data room, any gaps in documentation, and status of any outstanding items. This shows organization and transparency.

Use a proper data room platform: Services like Intralinks, ShareFile, or even Google Drive with controlled access work. Ensure you can track who's accessing what and revoke access after due diligence if needed.

Common Documentation Gaps and How to Fix Them

Gap: Missing IP assignments from founders

Fix: Have all founders sign IP assignments immediately. Investors won't move forward until this is resolved. Cost and time: minimal. Have your lawyer draft assignments or use a template. One week to fix.

Gap: Contractor relationships are verbal, not documented

Fix: For ongoing contractors or advisors with material contributions, document the relationship. Create a simple contractor agreement specifying scope, compensation, and IP assignment. For past contractors, try to get retroactive agreements. At minimum, document what they worked on and that IP is owned by the company.

Gap: Employee equity is undocumented or inconsistently documented

Fix: Create documentation for any existing employee equity. Provide grant letters, vesting schedules, and confirmation of any special terms. Standardize for future grants.

Gap: No formal equity plan or cap table

Fix: Create an equity plan (use standard templates; many are available online) and a complete cap table. This takes a few days with your lawyer or an accountant but is essential.

Gap: Unpaid taxes or missing filings

Fix: Address immediately by filing overdue returns or paying back taxes. This is a deal-killer if unresolved. Work with a CPA to understand what's owed and create a payment plan. Transparency and action resolve this; hiding it kills deals.

Key Takeaways

• IP ownership is paramount: All founders, employees, and contractors must have assigned IP to the company. This is non-negotiable.
• Formation and cap table documents are foundational: Articles, bylaws, board resolutions, and complete cap table are essential.
• Employment agreements should be consistent and complete: All employees and contractors should have documented agreements with IP assignment.
• Customer contracts for material revenue should be documented: Major customers should have signed contracts showing revenue and terms.
• Tax compliance is essential: All tax filings should be current. Overdue or missing filings are major red flags.
• Organize proactively: A well-organized data room shows that your house is in order and speeds due diligence dramatically.
• Address gaps immediately: Don't wait for due diligence to discover missing documents. Fix gaps proactively.

FAQ: Legal Due Diligence Documents

Q: If I don't have a document investors request, does the deal fail?
A: Not automatically, but it's a problem that needs resolution. If you can't provide a document, you need to explain why and work to obtain or recreate it. Some gaps can be resolved quickly; others take time. Address gaps immediately rather than delaying.

Q: Should I hire a lawyer to help with due diligence?
A: For Series A and above, yes. A startup lawyer acts as intermediary, helps organize documents, and works with investor counsel to resolve issues. Cost is $5K–$15K but worth it for smoothing the process and avoiding missing documents.

Q: What if I have legal disputes or pending litigation?
A: Disclose them fully. Pending litigation doesn't automatically kill deals, but hiding it does. Explain the nature of the dispute, your position, and likely outcome. Work with your lawyer on settlement or resolution if possible before close.

Q: How far back should I provide documents?
A: Typically since company formation. For a multi-year-old company, you might have extensive historical documents. Provide everything since formation; organize by year to make navigation easier.

Q: What if a document is sensitive or contains confidential information?
A: Mark it confidential and use access controls in your data room. Investor counsel will sign NDAs, so they can access confidential information. Redact personal information (employee home addresses, etc.) if needed. Don't withhold entire categories of documents; that raises red flags.