Due Diligence for Business Angels: Key Legal Issues to Consider
Anyone investing in a startup as a business angel is not only investing in an idea but also in a legal structure. Particularly in early-stage financing rounds, due diligence is often conducted pragmatically. Nevertheless, certain legal aspects should always be reviewed to avoid unexpected issues down the road.
Does the company actually belong to the founders?
The first step should always be to examine the company’s corporate structure. Key documents and information include:
Commercial Register extract
Share register and documentation relating to previous share transfers
Existing shareholders’ agreements
Employee participation plans and any outstanding convertible loans or option programs
For investors, it is crucial to understand who actually owns which shares and whether future dilution or other restrictions on statutory shareholder rights may arise.
Are there any ongoing disputes or regulatory risks?
Another important area concerns pending or potential legal disputes. Depending on the nature of the company’s business, relevant regulatory matters should also be reviewed, and appropriate disclosures requested. This includes information regarding:
Pending litigation
Employment-related disputes
Regulatory warnings, sanctions, or administrative proceedings
Required permits, approvals, or licenses
Not every legal proceeding is automatically a dealbreaker. What matters is whether the risks are known, manageable, and communicated transparently.
Key contracts and protection of intellectual property
For many startups, intellectual property represents the company’s most valuable asset. Therefore, a critical question is whether software, patents, trademarks, and other intellectual property rights are actually owned by the company.
Business angels should pay particular attention to:
Employment and freelancer agreements
IP assignment provisions
Relevant IP registers
Software ownership and licensing arrangements
A common early-stage mistake is that founders work without written agreements, resulting in unclear arrangements regarding salary claims or other forms of compensation. Ambiguous legal relationships with employees or the premature departure of founders often lead to disputes.
The absence of a valid assignment of intellectual property rights can create significant problems during future financing rounds or exit transactions.
General terms and conditions and data protection
Comprehensive, clear, and legally enforceable terms and conditions, as well as compliance with data protection regulations, are particularly important for AI, SaaS, and platform-based business models.
Although documentation may not be perfect in the early stages, there should at least be a demonstrable awareness of civil liability risks and the applicable regulatory framework.
Due diligence for an angel investment does not need to be as extensive as the due diligence conducted in a business acquisition. In practice, it is often advisable to begin with a red-flag review. Additional issues can generally be assessed efficiently through a well-structured data room and a concise document checklist.