After the good meetings and the signed term sheet comes the stage founders rarely talk about: due diligence. The investor — directly or through attorneys and accountants — goes through the company end to end to confirm that what you said is true. A meaningful share of deals die here, and almost never because the technology turned out to be weak. They die because of mess that could have been cleaned up in advance: unassigned IP, verbal equity promises, contractor agreements nobody signed. This checklist covers what gets examined and how to be ready.

Projects House is an engineering firm. This article is educational information about the diligence process, not legal, tax, or accounting advice.

1. IP ownership — the check that kills deals

The question is not "is there a patent" but "does the company actually own what it is selling." The findings that stop wires:

  • A founder who developed the core concept while employed elsewhere. See employee invention ownership rules.
  • A contractor who wrote firmware or designed mechanics with no written assignment. In the US, work-for-hire does not automatically cover patentable inventions — you need an explicit assignment. Our article on who owns the IP in product development explains the gap.
  • A former co-founder who walked away without settling their share.
  • A patent still recorded in the individual inventor’s name rather than assigned to the company at the USPTO.

Every one of these is fixable — and vastly easier to fix before you start raising than mid-diligence, when the other side knows you need the money.

2. Corporate records and contracts

Formation documents, board consents, stock issuances, a clean cap table including every verbal promise of equity (this is where they surface), employment and advisor agreements with assignment and confidentiality terms, and customer and supplier contracts. Investors are looking for documented obligations and no surprises — for example an exclusivity clause granted to your first customer that constrains the entire business. Start from what a cap table is and how to keep yours clean, and understand the document you already signed via the term sheet explained.

3. Technical diligence

For a hardware company this is a real review, often by an outside consultant: does the prototype do what the demo showed, what state is the engineering documentation in, and how far is the design from manufacturable? Expect questions about the bill of materials and single-source components, tolerances and test results, certification status, and tooling readiness. A complete manufacturing data package is the single strongest signal of engineering maturity you can hand over — it says the product exists as documented reality, not as one working unit.

4. Financials, grants, and market claims

Clean bookkeeping, a defensible burn model, all liabilities and obligations, and any government funding terms. Federal awards carry conditions that affect future deals — data rights, march-in provisions, and reporting duties. If you hold an SBIR or other federal grant, read who owns the IP from a federal grant before an investor asks. Market claims from your deck also get verified; a number that does not survive checking damages trust far beyond that number.

How to prepare: build the data room first

Assemble the folder before you start pitching: formation documents, cap table and all equity agreements, every employee and contractor agreement with IP assignment language, the patent file, commercial contracts, financial statements, and technical documentation. Beyond the time saved, an organized data room has a psychological effect — an investor who opens a tidy room gets confirmation the company is run seriously. The reverse is also true.

How long it takes, and why speed matters

Diligence on an early round usually runs a few weeks to a couple of months, and the main variable is you. Every document request answered within a day preserves momentum; every request that drags for a week cools the deal and invites doubt. The practice we recommend: one person owns the process, every request is logged in a tracker with a status, and partial answers go out immediately with a note on what is coming and when.

Handle findings honestly. A problem you raise yourself, with a remediation plan, builds trust. A problem the investor discovers alone breaks it. Deals usually die not from the finding but from the feeling that something was concealed.

A note on NDAs

Professional investors generally do not sign NDAs at the introduction stage — they see dozens of ventures and cannot take on the conflict. Demanding one signals inexperience. The right protection is staged disclosure: tell the story and the market freely, and reveal technical depth only in diligence, once a term sheet is signed. More on that balance in NDAs for inventors.

Reverse diligence: check them too

Diligence runs both ways. Which companies has this investor backed? What do founders who took their money say — including founders whose companies failed? Do they participate in follow-on rounds? Are the terms they offer standard for the stage? One phone call with a founder from their portfolio is worth more than any pitch. If you are still mapping the road ahead, see how to fund a hardware startup and the startup fundraising hub.

Want your engineering documentation in a state that survives technical diligence? Reach out through our contact form and we will review what you have and what is missing.