When assessing a startup’s readiness to accept funding, investors will look for a number of legal, corporate, and contractual housekeeping requirements. These will include a clean cap table, a formed Delaware C-corp (or converted LLC), executed IP assignment agreements, and a clean slate vis-à-vis state and federal compliance (e.g., no filing lapses for franchise taxes, an expired registered agent, etc.). Due diligence can stall for weeks if any of these are outstanding.
Formation attorneys and compliance teams review many cap tables and formation documents for founders about to raise capital. The findings have been consistent with the previous decades of funding: the business is solid, but the documentation is messy. Investors do not fund messy documentation, and this is the checklist that should be run before any term sheet is signed.
What Does “Investor Ready” Actually Mean Legally?
Investors do not concern themselves with your pitch deck during the legal part of due diligence, but rather with the legal aspects of your operations and the integrity of your funding history.
This includes confirming your entity type, checking the cap table (and verifying any corresponding ownership agreements), and reviewing any state liabilities that may be contractually outstanding. A startup can have a great product and still fail this checklist if, for example, no one filed Delaware’s mandatory reports for two consecutive years.
Do You Need to Convert Your LLC to a C-Corp Before Raising?
If your LLC is raising money from institutional VCs, likely, yes. The majority of US-based venture funds are unable to accept LLC membership interests due to tax pass-through issues for limited partners. A C-corp, more specifically, a Delaware C-corp, is what is expected.
The process of conversion isn’t instant. A statutory conversion from an LLC to a Delaware corporation usually takes about 5 to 10 business days once you’ve submitted both the Certificate of Conversion and Certificate of Incorporation to the Delaware Division of Corporations. This will take longer if you need certified copies for the bank. As of July 2026, the state filing fee is $89. Your registered agent may also charge a fee for the conversion package. This fee typically ranges from $150 to $400.
One of the more common errors you will see is founders waiting until after converting their LLC to sign the term sheet, only to find that the investors require the conversion to be finalized before they wire funds. This will turn a 10-business-day estimate into a full closing delay.
Is Your Cap Table Actually Accurate?
Think of everyone who has equity or has received equity in the form of a grant, a SAFE, or a verbal pledge. You should check whether they are all documented in your cap table.
Deals unnecessarily stall out because the departed co-founder (who also happens to be the departed co-founder of 12 other firms) didn’t sign a proper vesting agreement, so no one knows what happened to their shares when they left. Advisors who promised “a point or two” verbally, with nothing in writing, become a legal question mark the moment a lawyer starts to ask for documents.
Every option grant must have a board resolution, and every SAFE must be documented with its valuation cap and discount terms. Founder shares must come with a stock purchase agreement that has vesting terms, in most cases, four years with a one-year cliff.
Have You Actually Assigned Your IP to the Company?
Yes, most investors will ask you about this.
If you need to be reminded to vest your equity and sign your governance documents, this is the single most common gap in early-stage diligence. There was a time when not doing this would cost you a deal, but the fact that this would never be done actually impacts what the investors are buying.
This applies to contractors and freelance developers, especially those who touched the codebase early on. The company may not actually own its own product.
Have you actually assigned your IP to the company? If you need to be asked this during the formation stage, you should sign an IP assignment agreement before you start talking to VCs.
Are Your State and Federal Filings Current?
| Filing | Frequency | Typical Cost (as of July 2026) | Agency |
| Delaware Annual Franchise Tax | Annual, due March 1 | $175 minimum (corps), often more based on authorized shares | Delaware Division of Corporations |
| Delaware Annual Report | Annual, due March 1 | $50 for corporations | Delaware Division of Corporations |
| EIN confirmation (CP575) | One time, keep on file | Free | IRS |
| Registered Agent renewal | Annual | $100 to $300 depending on the provider | Varies |
| BOI Report (Beneficial Ownership Information) | Currently not required for U.S. domestic entities | N/A under the current FinCEN rule | FinCEN |
Regarding that last line: BOI reports are not currently required, as the FinCEN March 2025 interim final rule exempts all domestic entities. If your company was formed in Delaware or any other U.S. state, you are not required to file BOI reports now, even as a foreign-owned company.
This is applicable as of mid-2026, and FinCEN has not yet published a final rule, so this could change. Keeping internal company documents regarding beneficial ownership is still a good idea because potential investors will almost always ask for this information.
Delaware franchise taxes are ones that everyone struggles to understand because they use the Authorized Shares Method or the Assumed Par Value Capital Method, and many early-stage companies just choose the higher tax amount for valuation unless someone actually lays out the calculations and reverts to the Assumed Par Value Capital Method. Founders will be stuck paying $800 easily, and if done correctly, it could be under $400.
What Documents Will Investors Actually Ask to See?
Investors have a standard due diligence request list which contains your Certificate of Incorporation and amendments, bylaws, meeting minutes and consents, cap table with all SAFEs, notes, and option agreements, IP assignment agreements, employment agreements, contractor agreements, customer agreements, vendor agreements, high-value contracts, and your EIN confirmation letter and proof of good standing.
Your good standing will also come up during due diligence. If you have not paid your franchise tax or filed your annual report, you may not operate in good standing, and there will be no good standing certificate. Getting current could be as fast as paying a franchise tax online via the portal. If the reports have a backlog, it could be a week or more.
Common Mistakes That Delay a Raise
Founders usually underestimate three things. First, the time it takes to convert an LLC to a C-Corp, especially when there is a 30-day election period for the IRS’s 83(b) election, which is a hard deadline when the shares are issued. This cannot be extended, or you will miss the deadline. Second, the franchise taxes go unpaid for years when no one checks the Delaware portal. Third, the number of times contractual equity promises made to early advisors or contractors, once thought to be verbal agreements, turn into real legal disputes when the company is worth something.
Separately, none of these are difficult to fix. What makes them expensive is when they come to light during diligence, especially with a term sheet deadline.
Run this checklist before scheduling investor calls, not after the first diligence request comes in. A cap table audit, a signed set of IP assignments, and a current good-standing certificate take a fraction of the time to fix now compared to fixing them under a term sheet deadline.
