I've seen deals fall apart at the due diligence stage for reasons that had nothing to do with the underlying business. Messy financials, undocumented equity grants, unclear revenue recognition policies — these are all fixable problems, but not in the compressed timeline of an active deal.
The Due Diligence Checklist
Serious institutional investors will ask for everything. They'll want:
- Three to five years of audited or reviewed financials
- A cap table that accounts for every share, option, and warrant
- Customer contracts with clearly documented revenue recognition
- Documented internal controls and approval processes
- Clean employee classification (1099 vs. W-2)
Revenue Recognition Is Almost Always an Issue
In my experience, revenue recognition is the single most common problem I find when I walk into a company preparing for a raise. SaaS companies are particularly prone to this — recognizing annual contracts upfront, misclassifying professional services revenue, or not properly accounting for contract modifications.
Start Now
The best time to prepare for due diligence is 18 months before you need capital. That gives you time to fix problems, run a clean quarter or two to show the new systems working, and approach investors from a position of strength rather than urgency.