The short answer. For a business angel at pre-seed or seed, due diligence means checking, before you invest, that what the startup says holds up. It covers five areas: the company and its capital, the numbers, the market, the team and the risks, and how deep you go depends on how much you're putting in. The core of it is separating what the startup claims from what it can back up with documents.
What you'll learn
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What due diligence means at the early stage, and how deep to go for your check size.
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What to ask for, in what order and why.
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How to read a startup's numbers and spot the ones that don't add up.
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How to check the founders, and which terms to review.
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What to verify if you plan to claim the Spanish tax relief for investing in startups.
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The most common red flags, and a checklist for your next investment.
This guide complements the Startup Index Score investor dossier (The startup dossier for investors), but works just as well without it.
What is due diligence, and why does a business angel need it?
Definition Due diligence is the review an investor carries out before investing to check that what they've been told is true and that there are no hidden problems affecting the investment.
At the early stage you can't audit everything, and you don't need to. But investing without checking the essentials is betting on a presentation. In a startup that's just getting going, part of the decision will always be trust in the people. Due diligence takes care of the other part: the part that can be checked.
What I've seen A European investor was about to back a startup offering a stock-market investing service, with a method presented as almost infallible: a beautifully packaged product and three founders prepared down to the last detail. Working for the investor, we met the three founders, first together and then separately, to test every figure and every claim. Small contradictions appeared and, as we pulled on them, they grew. The investor saw it for himself and decided not to invest. Not long afterwards, the startup disappeared.
"The better a project is told, the more it matters to separate what's said from what can be backed up."
How is it different from a fund's due diligence?
| Item | Business angel | Fund |
|---|---|---|
| Depth | The essentials, in proportion to the check | Broader and more formal |
| Who does it | You, sometimes with an adviser or your network | A team, with lawyers and auditors |
| Time | Days or a few weeks | Weeks or months |
| What weighs most | Team, consistent numbers and a clean company | All of that, plus scale and metrics |
How deep should you go for the amount you're investing?
Due diligence costs time, and sometimes adviser fees. It's sensible to keep it in proportion to what you're risking and to your role in the round.
Indicative depth by your role in the round
- read the numbers and the company records
- talk to the founders
- lean on the lead's review
- all of the above
- check documents
- customer references
- full review of all five fronts
- a lawyer for the terms
- a written memo
Tip If you're co-investing behind a lead, ask to see their review, but don't rely on it blindly. It's your money, and the three essential checks will only take you a few hours: match the cap table to the deeds, ask for the monthly revenue series with bank statements, and talk to the founders separately.
In what order does early-stage due diligence run?
The five stages of lean due diligence
- story and key figures
- what's claimed versus what's documented
- clean records and ownership
- founders, together and separately
- risks, terms and fit
What should you ask for on the company and its capital?
| What to ask for | What to check | Red flag |
|---|---|---|
| Incorporation deed, bylaws and a Commercial Registry extract | That the company exists and who runs it | Out-of-date or inconsistent documents |
| Cap table and shareholder register | Who owns what | Doesn't match the deeds |
| Convertibles and previous rounds | What rights other investors hold | Terms nobody mentioned |
| Shareholders' agreement and vesting | That nobody can simply walk off with their stake | A key co-founder with no vesting |
| IP assignment | That the company owns its product | Third-party code or design not assigned |
| Loans and public grants | Obligations that constrain the company | Terms that affect the round |
(The data room you should ask for)
How do you read a startup's numbers?
What matters isn't how big the numbers are, but whether they're consistent with each other and with the story.
Three quick checks:
- Growth: if the startup says it grows every month, the monthly revenue series has to show it. Look at the trend, not the best month.
- Cash: current cash divided by monthly net burn is its runway. If the startup says it has a year of cash, the math has to confirm it.
- Proportion: what revenue would the startup need to return your investment three, five or ten times, and is its market big enough for that? (Does the round fit the market?)
Declared, documented or missing
| Figure | Value | Status |
|---|---|---|
| Monthly revenue | €18,400 | Documented |
| Paying customers | 37 | Declared |
| Cash | 9 months | Declared |
| Last year's accounts | — | Missing |
| Figure | Ask for | Document that backs it |
|---|---|---|
| Monthly revenue | The series for recent months | Invoices or bank statements |
| Paying customers | How many, how much they pay, how many come back | Billing list |
| Cash | Current balance and monthly burn | Bank statements |
| Forecast | The assumptions behind it | The spreadsheet with its assumptions |
| Market | How it was calculated | Sources for the calculation |
Tip Always ask for the series, not the latest figure. One good month isn't a trend. Neither is one bad month.
What should you look at in the market?
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Proof the problem exists: paying customers, pilots, repeat usage.
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Reachable size: not the global market, but the part the startup can actually reach.
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Real competition: including whatever the customer uses today.
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Why now: what has changed so this works today.
If you can, talk to two or three customers. Ask the startup to introduce you, and ask them why they pay and what they'd like to see.
Common mistake Accepting "we have no competition." It means there's no market, or they don't know it.
How do you check the founding team?
With facts, not adjectives. Three practices that work:
- Talk to the founders together, then separately. Different versions of the same story say a lot, as in the case of the European investor above.
- Check their track record through independent sources: previous roles and companies in the Commercial Registry, references from former partners, customers or investors, and what the founder has published.
- Ask who decides what, and what happens if one of them leaves. The answer should match the shareholders' agreement.
And watch whoever pitches: inspiring confidence is part of a founder's job. I've seen projects with real potential where, among other problems, the person pitching couldn't inspire confidence. (Jordi Gil's stories)
A word of caution Stick to professional track record, not private life. Always ask permission before contacting references, and treat their information with the same discretion you'd expect for your own.
What risks should you look for?
| Risk | Key question |
|---|---|
| Dependence | What happens if their biggest customer leaves or their main channel fails? |
| Cash | How many months are left, and what happens if the next round is late? |
| Regulation | Could something change that affects the business? |
| Team | What happens if a key co-founder leaves? |
| Legal | Are there lawsuits, or debts with the tax authorities or social security? |
Single-channel dependence deserves special attention: an acquisition channel can close because a platform changes its policies, without the startup doing anything wrong. (What business angels look at: the Healthiers case)
Which investment terms should you review?
Valuation is the number everyone looks at, but it isn't the only one that decides what you'll get back. Review at least these with your lawyer:
| Term | What it is | Why it matters |
|---|---|---|
| Instrument | Equity or a convertible loan | When, and at what price, it turns into a stake |
| Liquidation preference | Who gets paid first if the company is sold | Changes the split in a modest exit |
| Pre-emption and anti-dilution | The right to take part in future capital increases and, sometimes, an adjustment if the next round is at a lower valuation | Protects your percentage and your entry price |
| Tag-along and drag-along | Tag-along lets you sell alongside the majority shareholder; drag-along can force you to sell | Review both: one protects you, the other can bind you |
| Information rights | Which figures you'll get, and how often | Without information you can't follow your investment |
(How much to raise: valuation and dilution explained)
What should you check if you plan to claim the Spanish tax relief?
Spanish personal income tax (IRPF) can give you a deduction of up to 50% of the amount invested in newly or recently created companies, on a maximum base of €100,000 a year. If you're counting on it, check it before you invest, not afterwards. Among the conditions worth verifying:
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The company's equity: it can't exceed €400,000 at the start of the tax year in which you invest.
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How you acquire the shares: at incorporation, or in a capital increase within the following five years (seven for emerging companies under Law 28/2022).
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Type of company: a public or private limited company (SA or SL), not listed on any organized market, with its own staff and resources.
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Your stake: no more than 40% of the capital, including your family's holdings as defined in the rules (except for founding partners of an emerging company).
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Holding period: you must keep the stake for three to twelve years.
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Activity: the company must carry on a genuine business, not just manage assets.
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Certificate: ask the company for the certificate confirming it meets the requirements.
Some regions add their own reliefs, with different conditions. Always check the current rules with the Spanish Tax Agency and your tax adviser.
Should you invest alone or with an angel network?
| Item | Alone | With a network or group |
|---|---|---|
| Due diligence | All on you | Shared, often with a lead |
| Access to deals | Your own network | A flow of pre-screened projects |
| Terms | You negotiate alone | More negotiating weight |
| Diversification | Harder with small checks | Easier |
| Control | Total | Shared with the group |
According to the Business Angels 2025 report by AEBAN and IESE, only 14% of the Spanish angels surveyed didn't co-invest with others in 2024. That's no accident: sharing the review and the risk makes sense at the early stage. (For angel networks and funds)
How should you put your decision in writing?
A one- or two-page investment memo forces you to set out what you know and what you don't, and it'll help you follow the investment later.
Your investment memo on one page
A guide, not a rulebook. You can print it.
How much uncertainty is normal at pre-seed and seed?
No due diligence removes the risk in a startup. At the early stage some things can't be fully verified, and that's normal:
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The real size of the market the startup will capture.
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The forecasts: they're assumptions, not commitments. What you can check is whether the assumptions are reasonable.
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How the team behaves under pressure, which only time reveals.
What isn't normal is inconsistency: numbers that contradict each other, documents that don't match, or co-founders giving different answers. You accept uncertainty. You clear up inconsistency before you invest.
What are the most common red flags?
Red flags, by severity
- cap table that doesn't match
- IP not assigned
- numbers that contradict each other
- key co-founder with no vesting
- unexplained debts
- dependence on one customer
- forecasts with no assumptions
- the global market presented as their own
- co-founders giving different answers
How can you save time on due diligence?
Lean due diligence starts with knowing what to check first. Asking the startup for its Startup Index Score dossier gives you, in the same format for every startup at the same stage, which figures are declared, which have a document provided and what's missing, along with what to check first and which documents to request. The startup provides it. It doesn't replace your due diligence: it tells you where to start. (Evaluating a startup as an angel investor · See pages from a sample dossier)
Note: a figure matching a document isn't an audit and doesn't guarantee the document is genuine: its accuracy is the startup's responsibility.
Due diligence checklist for business angels
Pre-seed and seed due diligence
A guide, not a rulebook. You can print it.
In short
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Due diligence checks that what's been said holds up, with a depth in proportion to your check.
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At the early stage, the essentials: company and capital, numbers, market, team and risks.
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Read the numbers for consistency, not size.
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Talk to the founders together and separately, and to a few customers.
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Review the terms, not just the valuation.
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Uncertainty is normal at the early stage; inconsistency isn't.
Frequently asked questions
How long does an angel's due diligence take? At pre-seed and seed it usually takes from a few days to a few weeks, depending on the startup, the amount and how organized its documents are. A complete data room speeds things up a lot; if the cap table or IP needs sorting out first, it takes longer.
What should a business angel check first? The cap table and the company documents, to know who owns what, and the key figures, to check that what you were told holds up. If something doesn't add up in those two areas, everything else deserves a more cautious look.
Do I need a lawyer for due diligence? For the essentials of a small round, many angels do the first review themselves or with their network. For the terms and the legal documents of the investment, and for any doubt about the company, it's wise to have a lawyer. This guide doesn't replace legal advice.
What are the conditions for the Spanish tax relief on startup investments? Under Spanish IRPF, among others: shares acquired at incorporation or in a capital increase within five years (seven for emerging companies), company equity up to €400,000, a stake of up to 40% and a three-to-twelve-year holding period. Relief: up to 50% on €100,000. Confirm with your adviser.
Does the Startup Index Score dossier replace due diligence? No. The Startup Index Score dossier tells you which figures the startup declares, which have a document provided and what's missing, so you know where to start. It isn't an audit or due diligence, and it doesn't verify that documents are genuine.
Keep reading
Sources
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Spanish Tax Agency (Agencia Tributaria), relief for investing in newly created companies: sede.agenciatributaria.gob.es/Sede/ca_es/Ayuda/25Presentacion/100/9_2.html
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AEBAN and IESE, "Business Angels 2025. La inversión en startups: actividad y tendencias": www.iese.edu/media/research/pdfs/78716.pdf
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The rest of this guide reflects common due diligence practice in pre-seed and seed rounds and Jordi Gil's experience.
About the author
Jordi Gil is the creator of Startup Index Score. He has spent almost 30 years developing projects and working with startups, including alongside investors deciding where to put their money, across the Americas, Europe and Asia. (Meet Jordi Gil)