Start-up due diligence: what investors need to know before investing

Start-up due diligence: different from a traditional company

Due diligence for a start-up investment differs from that of a traditional company in several material respects. The most important assets — intellectual property over the code, algorithms, and brand — are intangibles that do not appear in the balance sheet but whose correct ownership is critical. The cap table may include convertible instruments whose dilutive effect only materialises in the future. The regulatory risks of the business model may be the factor that determines whether the start-up can scale or not. And the documentation may be scarce or disorganised if the founders have focused on the product rather than the legal structure.

At BMC we carry out due diligences specifically designed for the start-up ecosystem: agile in process, focused on the risks most material to the investor, and delivered in an executive format that facilitates decision-making.

Cap table: the most critical asset and the most frequently poorly structured

The cap table — the capitalisation table showing who has what percentage of the company and on what terms — is the first element any investor reviews in a start-up. A poorly structured cap table may reveal: co-founders with non-vested shareholdings who left the company early and retain significant percentages without contributing anything, convertible instruments with conditions unfavourable to future investors, or accumulated preference rights that mean that in a moderate exit the founders receive virtually nothing.

We review the cap table, verify consistency between existing instruments and the Commercial Registry shareholders ledger, and calculate the post-conversion cap table so that the investor knows their actual position before investing.

Intellectual property: verifying what seems obvious

A tech start-up’s intellectual property — the code, algorithms, data, and brand — is its most valuable asset. But ownership of that intellectual property is not automatic: it requires correct contracts with everyone who has contributed to creating it. A freelancer who developed part of the product without assigning IP rights to the company can technically claim ownership of the code they developed. An employee who signed a contract without an IP assignment clause is in a similar position. We verify that all relevant contracts correctly establish the assignment of intellectual property rights to the start-up.

Regulatory risks: the invisible constraint on growth

For start-ups in regulated sectors — fintech, medtech, legaltech, edtech, proptech — regulatory risks may be the limiting factor of the business model. A fintech processing payments without the appropriate payment institution licence, a medtech distributing a medical device without CE marking, or a real estate intermediation start-up without the necessary authorisation are all examples of situations where the start-up may be operating in a grey area that the regulator could close at any time.

We analyse the start-up’s specific business model, identify the regulated activities, and verify compliance or the status of the authorisation process.

Request information about our start-up due diligence process for your next investment.