Startup Fundraising Pitfalls Investors Flag Early

Recent venture capital due diligence checklists for investors, such as the guide from Affinity, list insurance policies among the legal documents that may be requested from startups as of 2025.

Law firm Cooley distributes a sample venture capital diligence request list that spans corporate minutes, cap tables and proprietary information and invention assignment agreements. Many founders reportedly assemble these materials only when a term sheet is already at risk.

Venture capital fundraising therefore involves more than pitch decks and growth metrics. While no federal statute cited here prescribes these specific documents, investors rely on structured request lists to identify governance, ownership, insurance and compliance issues that can delay or reprice a round.

Key Due Diligence Requirements Often Overlooked by Startups

Insurance policies are requested in standard venture diligence checklists such as Affinity's.
Cooley diligence lists cover corporate and intellectual property documentation.
Cap table accuracy and evidence of blue-sky exemptions are important for valuation integrity.
409A valuation reports (as requested in diligence checklists) and timely 83(b) elections (per IRS rules) help avoid certain additional tax liabilities.
Security policies and disaster recovery documentation now influence investors’ view of operational risk.

Insurance Provisions in Standard Venture Documentation

Insurance policies, data management and data security practices, and documentation of a disaster recovery plan appear together in checklists such as Affinity's venture capital due diligence template.

The NVCA model term sheet states that the company will bind D&O insurance with a carrier and in an amount satisfactory to the board of directors. This makes director coverage a common expectation in venture rounds.

Corporate Records and Governance Documentation

Clean records such as board consents, shareholder approvals and charter amendments support enforceable decision making. Cooley's 2014 sample list asks for all shareholder and board actions and meeting minutes.

Gaps in these records can prompt investor questions about authority to issue equity or sign key contracts. Annual reports, as listed in checklists like Affinity's venture capital due diligence checklist, help confirm basic corporate compliance as of their issuance.

Capitalization Table Integrity and Security Issuances

Cap tables should reconcile shares, rights to securities, notes and warrants with board actions and with evidence of qualification or exemption under applicable federal and state blue sky laws, as reflected in sample diligence lists.

Inconsistent exercise prices, missing side letters or undocumented transfers can distort dilution calculations and slow negotiations.

Intellectual Property Chain-of-Title Verification

Sample diligence lists, such as Cooley's 2014 checklist, request the form of proprietary information and invention assignment agreements from employees and contractors plus information on any exceptions.

Without signed assignment agreements, the company may not actually own code or patents that underpin its valuation, which creates risk for investors. Trademark registrations and inbound license terms also undergo review because restrictions in license agreements can limit future product scope or exit options.

Equity Compensation and Tax Compliance Standards

A current Section 409A valuation supports option strike prices that are intended to comply with Section 409A deferred compensation rules under IRS guidance such as Notice 2005-1.

The IRS Section 83(b) election form allows a taxpayer who receives substantially nonvested property in connection with services to elect to include income based on the fair market value at the time of transfer rather than when the property later vests, if the election is filed within the required time.

Affinity's checklist lists recent 409A valuation reports in its tax section, so investors can review how a company has handled option pricing. Sample diligence lists such as Cooley's 2014 checklist ask for stock plan documents, board approvals of option grants and equity records that show exercised options or lapses.

These documents together help investors verify the accuracy of the option pool and employee ownership.

Financial Statements and Operational Controls

Cooley's sample list requests the most recent audited financial statements and the latest unaudited monthly financial statements. Early stage companies may provide unaudited monthly statements, while later stage rounds are more likely to involve reviewed or audited financials.

Security controls now influence investment risk assessments for many startups that handle sensitive data or rely on cloud infrastructure. Affinity's due diligence checklist asks for data management and data security practices and for documentation of a disaster recovery plan.

This signals that investors include operational resilience in their review of potential investments.

Practical Preparation Recommendations

Founders can reduce negotiation friction by building a data room aligned with Cooley's sample categories. This includes corporate records, cap table documentation and intellectual property agreements, supplemented by 409A valuation reports, security materials consistent with Affinity's checklist and insurance documentation.

Engaging legal counsel and insurance brokers early allows coverage limits, 409A reports and invention assignment rollouts to be completed before investor deadlines compress.

Once assembled, a diligence oriented data room can support later financing rounds, acquisitions or public company filings. This is because many investor and acquirer requests draw on the same categories of information.

Companies that keep these materials current signal risk discipline, preserve negotiation leverage and can reduce the time required for each future diligence cycle.