Due Diligence Red Flags: What Kills Series A Deals
Learn what issues cause investors to walk away, reduce valuations, or add onerous terms. Identify and fix these problems before you start fundraising.
You've got a term sheet. The partnership voted yes. Now comes due diligence—and this is where deals can fall apart. Issues discovered during diligence don't just delay closes; they kill deals, reduce valuations, and add unfavorable terms.
This guide covers the red flags that most commonly derail Series A deals. Identify these issues early and fix them before you start fundraising. For the broader picture, see our Complete Guide to Series A Readiness.
Prevention Is Key
Issues found during diligence give investors leverage to renegotiate or walk away. Issues you disclose upfront can often be worked through. The surprise factor is what kills deals.
What Kills Deals
Not all diligence issues are equal. Some cause investors to walk away entirely; others result in retrading (changing terms); others just slow down the process.
Deal Killers
- Fraud or material misrepresentation
- Unresolvable IP issues
- Hidden litigation with existential risk
- Founder credibility issues
- Numbers don't match pitch deck
Valuation/Terms Impact
- Metrics weaker than presented
- Customer concentration
- Cap table messiness
- Compliance gaps
- Key person risk
Timeline Delays
- Missing documentation
- Disorganized data room
- Slow responses
- Minor legal cleanup
- Stale 409A
Financial Red Flags
Revenue Irregularities
Aggressive revenue recognition, one-time deals presented as recurring, channel stuffing, or ARR that doesn't reconcile to your books.
Severity: Can be deal-killer if seen as intentional
Hidden Liabilities
Undisclosed debt, pending litigation, tax obligations, or other liabilities that surface during diligence.
Severity: Deal-killer if material and undisclosed
Customer Concentration
More than 30-40% of revenue from a single customer without long-term contract protection. Creates risk that losing one customer destroys the business.
Severity: Terms impact or valuation reduction
Declining Metrics
Unit economics, retention, or growth rate deteriorating during the process. Contradicts the "things are going great" narrative in the pitch.
Severity: Valuation reduction or deal pause
Messy Books
Unreconciled accounts, improper revenue recognition, or inability to produce clean financial statements. Signals operational immaturity.
Severity: Timeline delay, possible valuation impact
For more on fixing financial issues, see How to Clean Up Your Books Before Fundraising.
Legal & Corporate Red Flags
IP Assignment Issues
Founders or early employees who built the product but never signed IP assignment agreements. Prior employer claims on IP. Open source licensing violations.
Severity: Can be deal-killer if unresolvable
Founder Disputes
Unresolved conflicts among co-founders. Departed co-founder who still holds significant equity without clear resolution. Threatened or pending litigation among founders.
Severity: Often deal-killer
Cap Table Issues
Missing stock purchase agreements, unsigned option grants, promised equity that was never issued, or confusion about SAFE conversion terms.
Severity: Timeline delay, possible terms impact
Regulatory/Compliance Gaps
GDPR violations, missing SOC 2 for enterprise sales, industry-specific regulatory issues, or data privacy concerns.
Severity: Terms impact or timeline delay
Missing Documentation
Board minutes not properly maintained, unsigned contracts, missing corporate records. Suggests sloppy governance.
Severity: Timeline delay
For cap table specifics, see Cap Table Management: Getting It Right Before Series A.
Team & HR Red Flags
Background Issues
Undisclosed issues in founder backgrounds: prior company failures with unresolved disputes, legal problems, or misrepresented credentials.
Severity: Can be deal-killer depending on nature
Key Person Risk
Critical functions (sales, engineering, customer relationships) dependent on a single person who might leave. No succession planning.
Severity: Terms impact (vesting acceleration concerns)
Employment Issues
Misclassified contractors who should be W-2, unpaid overtime, discrimination claims, or employment law violations.
Severity: Liability creation, potential terms impact
Reference Red Flags
Negative references from former colleagues, investors, or customers. Investors often do extensive backchannel references.
Severity: Can be deal-killer in extreme cases
Operational Red Flags
Customer Reference Issues
Customers who won't give references or who express dissatisfaction. Unhappy customers mentioned in the pitch as success stories.
Severity: Can be deal-killer or major terms impact
Technical Debt/Security
Serious security vulnerabilities, unstable infrastructure, or technical debt that threatens scalability. History of outages or data breaches.
Severity: Terms impact or timeline delay
Vendor Dependencies
Critical reliance on a single vendor, API, or platform with unfavorable terms or risk of being cut off.
Severity: Terms impact
The Trust Factor
The #1 Deal Killer: Lost Trust
The single biggest deal-killer isn't any specific issue—it's when investors discover that the story in the pitch deck doesn't match reality.
- Metrics in the deck that don't reconcile to the data room
- Problems that were hidden rather than disclosed
- Spin that crosses into misrepresentation
- Evasive or inconsistent answers to questions
When trust breaks down, deals die—even if the underlying issues were fixable.
Transparency Wins
Most issues can be worked through if disclosed early. Say "we have this challenge, and here's our plan to address it" rather than hoping investors won't find it. Transparency builds trust; hiding things destroys it.
How to Address Issues
Before Fundraising
- Self-audit: Do your own diligence before investors do. What would you find?
- Fix what you can: Clean up books, cap table, documentation, compliance
- Prepare explanations: For issues you can't fix, have a clear story
- Get professional help: Lawyer, fractional CFO for complex issues
During Fundraising
- Disclose early: Surface known issues before they're discovered
- Be responsive: Slow responses signal something to hide
- Be consistent: Story should be the same to all investors
- Have remediation plans: Show how you'll address issues post-close
Pre-Diligence Checklist
Related Articles
Complete Series A Readiness Guide
Everything founders need to know
Data Room Checklist
What investors expect to see
Clean Up Your Books
Get audit-ready before fundraising
Cap Table Management
Get your equity right
Concerned About Due Diligence?
Eagle Rock CFO helps startups prepare for due diligence. We'll identify issues, clean up your financials, and get you ready to close your round.
Get Diligence-Ready