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

Investing in a start-up without adequate due diligence means accepting risks that can eliminate the return on the investment. Intellectual property over the code not correctly secured, a cap table with phantom shareholdings belonging to former co-founders, client contracts the investor was unaware of, tax debt accumulated from structuring errors in the first financial years, or regulatory risks in supervised markets are findings common in start-up due diligences that no investor wants to discover after closing.

Since 2010 · 16 years Tax agent AEAT

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Why BM Consulting

Specialised advice and personal service

At BMC we carry out due diligences specifically designed for investments in start-ups and scale-ups: cap table and existing investment instrument analysis, review of key employee employment contracts, verification of intellectual property, tax review of the early financial years, and analysis of the business model's regulatory risks. We deliver an executive report aimed at the investor's decision-making process.

  • Cap table due diligence must verify post-conversion cap table including all outstanding SAFEs, convertible loans, and option pools — the pre-money cap table shown to investors frequently does not reflect the fully diluted position that determines the investor's actual economic stake.

  • IP ownership is the most common and most material finding in tech start-up due diligence

    freelancer code without assignment agreements and employee contracts without IP clauses leave legal ownership of the product's core technology uncertain.

  • Regulatory risk analysis is critical for fintech, medtech, legaltech, and edtech — a business model operating in a grey area without the required administrative licence faces a regulator closure risk that no financial return can compensate.

  • Stock option plans not structured under Ley de Startups (Ley 28/2022) — which raised the tax-free annual threshold to €50,000 and deferred tax to liquidity event — generate undeclared remuneration in kind that becomes a tax contingency in due diligence.

How we work

From first contact to case completion

  1. Cap table and corporate documentation review

    We verify the cap table structure, existing investment instruments (SAFEs, convertible loans, convertible notes), current investors' rights (liquidation preferences, anti-dilution, information rights), and the subsisting articles of association and shareholder agreement.

  2. Intellectual property and key contracts

    We verify that the start-up owns all relevant intellectual property: we review employment and freelancer contracts to confirm IP assignment, trademark registrations, third-party software licences, and contracts with the most material clients.

  3. Tax and employment review

    We review the start-up's first three financial years to identify material tax contingencies, compliance with employment obligations (staff registration, withholdings, stock options), and the Social Security position. We analyse whether the company meets the requirements for the Start-ups Act regime.

  4. Business model regulatory analysis

    For start-ups in regulated sectors (fintech, medtech, legaltech, edtech), we analyse whether the business model requires an administrative licence or authorisation and whether the company holds one or is in the process of obtaining it. We identify the regulatory risks that may affect the scalability of the business.

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The problem

Investing in a start-up without adequate due diligence means accepting risks that can eliminate the return on the investment. Intellectual property over the code not correctly secured, a cap table with phantom shareholdings belonging to former co-founders, client contracts the investor was unaware of, tax debt accumulated from structuring errors in the first financial years, or regulatory risks in supervised markets are findings common in start-up due diligences that no investor wants to discover after closing.

Our solution

At BMC we carry out due diligences specifically designed for investments in start-ups and scale-ups: cap table and existing investment instrument analysis, review of key employee employment contracts, verification of intellectual property, tax review of the early financial years, and analysis of the business model's regulatory risks. We deliver an executive report aimed at the investor's decision-making process.

Process

How we do it

1

Cap table and corporate documentation review

We verify the cap table structure, existing investment instruments (SAFEs, convertible loans, convertible notes), current investors' rights (liquidation preferences, anti-dilution, information rights), and the subsisting articles of association and shareholder agreement.

2

Intellectual property and key contracts

We verify that the start-up owns all relevant intellectual property: we review employment and freelancer contracts to confirm IP assignment, trademark registrations, third-party software licences, and contracts with the most material clients.

3

Tax and employment review

We review the start-up's first three financial years to identify material tax contingencies, compliance with employment obligations (staff registration, withholdings, stock options), and the Social Security position. We analyse whether the company meets the requirements for the Start-ups Act regime.

4

Business model regulatory analysis

For start-ups in regulated sectors (fintech, medtech, legaltech, edtech), we analyse whether the business model requires an administrative licence or authorisation and whether the company holds one or is in the process of obtaining it. We identify the regulatory risks that may affect the scalability of the business.

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.

FAQ

Frequently asked questions

The cap table review covers: verification of each shareholder's interest and its origin (cash contribution, non-cash contribution, loan conversion), review of pending convertible instruments and their post-conversion impact on the cap table, analysis of co-investment agreements and pro-rata participation rights in future rounds, verification of vesting schedules for founders and employees with shareholdings, and review of special rights attached to previous investors' shareholdings (liquidation preferences, anti-dilution). A clean, well-documented cap table is one of the hallmarks of a mature start-up.
The most common problems are: code developed by freelancers or external providers without an express assignment of intellectual property rights to the company, employees who worked on the product without a contract establishing that the IP belongs to the company, use of open-source software under licences incompatible with the business model (copyleft), unregistered trademarks that turn out to be already registered by third parties, and critical dependency on technology providers without contracts guaranteeing continuity of service.
In fintech: the need for a payment institution, e-money institution, or credit institution licence for certain business models. In medtech or healthtech: the medical devices regime (EU Regulation 2017/745) and the need for CE marking. In legaltech: the distinction between legal information and legal advice (an activity reserved to lawyers). In edtech: compliance with children's data protection regulations. In proptech: the need for authorisation for real estate intermediation in certain business models.
A standard due diligence for a start-up at seed or Series A stage can be completed in two to three weeks from the moment the company shares a complete data room. Speed depends fundamentally on the availability and organisation of documentation by the start-up. A start-up with a well-organised data room and up-to-date documentation sends a positive signal to the investor and accelerates the due diligence process.
The data room is the document repository that the start-up shares with investors during due diligence. It should include: corporate documentation (deeds of incorporation, articles of association, shareholders register, shareholder agreement), documentation from previous rounds (investment agreements, SAFEs, convertible loans), key employee and director contracts, contracts with principal clients and suppliers, intellectual property documentation (assignment agreements, trademark registrations, licences), financial statements for the last financial years, tax returns for the last financial years, and any pending litigation or claims.
The most common tax contingencies in Spanish start-up due diligence are: stock option or phantom share plans that were not structured to qualify for the Ley de Startups (Ley 28/2022) favourable treatment, generating undeclared remuneration in kind; invoicing from the founder's personal autónomo to the company without market pricing (transfer pricing risk under Art. 18 LIS); R&D&i tax credit claims that were not formally documented at the time of the research activity, making them vulnerable to inspection challenge; and VAT errors on international B2B services where the reverse charge or zero-rating was applied incorrectly. Identifying these contingencies before closing allows the buyer to seek price adjustments or require regularisation.

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Frequently asked questions

Questions about Due Diligence for Start-ups and Technology Companies

The cap table review covers: verification of each shareholder's interest and its origin (cash contribution, non-cash contribution, loan conversion), review of pending convertible instruments and their post-conversion impact on the cap table, analysis of co-investment agreements and pro-rata participation rights in future rounds, verification of vesting schedules for founders and employees with shareholdings, and review of special rights attached to previous investors' shareholdings (liquidation preferences, anti-dilution). A clean, well-documented cap table is one of the hallmarks of a mature start-up.
The most common problems are: code developed by freelancers or external providers without an express assignment of intellectual property rights to the company, employees who worked on the product without a contract establishing that the IP belongs to the company, use of open-source software under licences incompatible with the business model (copyleft), unregistered trademarks that turn out to be already registered by third parties, and critical dependency on technology providers without contracts guaranteeing continuity of service.
In fintech: the need for a payment institution, e-money institution, or credit institution licence for certain business models. In medtech or healthtech: the medical devices regime (EU Regulation 2017/745) and the need for CE marking. In legaltech: the distinction between legal information and legal advice (an activity reserved to lawyers). In edtech: compliance with children's data protection regulations. In proptech: the need for authorisation for real estate intermediation in certain business models.
A standard due diligence for a start-up at seed or Series A stage can be completed in two to three weeks from the moment the company shares a complete data room. Speed depends fundamentally on the availability and organisation of documentation by the start-up. A start-up with a well-organised data room and up-to-date documentation sends a positive signal to the investor and accelerates the due diligence process.
The data room is the document repository that the start-up shares with investors during due diligence. It should include: corporate documentation (deeds of incorporation, articles of association, shareholders register, shareholder agreement), documentation from previous rounds (investment agreements, SAFEs, convertible loans), key employee and director contracts, contracts with principal clients and suppliers, intellectual property documentation (assignment agreements, trademark registrations, licences), financial statements for the last financial years, tax returns for the last financial years, and any pending litigation or claims.
The most common tax contingencies in Spanish start-up due diligence are: stock option or phantom share plans that were not structured to qualify for the Ley de Startups (Ley 28/2022) favourable treatment, generating undeclared remuneration in kind; invoicing from the founder's personal autónomo to the company without market pricing (transfer pricing risk under Art. 18 LIS); R&D&i tax credit claims that were not formally documented at the time of the research activity, making them vulnerable to inspection challenge; and VAT errors on international B2B services where the reverse charge or zero-rating was applied incorrectly. Identifying these contingencies before closing allows the buyer to seek price adjustments or require regularisation.
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