Due diligence in the VC context: What investors should look out for

This article highlights the critical areas to examine from an investor's perspective and outlines the warning signs that deserve special attention.  

What is the objective of due diligence in the VC environment? 

For investors, due diligence is not only used to validate information from the pitch deck. It is a litmus test for the professionalism of the founding team, the legal resilience and future viability of the corporate structure, and the investability of the business model. Structured due diligence creates transparency in all directions, reduces liability risks, and strengthens the negotiating position when drafting contracts.  

What are the key areas to examine from an investor's perspective? 

1. Company structure and cap table 

• Is the ownership structure clearly documented and easy to understand? 
• Are there any existing shareholders with special rights or pre-emptive rights? 
• Are convertible loans, options, and virtual shareholdings correctly recorded? 

2. IP rights and intellectual property protection 

• Are all essential IP rights (e.g., software, trademarks, patents) legally assigned to the company in an unambiguous manner? 
• Have developer contracts with freelancers or agencies been legally documented in a clear manner? 
• Have property rights been registered and are these strategically sound? 

3. Contractual situation and liability risks 

• Are there legally binding contracts with customers, suppliers, and cooperation partners? 
• Are there any potential liability risks, e.g., through general terms and conditions, guarantees, or SLA obligations? 
• Are significant contracts terminable or subject to change-of-control clauses? 

4. Regulatory requirements and compliance 

• Does the company operate in a regulated market (e.g., FinTech, MedTech, HealthTech)? 
• Are data protection requirements (GDPR) being complied with? 
• Are there established processes for compliance with regulatory requirements, and do these processes themselves meet legal requirements? 

5. Employee retention and participation programs 

• Are there legally compliant ESOP or VSOP programs in place? 
• Are vesting rules, leaver clauses, and exit participations clearly defined and do they meet the legal requirements for validity, in particular those of the current supreme court rulings (e.g., on leaver clauses)? 
• Are there any labor law risks, e.g., due to unclear contractual situations? 

6. Financial and tax structure 

• Is there a comprehensible financial plan in place? 
• Are there any outstanding tax liabilities or tax audits? 
• Have subsidies or grants been received that entail repayment risks? 
   

What are warning signs and potential deal breakers? 

• Unclear IP allocation: If, for example, software has been developed by third parties without the rights having been effectively transferred, this can severely impair the exit capability.  
• Non-transparent cap tables: Undocumented convertible loans or silent partnerships can lead to conflicts in valuation and dilution. 
• Lack of compliance structures: Especially in regulated markets, the lack of data protection or licensing concepts poses a significant risk.  
• Improvised employee participation schemes: VSOP models without legal review entail tax and labor law risks – including for investors. 
   

Conclusion

Structured and focused due diligence is essential for investors. It not only enables well-founded investment decisions but also protects against subsequent liability risks and conflicts. Professional founding teams recognize the value of this process and prepare accordingly.  

Are you planning an investment or would you like to optimize your due diligence processes? We support venture capital investors in legal review, risk assessment, and contract drafting – efficiently, solution-oriented, and with deep market understanding.