---
title: "Eliminate Surprise Red Flags Before Diligence"
section: "Fundraising"
sectionId: "fundraising"
date: "2026-05"
---

Beyond a messy cap table, investors encounter other "surprise red flags" during due diligence that can kill a deal. Audit your situation before you start fundraising — it's far better to surface and fix these yourself than to have an investor find them.

## Common surprise red flags

**Outstanding lawsuits, letters, or threats.** Any open legal matter must be disclosed. Undisclosed legal risk discovered in diligence ends deals immediately.

**Disgruntled former employees.** If someone left on bad terms and could potentially sue down the road, investors will worry. Address this proactively — a clean exit agreement is worth the cost.

**Paying personal expenses through the business.** Paying rent or other personal costs out of the company instead of taking a salary blurs the line between personal and business finances and raises governance concerns.

**Cash-based accounting.** Investors expect accrual-based accounting. Cash-based accounting makes your financials harder to interpret and signals that your reporting isn't investor-ready.

**Not being intellectually honest about the business.** If you are not straightforwardly honest about what's working and what isn't, investors will notice — and they talk to each other. Candour builds trust; spin destroys it.