Getting Your Legal House in Order: 5 Critical Mistakes Startups Make Before VC Due Diligence

When you’re gearing up to raise venture capital (VC), having your legal house in order is just as important as having a great pitch deck or compelling business model. Due diligence is a deep dive where investors scrutinise every aspect of a company’s legal and operational framework before committing capital. Yet, many startups overlook key legal basics mistakes that can delay funding, reduce your valuation, or even kill the deal. Understanding the frequent pitfalls and addressing them proactively is essential for founders aiming to secure investor confidence and accelerate growth.

Here are five common legal missteps and how to avoid them.

1. Incomplete or Disorganised Corporate Records

One of the most fundamental mistakes startups make is failing to maintain comprehensive corporate records. Investors expect clear documentation of the company’s incorporation, shareholder agreements, board resolutions, and historical filings. Missing or inconsistent records create uncertainty about ownership structures, decision-making authority, and compliance history, raising red flags for potential investors.

Fix it: Keep a clean, centralised folder (digital or physical) with all your key documents. Make sure everything is current, signed, and easy to find.

2. Neglecting Intellectual Property Protection

Intellectual property (IP) is often a startup’s most asset, yet many founders underestimate its legal significance. Startups may operate with unregistered trademarks, unpatented innovations, or unclear ownership agreements regarding IP created by employees or contractors. During due diligence, VCs will closely examine IP ownership, licensing agreements, and potential infringement risks. A lack of proper protection or clarity can lead to valuation reductions or even jeopardise the deal.

Fix it: Register your IP early. Make sure every contributor employee or freelancer has signed agreements assigning their work to the company. Keep a clear record of who created what.

3. Confusing Equity and Option Structures

Equity distribution is a common source of legal complications during VC due diligence. Startups frequently make errors in allocating stock options, maintaining accurate cap tables, or documenting investor rights. Discrepancies between legal agreements and the cap table can delay or scuttle negotiations. Transparent equity structures instil confidence in investors and streamline the due diligence process.

Fix it: Keep your cap table up to date and aligned with your legal docs. Make sure all equity grants and investor rights are properly documented and legally enforceable.

4. Poor Contract Management

Startups often enter into contracts with customers, suppliers, or partners without rigorous legal oversight. Ambiguous terms, missing signatures, or informal agreements may expose the company to liabilities or disputes. During due diligence, VCs will scrutinise key contracts to assess revenue stability, risk exposure, and contractual obligations. Maintaining a well-organised and reviewed contract portfolio, including standardised templates and signed agreements, demonstrates professionalism and reduces investor concerns.

Fix it: Use standardised templates. Store all contracts in one place. Make sure they’re signed, reviewed, and easy to access.

5. Overlooking Compliance and Regulatory Requirements

Finally, startups sometimes underestimate the importance of regulatory compliance. Depending on the industry, there may be data protection obligations, licensing requirements, employment regulations, or sector-specific rules. Non-compliance can trigger legal liabilities and pose a material risk to investors.

Fix it: Stay on top of your regulatory obligations. Conduct regular compliance checks and keep records that show you’re playing by the rules.

Being legally prepared isn’t just about ticking boxes, it’s about showing investors you’re serious, professional, and ready to scale. By getting ahead of these common issues, you’ll build trust, speed up the fundraising process, and position your startup as a smart, low-risk investment. In the competitive landscape of VC funding, meticulous preparation often differentiates successful fundraising from missed opportunities.

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This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.