Structure6 min read
What diligence actually asks for, and why you can't produce it
Nobody loses a deal because the company was structured badly. They lose value because the documents proving it was structured at all were never signed, never filed, or live in a departed co-founder's account.
The request arrives as a spreadsheet with about ninety rows and a two-week deadline, and it is the first time most founders discover what the last four years of administration actually produced.
The failure is almost never structural. Companies rarely turn out to be organised wrongly. They turn out to be undocumented — the decisions were made, the arrangements are real, and there is no signed, dated artefact proving any of it. That gap is what gets priced.
What gets asked for
| Area | Typical requests |
|---|---|
| Corporate | Certificate of formation and every amendment; operating agreement or bylaws, executed; all member or board consents; certificates of good standing in every state you are registered in; the full equity ledger |
| Equity | Cap table reconciled to source documents; every issuance agreement; option grants with the approvals authorising them; valuations supporting strike prices; all convertible instruments with side letters; evidence of section 83(b) elections |
| Intellectual property | Assignment agreements from every founder, employee and contractor who touched the product; trademark and domain records; an open-source inventory |
| People | Employment agreements; contractor agreements; the classification basis for each; any employer-of-record arrangements; a list of every country anyone works from |
| Tax | All returns filed, federal and state; information returns; sales tax registrations and filings; payroll returns; any nexus or permanent establishment analysis |
| Commercial | Top customer and supplier contracts, flagged for change-of-control, assignment and exclusivity terms |
| Data | Privacy policy, processing agreements, and the basis on which personal data is handled |
| Financial | Ledgers, bank statements, revenue recognition policy, receivables ageing |
The eight that reliably fail
1. The 83(b) election with no proof of mailing
The single most common finding. The election has a hard thirty-day deadline from the grant of restricted equity, it is filed by post, and the IRS does not send an acknowledgement. The only evidence it ever existed is your own proof of mailing.
Founders who filed correctly but kept nothing are in the same evidentiary position as founders who never filed. There is no retrospective fix, and the consequence — tax on vesting rather than at grant — lands on the individual, which is why it stalls deals rather than merely annoying lawyers.
2. Contractor IP that was never assigned
Employment agreements usually handle employees. The early contractors — the designer who did the logo, the developer who built the first version, engaged over email at the point when the company had no lawyer — usually assigned nothing.
Absent an assignment, ownership of what they produced frequently stays with them. Fixing it means finding people from years ago and asking them to sign something, which is a negotiation you are conducting from a position of visible need.
3. Unsigned versions of the founding documents
The operating agreement exists as a draft. The amendment was agreed by message and never executed. The consent authorising an option grant was never actually written. A document that was never signed did not happen, and a signature platform belonging to a departed co-founder is functionally the same as no signature at all.
4. Lapsed good standing, often in a forgotten state
Home state usually fine. The second state you registered into because you briefly had someone there — annual report missed for three years, now not in good standing, and a certificate cannot be issued until every year is paid. It is fixable, it takes weeks, and weeks are what you do not have. The same accrual problem is described in dissolving a US LLC without leaving a tail.
5. Unfiled information returns
For a foreign-owned US entity, the annual information return is mandatory whether or not there is any activity, and the penalty is $25,000 a year. Several unfiled years is a quantifiable liability that a buyer will simply deduct, and it appears on the diligence list as a single innocuous row asking for copies of federal filings. What is actually owed is in what a non-resident with a US LLC actually owes the IRS.
6. A cap table that disagrees with the documents
The spreadsheet says one thing. The instruments say another. Usually the cause is benign — a convertible modelled at the wrong cap, an option grant recorded but never formally approved, a side letter nobody logged. It still means the company does not currently know who owns it, and that is the question the entire transaction is built on.
7. People in countries with no filings
The request asks where everyone works. The answer names four countries. The follow-up asks what has been filed in each, and the answer is nothing. Whether that is a real exposure depends on what those people do, which is the analysis in paying international contractors without creating a permanent establishment — but having never done the analysis is itself the finding.
8. Contracts with change-of-control clauses nobody read
Your three largest customers can terminate on a change of control, or their contracts cannot be assigned without consent. Not fatal, but it converts a clean transaction into one requiring consents from the parties with the most leverage and the least urgency.
What it costs
| Finding | Usual consequence |
|---|---|
| Unfiled returns, quantifiable | Deducted from price, or escrowed pound for pound |
| Missing IP assignments | Specific indemnity, holdback, or a condition to closing |
| 83(b) evidence missing | Individual tax exposure; often a personal problem rather than a company one |
| Good standing lapsed | Delay while it is cured — measured in weeks |
| Cap table discrepancies | Delay, legal cost, and a durable credibility problem |
| Unanalysed foreign presence | Broad indemnity, because nobody can size it |
Note the pattern in the right-hand column. Quantifiable problems get priced; unquantifiable ones get indemnified, and an open-ended indemnity is usually worse than a number. The founder's interest is therefore in making every finding measurable, which mostly means having done the work rather than having a clean answer.
The standing file
None of this requires a data room in advance. It requires one folder, owned by the company rather than by a person, containing the artefacts as they are created.
- Formation documents and every amendment, executed, in one place.
- A decision log. Every consent and approval, dated and signed, at the time. Retrofitting consents is visible and is exactly what makes a buyer look harder.
- The equity file. Every instrument, every side letter, every grant with its approval — and a cap table reconciled to them at least yearly.
- 83(b) elections with proof of mailing, scanned the day they are posted. This takes two minutes and there is no substitute for it.
- An IP assignment from everyone who has ever written a line of code or drawn a pixel. Employees, contractors, agencies, the friend who helped. No exceptions, and get it signed before the work starts.
- A registration inventory. Every state and country you are registered in, what is due in each, and when. Nothing lapses quietly if something is watching it.
- Every filed return, federal, state and information, filed where you can find it rather than in an accountant's portal you lost access to.
- A people-and-places list. Who works for you, in which country, under what arrangement.
The cost of maintaining this is perhaps an hour a quarter. The cost of not maintaining it is discovered on a deadline, priced by someone whose interests are opposed to yours, at the one moment when your negotiating position is weakest.
Which is the same argument as everything else on this blog, in a different setting: the administrative work is cheap when it is contemporaneous and expensive when it is reconstructed.
The document of record, kept as you go
Entity documents, filings, registrations and deadlines held in one place that belongs to the company — so the diligence list is a retrieval exercise rather than an investigation.
See the Business OSFounders 8 tracks obligations and deadlines for your reference. It does not provide legal or tax advice — filings are prepared and reviewed by qualified partners.