By Al Wadyat CapitalPublished Updated 9 min read
Diligence is not a test of how good the company is. It is a test of whether what the founders said is what the documents show — and the order in which an investor discovers a gap decides how expensive that gap becomes.
Every item below can be prepared in advance. A founder who arrives at diligence with a written, ranked list of their own weaknesses is in a stronger position than one whose weaknesses are found by somebody else.
Why the order matters more than the list
Most founders treat diligence as a document request: send the folder, answer the questions, wait. That underestimates what is happening. An investor is not verifying facts one at a time; they are building a model of how carefully this company is run, and every answer either reinforces that model or damages it.
The practical consequence is that discovery order matters. A cap table problem disclosed by the founder in week one is a task. The same problem found by a lawyer in week five is a renegotiation, because it now sits alongside the question of what else was not mentioned.
Everything below is checkable before a raise. Companies that do so are not necessarily better businesses. They simply run out of surprises earlier.
The team, and who actually controls what
The first checks are about people, and they are less about pedigree than founders expect. What an investor wants to establish is whether the company can survive an ordinary personnel event: a co-founder leaving, a key engineer resigning, an adviser going quiet.
That resolves into concrete questions. Is founder equity vesting, and from what date? Do the people who wrote the code have assigned intellectual property to the company, including contractors and anyone who contributed before incorporation? Are the roles described in the deck matched by people who actually hold them, or is a title being carried by somebody working two days a month?
The most common finding at this stage is not dishonesty. It is that a company grew faster than its paperwork, and nobody has gone back to close the gap between what was agreed verbally in the first year and what exists on paper in the third.
- Founder and employee vesting, with dates that match the story
- IP assignment covering contractors and pre-incorporation work
- Advisers documented, with terms, rather than remembered
- A clear answer to what happens if any one person leaves
Structure: the entity, the cap table and where value sits
The second layer is structural. Which entity holds the intellectual property, which one holds the customer contracts, which one employs the team, and which one is being invested into? In young technology companies these are frequently not the same, and the difference is rarely deliberate.
The cap table then has to reconcile with that structure and with every instrument ever issued. Uncapped convertibles, side letters, verbal promises of equity to early helpers, an option pool described in a board minute but never created — each of these is survivable individually and corrosive in combination, because they surface one at a time and each one makes the investor wonder what is next.
For blockchain companies, a further question sits on top: where does token value accrue, and does the equity being sold have any relationship to it? An investor buying equity in an operating company whose economics run through a foundation in another jurisdiction is buying something quite different from what the pitch implied, and that has to be explicit rather than discovered.
Regulatory footing
For anything touching payments, custody, exchange or investment, the regulatory position is the single largest discount an early company carries. Investors are not looking for a licence in every case; they are looking for evidence that the founders know which regime applies and have a credible route through it.
In the United Arab Emirates that means being able to name the relevant authority for the activity — the Virtual Assets Regulatory Authority for virtual asset activity in Dubai, the Central Bank for payment and stored-value services, or the Securities and Commodities Authority where an instrument is a security — rather than gesturing at the jurisdiction as a whole.Sources for this passage: Virtual Assets Regulatory Authority (VARA)Central Bank of the UAESecurities and Commodities Authority
Anti-money-laundering expectations travel with the activity rather than the address, and the international standards that most supervisors implement are public. A company that can show how its onboarding and monitoring map onto those expectations answers a question that would otherwise take three meetings.Sources for this passage: FATF Recommendations
The failure mode here is not being unlicensed. It is being unable to say clearly why the company does not need a licence, or by when it will have one.
The technology, and who can move the money
Technical diligence in this sector is less about elegance than about control. Who holds keys, how are they held, and what is the process when somebody with access leaves the company? If contracts are upgradeable, who can upgrade them, and what stops a single person from doing so?
Dependency concentration is examined next: a product that only works on one chain, one bridge, one oracle or one custodian has a single point of failure that no amount of engineering quality removes. Investors do not expect this to be eliminated; they expect it to be named, monitored and to have a rehearsed alternative.
Prior incidents come up as well, and honesty is strongly rewarded. An incident that was disclosed, contained and documented reads as operational maturity. The same incident discovered in a forum thread reads as concealment, whatever the intent.
Traction that survives its own definition
Every early company presents a number that goes up. Diligence asks what the number counts, who chose that definition and what happens to it under a stricter one. Active users measured over ninety days behave very differently from the same metric over seven. Volume that includes internal or incentivised activity is not the same as volume from paying users.
The most useful preparation is to write the definitions down first and then present the numbers, rather than the reverse. Investors are used to metrics being flattering; what damages a process is discovering that a definition changed between two versions of the deck.
Concentration matters as much as growth. Revenue that depends on one customer, one channel or one integration is priced accordingly, and pretending otherwise simply moves the discovery to a later, more expensive stage.
Treasury and counterparties
Where is the company's cash, and in what? A treasury denominated substantially in the asset the company itself issues is a risk that compounds: the moment the company most needs reserves is exactly the moment that asset is likely to be worth least.
Banking and payment relationships receive the same scrutiny. For fintech and blockchain companies these are frequently the most fragile part of the operation, because they can be withdrawn at short notice for reasons that have nothing to do with the company's own conduct. An investor will ask what the alternative is, and the good answer is a tested one rather than a theoretical one.
Custody arrangements complete the picture: which third parties hold company or client assets, under what terms, with what insurance, and what happens if one of them fails.
What the data room itself says
By the end of diligence, the room has told the investor something independent of its contents. A room that is complete, consistently named and internally consistent suggests a company that will produce reliable board reporting. A room assembled in a panic, with three versions of the same agreement and a folder called final, suggests the opposite.
This is worth optimising precisely because it is cheap. Nothing about tidy documentation improves the business, but it removes an entire category of doubt at a moment when doubt is expensive.
The strongest posture a founder can adopt is a short, written note listing the known weaknesses, ranked, with what is being done about each. It converts every subsequent discovery from a surprise into a confirmation, and it is the single cheapest thing on this list.