What Is Legal Due Diligence?

Legal due diligence is the process by which investors assess the legal health and structure of your startup. Before investing, they want to confirm that your company is properly formed, authorized to issue equity, owns its intellectual property, and is free of liabilities or contractual issues that could jeopardize their investment.

Think of it as a legal x-ray of your company—designed to reveal any fractures that might need to be addressed before money changes hands.

Why Does It Matter?

A clean due diligence process can accelerate your funding timeline and build investor trust. On the flip side, disorganized records, missing contracts, or unresolved disputes can raise red flags, delay your deal, or even result in lower valuations or withdrawn offers.

Startups that invest early in legal hygiene are often better positioned to close rounds quickly and on favorable terms.

Key Areas of Legal Due Diligence

Here are the main categories investors will typically review:

1. Corporate Structure and Governance

  • Formation documents (e.g., Certificate of Incorporation, Bylaws)
  • Cap table and stockholder ledgers
  • Board resolutions, consents, and meeting minutes
  • State filings and good standing certificates

2. Equity and Securities

  • Stock purchase agreements
  • Option grants and option pool details
  • 409A valuations (if applicable)
  • SAFEs, convertible notes, or other debt instruments

3. Intellectual Property

  • Assignment agreements from founders and contractors
  • Trademark registrations or applications
  • Patent filings (if any)
  • IP-related NDAs or licenses

4. Material Contracts

  • Customer and vendor agreements
  • Partnership, licensing, or joint venture deals
  • Any agreements with exclusivity, non-competes, or change-of-control provisions

5. Employment and Independent Contractors

  • Offer letters and employment agreements
  • Confidentiality and IP assignment agreements
  • Contractor agreements and consultant terms
  • Employee handbook and policies

6. Litigation and Regulatory

  • Pending or threatened litigation
  • Government investigations or compliance issues
  • Permits and licenses required for operations

How to Prepare for Legal Diligence

Start Early. Many diligence issues stem from delays in documenting early-stage decisions—equity grants, founder splits, or third-party IP contributions. It’s far easier to get your house in order early than to clean up later under time pressure.

Centralize Your Docs. Use tools like Dropbox, One Drive, Google Drive, or a formal data room to keep your legal records organized. Create folders for incorporation, cap table, contracts, and IP, so you’re ready to share when the time comes.

Work With Startup Lawyers. General practice attorneys might not anticipate venture-specific red flags. At Zecca Ross Law Firm, we specialize in working with early-stage companies and ensure your structure and documentation meet investor expectations from day one.

Red Flags That Can Scare Off Investors

Some common issues we help founders avoid:

  • Founders or contractors who never signed IP assignment agreements
  • Option grants made without proper board approvals
  • Multiple versions of the cap table or unclear equity records
  • Outdated incorporation documents (especially for Delaware C-Corps)
  • Unpaid or undocumented convertible notes

Partner With Zecca Ross Law Firm

If you're raising capital or preparing for diligence, we’re here to help. We believe in founder-friendly, transparent legal support that grows with your business. If you're planning your next funding round or just want to get your legal house in order, get in touch with Zecca Ross Law for a consultation.