Due diligence red flags: the institutional checklist
The six categories of failure that show up in almost every rejected deal. Each red flag below is paired with a concrete test — the artifact or reconciliation that either resolves the concern or confirms it.
01
Founding team red flags
Team problems compound. Governance and commitment gaps are cheap to spot and expensive to unwind post-investment.
Part-time founders with undisclosed side ventures
No vesting or single-founder ownership above 90%
Recent co-founder exits with no written explanation
References the founder refuses to make available
Repeated churn in the first ten hires
Test
Ask for the cap table, vesting schedule, and three references outside the founder's chosen list.
02
Market and traction red flags
TAM inflation and vanity traction are the most common decks distortions the SenseCore Protocol catches.
TAM built top-down from analyst reports with no bottom-up model
Traction charts without a labelled y-axis or with quarterly gaps hidden
Pilot and paid revenue collapsed into one line item
Customer logos shown without contract value or status
Growth rates reported as 'MoM' during a single spike month
Test
Ask for the last twelve months of MRR by customer, and the churn cohort table.
03
Financial red flags
Numbers should reconcile across the deck, the model, and the bank statement. Any gap is a signal, not a rounding error.
Revenue in the deck that does not match the P&L
Runway calculated on gross revenue instead of net burn
Unit economics that assume LTV recovered over a period longer than the average contract
Missing balance sheet or unexplained related-party loans
Salary and equity assumptions that ignore statutory costs
Test
Reconcile trailing three months of bank statements against the P&L line by line.
04
Product and technology red flags
Technical fragility rarely shows up in a demo. Ask for structural evidence, not screenshots.
No production access for reference customers
Architecture diagrams that hide third-party dependencies
'AI' features that are hand-rolled prompts with no evaluation harness
No incident history, SLA, or on-call rotation for a paid product
Roadmap slides that promise verticals the current team has never shipped
Test
Request a live walkthrough of the deploy pipeline and the last three post-mortems.
05
Legal, IP, and compliance red flags
Legal debt survives every pivot. Diligence should surface it before the term sheet, not during closing.
IP assigned to a founder personally, not the company
Employment agreements without non-compete or IP clauses
Unresolved disputes with former employees, co-founders, or vendors
Data processing without a documented consent or retention policy
Regulatory exposure the founder describes as 'grey area'
Test
Request the corporate secretarial file, employment templates, and any pending litigation summary.
06
Behavioural red flags
How a founder handles the diligence itself is often the strongest signal in the room.
Data room access delayed past the second request
Answers that shift between calls without acknowledgement
Hostility to adversarial questions or benchmarking
Selective introductions to customers the founder has coached
Urgency framing without a documented competing round
Test
Score consistency across three separate sessions with the same question set.
