Legal Due Diligence Checklist for VCs: A Comprehensive Guide

Investing in startups is an exciting but complex process. While market potential and financials are key considerations, legal due diligence is equally crucial to mitigate risks and protect your investment. This guide provides a detailed, actionable checklist for venture capitalists (VCs) to evaluate legal aspects before finalizing an investment.

1. Corporate Structure & Governance

• Entity Type & Jurisdiction – Verify the startup's legal entity type (C-Corp, LLC, etc.) and incorporation location.

• Cap Table Review – Examine the capitalization table to confirm ownership structure, investor rights, and potential dilution risks.

• Founders’ Equity & Vesting – Check founder equity allocation and vesting schedules to ensure alignment with long-term commitments.

• Board Structure & Minutes – Review board composition, governance policies, and past meeting minutes for consistency and compliance.

• Bylaws & Operating Agreements – Ensure these documents align with investor rights and protect against governance risks.

2. Securities & Financing History

• Previous Funding Rounds – Review SAFE notes, convertible notes, and past equity investments for potential complications.

• Stock Option Plans – Assess the Employee Stock Option Plan (ESOP) for its impact on future fundraising and employee retention.

• Rights & Preferences of Existing Investors – Identify liquidation preferences, anti-dilution protections, and voting rights.

• Outstanding Debt & Liabilities – Check for convertible debt, loans, or obligations that may impact the investment.

3. Intellectual Property (IP) Protection

• Ownership of IP – Confirm that the company owns all key intellectual property (patents, trademarks, copyrights, trade secrets).

• IP Assignments & Employee Agreements – Ensure all employees and contractors have signed IP assignment agreements.

• Trademarks & Domain Names – Verify registration of critical brand assets to prevent disputes.

• Licensing Agreements – Review third-party licensing terms to confirm no conflicts or risks to scalability.

4. Commercial Contracts & Obligations

• Key Customer & Supplier Contracts – Evaluate revenue-generating agreements and potential customer dependencies.

• Partnership & Joint Ventures – Identify agreements with third parties that may affect ownership or strategic flexibility.

• Non-Compete & Exclusivity Clauses – Look for restrictive clauses that could hinder future business growth.

• Material Agreements – Review any major contracts that could impact financial stability.

5. Regulatory & Compliance

• Industry-Specific Regulations – Ensure compliance with sector-specific legal requirements (e.g., fintech, healthcare, crypto).

• Data Privacy & Security Policies – Check GDPR, CCPA, or other privacy compliance measures to mitigate data-related risks.

• Employment & Labor Laws – Verify that hiring practices comply with local labor laws and immigration regulations.

• Environmental & Social Compliance – Assess adherence to sustainability, ethical sourcing, and corporate governance policies.

6. Litigation & Legal Risks

• Current & Pending Litigation – Identify any ongoing or threatened lawsuits that could impact the company's financials.

• Employee & Contractor Disputes – Review past employment disputes and claims for potential liabilities.

• IP Infringement Claims – Ensure there are no claims against the company’s technology or branding.

• Regulatory Investigations – Verify that there are no unresolved government inquiries or compliance issues.

7. Exit & Liquidity Considerations

• Change of Control Provisions – Review terms that could impact acquisition, mergers, or IPO options.

• Right of First Refusal (ROFR) & Co-Sale Rights – Check for investor protections that may affect exit strategies.

• Drag-Along & Tag-Along Rights – Assess provisions that facilitate or hinder liquidity events.

• Lock-Up Periods & Restrictions – Identify post-exit trading restrictions that could impact investor liquidity.

Final Thoughts

A thorough legal due diligence process helps VCs mitigate risks, avoid costly surprises, and ensure a smooth investment journey. While this checklist provides a strong foundation, leveraging a tool like Notion can streamline the entire process. VCs can build an interactive Notion workspace to track due diligence progress, centralize document storage, and collaborate with legal teams in real time. By setting up templates for legal checklists, investor rights documentation, and compliance tracking, Notion helps ensure nothing falls through the cracks. While working with legal counsel remains essential to address red flags, an organized due diligence system in Notion enhances efficiency, transparency, and decision-making.