Written from the lens of a non-bank venture debt lender. The goal: help you build leadership practices that pass diligence and run a better company in the process.
What management due diligence is (and when it happens)
In a financing, “management due diligence” is the review of your people, leadership systems, and decision processes alongside the legal/financial work. After a term sheet, most lenders run diligence over ~3–6 weeks; speed depends heavily on how organized your materials are (financials, cap table, projections, and management evidence like org charts, board minutes, and references).
What evaluators look for:
- Integrity and references
- Governance and board hygiene
- Lightweight but real internal controls
- Coherent org design and hiring plan
- Compensation that aligns people with the future
- A consistent reporting cadence
- A track record of doing what you said you’d do
1) Integrity first: background checks, references, and observable behavior
Prepare this before outreach:
- Identity & role history for each executive; confirm filings match officer/director records.
- References (6–10) spanning prior managers, direct reports, peers, customers, and at least one prior investor. Send each referee a short brief (your current scope + 2–3 specific outcomes) so calls are concrete, not generic.
What signals “high integrity”: On-time answers; consistent stories across on-list and back-channel calls; steady, clear communication (research on “honest signals” highlights turn-taking, listening, and calm as reliable cues of credibility).
Why it matters: Team friction and leadership misalignment appear repeatedly in failure post-mortems, so expect evaluators to probe alignment and trust deeply.
2) Governance and board hygiene (accountability you can show)
Make decisions auditable, not theatrical.
- Keep board minutes decision-centered: what alternatives were considered, who recused, what was approved, and follow-ups/owners/dates. Law-firm guides emphasize capturing approvals in proportion to importance.
- Adopt a simple Delegation of Authority (DoA): what requires board approval vs. CEO/executive authority; thresholds for spend, pricing exceptions, hiring, comp changes, related-party matters. This distributes decision-making while preserving accountability.
- Keep corporate records current: charter/bylaws, consents, cap table, option grants/vesting, IP assignments, key contracts—indexed in a clean data room.
3) Controls and expense discipline (lightweight, real, and visible)
You don’t need enterprise bureaucracy, just COSO-lite basics that show stewardship:
- Segregation of duties: preparer ≠ approver ≠ releaser; role-based banking; MFA for wires.
- Dual-signature thresholds on payments.
- Monthly close on a fixed day with a short variance table.
- Access reviews (quarterly) for finance/apps/data; immediate de-provisioning on exit. COSO’s framework is the common backbone; startup-friendly summaries exist.
Publish and enforce a written expense policy (what’s reimbursable, receipt rules, card limits by role, sample audits). This cleanly separates work and life and removes avoidable trust questions.
4) Org design and hiring: show today’s team and the next-milestone team
Present two org charts: “today” and “+12–18 months.” Include role scopes for direct reports, the hiring sequence (FTE vs. fractional), and why each hire maps to a milestone. Major law-firm checklists call out employment docs and organizational clarity as table stakes before raising.
If there are gaps (e.g., finance leadership), show how they’re owned now (controller or fractional CFO) and when you’ll upgrade. Tie GTM hires to KPI movement (e.g., SDRs → pipeline coverage; CS → NRR/churn). Evaluators are judging capability and realism, not headcount for its own sake.
5) Compensation that aligns people with future success (and avoids perverse risk)
- Time-based vesting with a cliff (e.g., 4-year/1-year) + a thoughtful refresh policy so long-tenured contributors don’t drift.
- Balance variable pay across durable metrics (retention/NRR, quality, risk-adjusted growth) versus short-term bookings alone. Academic and HBR research link heavy, short-dated option packages to excessive risk-taking; prefer longer horizons and mix cash/equity accordingly.
- Explain your ownership philosophy to employees (and in diligence): management meaningfully invested, dilution used carefully, and equity understood as aligned upside—not as a lottery ticket.
6) Reporting rhythm: prove you run the business on numbers
Ship a repeatable monthly pack (keep it tight):
- P&L
- Cash & 13-week forecast
- ARR/MRR bridge
- Vohorts (logo & dollar)
- NRR/churn
- Pipeline & win rate
- Hiring plan vs. budget
- A one-page commentary (variances, risks, corrective actions).
Lock a metrics glossary (ARR, churn, NRR, CAC, payback, sales efficiency) so finance/sales/product compute them identically each month.
Show historical track record: 3–4 quarters of plan-vs-actuals and a driver-based forecast that ties spend to KPI movement. This combination—clean historicals plus drivers—is one of the fastest ways to earn trust and speed diligence. (Flow’s process notes that prep level directly shortens the timeline.)
7) Green-flag patterns evaluators notice
- Minutes that record alternatives, approvals, and recusals when decisions affect an exec personally.
- A published DoA with sensible thresholds, reflecting acknowledged governance principles (transparency, accountability).
- COSO-lite controls actually running: dual signatures, monthly close date, access reviews.
- References that cite specific outcomes (e.g., “reduced CAC payback 16→12 months,” “stood up SOC 2”) rather than adjectives.
- Evidence of improving forecast accuracy and on-time board packs over multiple quarters.
Your 90-day “always-ready” plan (steal and adapt)
Days 1–30 — Corporate housekeeping & artifacts
- Build a clean data-room index (charter/bylaws; consents; cap table; option grants/vesting; IP assignments; key contracts).
- Create a one-page minutes template and bring the last two meetings up to that standard.
- Draft your DoA (board vs. exec thresholds).
Days 31–60 — Controls, expenses, and reporting
- Publish the expense policy; turn on dual-signature wires; set a monthly close date; schedule quarterly access reviews.
- Lock the metrics glossary and ship your first standardized monthly pack.
Days 61–90 — People, ownership, and proof
- Produce “today” and “+12–18 months” org charts with role scopes and hiring sequence; confirm employment/IP docs are complete.
- Adopt a refresh-grant rubric; publish a vesting FAQ.
- Assemble the reference set (6–10 names) with outcome-based bullets; pre-brief them.
Data room index (drop-in)
- Governance: charter, bylaws, board minutes/consents (past 12–24 months), DoA, policies (expense, information security).
- Equity: cap table (fully diluted), option grants & vesting schedules, plan docs, refresh policy.
- People: org charts (today & +12–18 months), role scopes, employment/IP assignment agreements, compensation bands.
- Operating cadence: last 3–4 monthly packs, metrics glossary, plan-vs-actuals.
- Reputation: reference list (managers/reports/peers/customers/prior investor) with outcome bullets.
- Controls: close checklist, dual-signature settings, latest access review;
Preparing for management diligence is mostly about building observable accountability: decisions you can trace, controls you actually use, people who are aligned for the long term, and a habit of reporting that matches how you truly run the business. Do that now—months before you raise—and the financing part becomes a confirmation exercise rather than a scramble.
Founder FAQs
1) When should we start preparing, and what should be ready?
Start months before you fundraise. Stand up a living data room with a clean index: charter/bylaws, board and shareholder minutes/consents, cap table (fully diluted), option grants/vesting, IP assignments, and key contracts. Using a law-firm diligence checklist as your folder map dramatically shortens review later.
2) What governance practices prove accountability (and thoughtful, distributed decision-making)?
Keep decision-centered minutes (alternatives considered, approvals, follow-ups/owners, recusals) and adopt a concise Delegation of Authority that clarifies what needs board approval vs. executive discretion. Anchor these to widely recognized governance principles of transparency and accountability.
3) Which internal controls and expense policies are realistic (and impressive) at our stage?
Implement a COSO-lite set: segregation of duties (preparer ≠ approver ≠ releaser), dual-signature thresholds for payments, a fixed monthly close with a short variance note, quarterly access reviews, and a written expense policy with limits, receipts, and sample audits. These basics are the common language evaluators expect and are straightforward to show in diligence.
4) How do we align compensation with long-term success (and avoid perverse risk-taking)?
Default to time-based vesting with a cliff and a clear refresh-grant policy for tenured contributors; balance variable pay around durable metrics (e.g., retention/NRR, quality), not just short-term bookings. Academic and practitioner work links heavy, short-dated option loads to excess risk-taking—so favor longer horizons and a sensible cash/equity mix.
