DD Readiness of Contracts
Why your contract stack can make or break an investment deal.
Founders spend months perfecting pitch decks. Yet when investors arrive at due diligence, it is frequently the contracts — not the pitch — that determine whether the deal closes smoothly.
Key Contracts Investors Scrutinise
Founders' Agreement
Governs the relationship between co-founders — roles, responsibilities, equity split, decision-making authority, and exits.
What Investors Look For
- Vesting schedules (4-year vesting with a 1-year cliff)
- Leaver provisions — good leaver vs. bad leaver clauses
- Deadlock resolution mechanisms
- IP ownership
- Non-compete and non-solicitation
Red Flag Example
A SaaS startup goes into Series A with equal equity split among three co-founders, no vesting schedule. One founder wants to exit two months before closing. Classic deal-breaker.
IP Assignment Agreement
For technology startups, IP is the core asset. Investors want certainty that all IP vests legally in the company.
What Investors Look For
- IP assignment by all founders
- IP clauses in employment agreements
- IP assignment from freelancers and consultants
- Clear chain of title
Red Flag Example
A fintech startup's core product was built by its CTO before incorporation. At Series B DD, no formal IP assignment is found. The deal is put on hold for 6 weeks.
Employment & Consultant Agreements
Every person who works for the company must have a written agreement covering confidentiality, IP assignment, and restrictive covenants.
What Investors Look For
- Signed agreements with all key employees
- ESOP letters and vesting schedules
- Non-disclosure obligations
- Notice periods for KMP
- Consultant IP clauses
Red Flag Example
A startup relied on three independent developers for 18 months on informal arrangements. No signed agreements creates a material contingent liability.
Shareholder Agreement (SHA)
The SHA governs the rights and obligations of all shareholders and is intensely scrutinised.
What Investors Look For
- Drag-along and tag-along rights
- Pre-emption rights
- Anti-dilution provisions
- Reserved matters
- Information rights
- Board composition
- Liquidation preference waterfall
Red Flag Example
An early investor holds full ratchet anti-dilution from Seed. At Series B the new investor pushes for renegotiation, delaying the round by three months.
Customer & Revenue Contracts
Customer agreements substantiate the revenue narrative.
What Investors Look For
- Contract value, duration, renewal terms
- Change of control and assignment clauses
- Termination rights
- Concentration risk
Red Flag Example
Top three customers (70% of ARR) each have change of control clauses requiring consent. The investor makes round closing conditional on consents.
Term Sheets & Prior Investment Agreements
All prior investment documents must be present and consistent.
What Investors Look For
- Existing investor rights
- Conversion terms of SAFEs/notes
- Side letters
- Outstanding conditions from previous rounds
Red Flag Example
A SAFE note converts at a much lower price than the round price, causing significant unexpected dilution to founders.
Key Vendor & Technology Agreements
Operational dependencies on third parties are reviewed for risk.
What Investors Look For
- Data processing agreements (GDPR/DPDP)
- SLAs and uptime guarantees
- Exclusivity or lock-in terms
- Revenue-sharing arrangements
Regulatory Licences & Government Agreements
For regulated sectors, investors verify all licences are in order.
What Investors Look For
- RBI, SEBI, IRDAI, or sector-specific licences
- Conditions attached to licences
- Show cause notices or regulatory correspondence
Building a DD-Ready Organisation
A practical five-point framework.
Start Early
Maintain a centralised contract repository from day one.
Review Annually
Conduct an internal legal audit at least once a year.
Standardise Templates
Use investor-acceptable templates for all standard agreements.
Engage Professionals
Involve your CS and legal counsel before any fundraising process.
Simulate DD
Conduct a mock DD review 6 months before you raise.
Written by CS Manavi Arora
Lead Company Secretary — SRF Capital Studio