What is Legal Due Diligence?
Nexa Consultancy | Startup & Finance Glossary
Legal Due Diligence is the process where an investor's lawyers review all of a startup's legal documents and corporate records to assess any legal risks or liabilities. The goal is to ensure the company has a clean legal structure and there are no hidden "skeletons".
Base Term for Startups: This process is as critical as financial diligence. A major legal issue discovered during diligence can kill a deal. Startups should perform a "legal health check" before starting a fundraise.
Key Areas of Focus: Key areas include reviewing the company's incorporation documents, cap table, founder and employee agreements (especially IP assignment clauses), customer contracts, and any pending or potential litigation.
Base Term Example: An investor's lawyer discovers during legal diligence that an early employee never signed an IP assignment agreement. The funding deal is put on hold until the startup can get the former employee to sign the document, potentially giving the ex-employee significant leverage.