Due diligence for a £10k–£50k cheque: what's proportionate

Full due diligence on a seed company takes a professional a fortnight and costs more than a small cheque. Nobody does it for £20,000, and nobody should. What is proportionate is an hour of focused checking, a call, and a decision about whether to rely on the lead investor's work for the rest. Here is the hour.

The eight checks that take an hour

1. Companies House, live. Find shows it on the listing: incorporation date, officers, filing status, charges, PSC register. Look at the directors' other appointments. Dissolved companies and overdue filings are questions, not verdicts.
2. The accounts versus the listing. Does last year's revenue in the filed accounts match what the listing says? If the accounts are micro-entity with no P&L, ask for management accounts.
3. The cap table. One class of shares, founders with a clear majority, no dead equity. Match it to the confirmation statement.
4. Advance assurance. Ask to see the HMRC letter. "Applied for" with a date is fine; "we'll apply after the round" is a price cut.
5. The product. Use it, buy it, visit it. Thirty minutes as a customer tells you more than the deck.
6. Two customers. Ask the founder for two customer names and ring one. "Would you buy it again?" is the whole call.
7. The founders online. Professional history, previous companies, anything that contradicts the listing. Not a character investigation — a consistency check.
8. The terms. Ordinary shares, no preferences, founder vesting in place, a shareholders' agreement that gives minorities information rights and pre-emption. Ask for the draft.

What to rely on the lead for

If an investor is putting in £100k+ and leading, they or their adviser will read the contracts, check the IP assignments, review the employment terms and negotiate the warranties. Ask them for a summary of what they found and what they negotiated. A good lead will share it; a lead who will not is a question in itself. Your cheque rides on their terms, so make sure you have read the term sheet even if you did not negotiate it.

The documents to insist on

• Management accounts for the last twelve months.
• The cap table, fully diluted.
• The advance assurance letter.
• The draft subscription and shareholders' agreement before you commit.
• The disclosure letter once it exists.

A founder who cannot produce the first three within 48 hours to a certified investor who has indicated is not ready to raise.

Call questions that reveal whether the founder knows the business

• "What did it cost to win your last ten customers, and how did you win them?"
• "Which customer are you most worried about losing, and why?"
• "What did you get wrong last year?"
• "If you only raised half, what would you do?"
• "Who on the team would you hire again, and who would you not?"
• "What would have to be true for this to be worth ten times more in four years?"

You are not testing the answers for correctness; you are listening for whether they are specific. Founders who know the business answer with numbers and names. Founders who do not answer with adjectives.

What you cannot check, and what covers it

You cannot check whether the market will want this in three years, whether the founders will fall out, or whether a competitor with more money will arrive. That is the risk the relief exists for. SEIS loss relief means the real downside on a £20,000 cheque for a 45% taxpayer is about £5,500 — see the arithmetic. Size the cheque to that, make ten of them, and let diligence be proportionate.

Questions investors ask

"Should I pay for a professional to look?"

For a £50,000 cheque with no lead, a few hundred pounds for an accountant to read the accounts and forecast is sensible. For £10,000, no.

"The founder has shared everything and it all checks out. What now?"

Decide on the business and the person. Diligence removes reasons to say no; it does not supply a reason to say yes.

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