Startup Due Diligence

First published on Skala Legal Skills

Legal Disclaimer

This skill is provided for informational and educational purposes only and does not constitute legal advice. The analysis and information provided should not be relied upon as a substitute for consultation with a qualified attorney. No attorney-client relationship is created by using this skill. Laws and regulations vary by jurisdiction and change over time. Always consult with a licensed attorney in your jurisdiction for advice on specific legal matters. The creators and publishers of this skill disclaim any liability for actions taken or not taken based on the information provided.

Startup Due Diligence Skill

Overview

Conduct legal due diligence on early-stage US startups (Seed/Series A). This skill supports:

• Investors: Identify risks before investing
• Founders: Prepare for diligence, fix issues proactively

Workflow

Step 1: Intake

Collect context before proceeding:

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1. Perspective: Investor or Founder?
2. Stage: Pre-seed / Seed / Series A
3. Scope: Full DD or specific area (Corporate, Cap Table, IP, etc.)
4. Company basics: Name, State, Entity type, Industry

Step 2: Document Collection

Based on scope, request documents by category. See references/checklists/ for complete lists:

Step 3: Document Review

For each document received:

1. Identify document type and category
2. Check against category-specific criteria
3. Flag issues using severity ratings (see below)
4. Cross-reference with other documents for consistency

Severity Ratings:

• 🔴 CRITICAL: Deal blocker, must resolve before closing
• 🟠 MATERIAL: Significant risk, requires remediation plan
• 🟡 MINOR: Should be fixed, but not blocking

See references/red-flags/common-issues.md for comprehensive issue patterns.

Step 4: Issue Analysis

For identified issues, provide:

1. Description: What the issue is
2. Risk: Why it matters
3. Remediation: How to fix it
4. Timeline: Estimated effort to resolve
5. Escalation: Whether legal counsel required

Step 5: Report Generation

Generate deliverables using templates in assets/templates/.

CRITICAL: Template Usage Protocol

NEVER directly edit template .docx files. Always use the deterministic script:

bashCopy code
# 1. Collect data into JSON
cat > data.json << 'EOF'
{
  "COMPANY_NAME": "Acme Inc.",
  "REPORT_DATE": "2024-01-15",
  ...
}
EOF

# 2. Validate data
python scripts/validate_data.py diligence-report data.json

# 3. Populate template (deterministic - only fills {{PLACEHOLDERS}})
python scripts/populate_template.py assets/templates/diligence-report.docx data.json output.docx

This ensures template text is NEVER modified - only placeholders are filled.

Guidance Documents

Load these as needed based on the issues encountered:

Quick Reference: Common Red Flags

Corporate

• Missing board/stockholder consents for key actions
• Charter not filed or not current
• No bylaws or outdated bylaws

Cap Table

• Discrepancies between cap table and stock ledger
• Options granted without 409A valuation
• SAFE/note terms not modeled in pro forma

IP

• No IP assignment from founders (pre-incorporation work)
• Missing PIIA from contractors who built product
• Open source license violations

Employment

• Founder shares not vesting (or fully vested day 1)
• Key employees without offer letters/agreements
• Misclassified contractors

Compliance

• No securities filings (Form D, Blue Sky)
• Missing 83(b) elections for early exercises

Output Formats

1. Summary Table: Quick overview of findings by category
2. Detailed Report: Full analysis with recommendations (DOCX)
3. Issue Tracker: Spreadsheet format for tracking remediation
4. Document Request List: Customized checklist for target company

Disclaimers

• This is diligence assistance, not legal advice
• All findings should be reviewed by qualified legal counsel
• Escalate securities, tax, and regulatory matters to specialists
• Document review is point-in-time; circumstances may change