Financial, Legal, Product, Market, Team

Editor’s take: Angel investing is high-risk by design. You’re betting on teams and markets before proof. But “trust your gut” is not a strategy. Due diligence kills 15–20% of term-sheet discussions for a reason—red flags surface when you look. This checklist won’t guarantee returns (nothing does), but it will filter out the obvious disasters and structure your thinking. Use it before you sign, not after.

Why a Checklist Matters

Angels typically invest $25K–$500K per deal with limited legal and financial resources. VCs have teams; angels often don’t. A structured checklist ensures you cover the bases that matter: financial health, legal cleanliness, team quality, market opportunity, and product viability. Skipping categories is how you end up in messy cap tables, undisclosed litigation, or companies with no path to revenue.

Category 1: Financial Due Diligence

Revenue and Traction

• [ ] Revenue: Current MRR/ARR, growth rate (MoM/QoQ), and revenue mix (recurring vs. one-time).
• [ ] Unit economics: CAC, LTV, LTV:CAC ratio, gross margin, contribution margin.
• [ ] Burn rate: Monthly burn, runway at current rate, and planned use of new capital.
• [ ] Customer concentration: Top 5 customers as % of revenue. Over 40% in one customer is a risk.
• [ ] Churn: Monthly/annual churn for SaaS; retention cohorts if available.

Financial Statements and Projections

• [ ] Historical financials: P&L, balance sheet, cash flow for last 12–24 months.
• [ ] Projections: 18–24 month projections with assumptions. Are they realistic or hockey-stick fantasy?
• [ ] Audit status: Audited vs. unaudited. For early stage, unaudited is common—but ask for bank statements and basic reconciliation.

Cap Table and Ownership

• [ ] Cap table: Current ownership breakdown. Look for founder ownership (ideally 60%+ post-raise), employee pool size (10–15% typical), and prior investor ownership.
• [ ] Outstanding instruments: SAFEs, convertible notes, warrants. Conversion impact on your ownership?
• [ ] Option pool: Size, unallocated portion, and refresh plans.

Reference: For valuation context, see startup valuation methods.

Category 2: Legal Due Diligence

Corporate Structure

• [ ] Entity: Pvt Ltd, LLP, or other. Jurisdiction and registration status.
• [ ] Subsidiaries: Any subsidiaries or related entities. Structure clarity.
• [ ] Compliance: ROC filings, annual returns, director compliance.

Contracts and Commitments

• [ ] Customer contracts: Key terms, renewal dates, termination clauses.
• [ ] Vendor contracts: Critical dependencies (e.g., cloud, data).
• [ ] Employment agreements: Key person clauses, IP assignment, non-compete.
• [ ] Founder agreements: Vesting, cliff, acceleration. Are they standard (4-year, 1-year cliff)?

Intellectual Property

• [ ] IP ownership: Does the company own all IP? Any employee or contractor work without assignment?
• [ ] Patents/trademarks: Filed, pending, or none. Relevance to business.
• [ ] Open source: License compliance. GPL or other copyleft risks?

Litigation and Disputes

• [ ] Pending litigation: Any suits, disputes, or regulatory actions?
• [ ] Founder disputes: Any history of co-founder or shareholder disputes?
• [ ] Regulatory: Sector-specific compliance (e.g., RBI for fintech, FSSAI for food).

Category 3: Team Due Diligence

Founders

• [ ] Background: Prior experience, exits, relevant domain expertise.
• [ ] Commitment: Full-time? Other commitments or conflicts?
• [ ] Dynamic: Co-founder relationship. Equity split and decision-making.
• [ ] References: Speak to 1–2 former colleagues, investors, or customers.

Key Hires

• [ ] Critical roles: Who fills product, tech, sales? Gaps?
• [ ] Retention: Key person risk. Are key employees locked in?

Advisors and Board

• [ ] Advisors: Who advises? Are they meaningful or vanity?
• [ ] Board: Current composition. Investor board seats post-raise?

Reference: For angel vs. VC comparison, see angel investing vs VC.

Category 4: Market Due Diligence

Market Size and Growth

• [ ] TAM/SAM/SOM: Bottom-up and top-down. Are they realistic?
• [ ] Growth rate: Market growth. Is the market expanding or contracting?

Competitive Landscape

• [ ] Competitors: Direct and indirect. How does the company differentiate?
• [ ] Moat: Network effects, data, distribution, IP. What’s defensible?
• [ ] Barriers to entry: Why can’t incumbents or new entrants copy this?

Go-to-Market

• [ ] Acquisition strategy: How do they acquire customers? CAC trend.
• [ ] Sales motion: PLG, outbound, partnerships. Fit for market?
• [ ] Pricing: Current pricing, willingness to pay, expansion potential.

Category 5: Product Due Diligence

Product and Technology

• [ ] Product demo: Use the product. Does it work? Is it differentiated?
• [ ] Tech stack: Build vs. buy. Technical debt?
• [ ] Roadmap: Next 6–12 months. Aligned with market and funding?

Traction Metrics

• [ ] Users/customers: Count, growth, engagement.
• [ ] Retention: D1, D7, D30, or NPS/customer satisfaction.
• [ ] Pilots/LOIs: For pre-revenue, what validation exists?

Red Flags: When to Walk Away

• Cap table mess: Complex, undisclosed instruments, or founder ownership below 40%.
• Legal issues: Pending litigation, IP disputes, or regulatory non-compliance.
• Team risk: Founder conflict, key person dependency, or no domain expertise.
• No path to revenue: Vague monetization, “we’ll figure it out later.”
• Burn rate mismatch: Runway under 6 months with no clear path to extend.
• Evasion: Founder unwilling to share financials, cap table, or references.

Post-Checklist: Documentation and Terms

Once you’ve completed diligence and decided to invest:
– [ ] Term sheet: Valuation, instrument (SAFE, convertible, equity), key terms.
– [ ] Legal docs: Ensure you receive and understand the investment agreement.
– [ ] Post-investment: Board observer rights (if applicable), information rights, reporting cadence.

Due diligence is a filter, not a guarantee. Use it to avoid the worst outcomes—and to ask better questions when you do invest. The best angels combine structured diligence with pattern recognition from experience. This checklist gives you the structure; the rest is judgment.

Time Allocation: How Long Should Diligence Take?

For a $25K–$100K angel check, expect 5–15 hours of diligence: 2–3 hours on materials review, 1–2 hours on calls (founder, references), 1–2 hours on market/competitive research, and 2–4 hours on legal/financial deep dives. For larger checks ($250K+), budget 20–40 hours. Rushing diligence is the most common angel mistake—founders will wait if you’re serious.

Reference Checks: What to Ask

When speaking to references (former colleagues, customers, advisors), ask: (1) “How would you describe the founder’s execution ability?” (2) “What’s their biggest weakness?” (3) “Would you invest your own money?” (4) “Any concerns about the team or market?” Avoid yes/no questions. Listen for hesitation or qualified praise—”they’re great, but…” often reveals more than enthusiasm.

The One-Page Summary

Before writing a cheque, write a one-page investment memo: thesis, key risks, why you’re investing, and what would make you wrong. It forces clarity and creates a record for future reference. If you can’t articulate the thesis in 300 words, you probably shouldn’t invest. For comparison with institutional VC diligence, see angel investing vs VC.

Further Reading

Related: Angel Round Mechanics in India: Ticket Sizes, Valuations — Startup Nerve

Related: Accounting & Compliance Tools for Indian Startups — Startup Nerve

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