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Research a startup as two separate things: the business and the investment contract. Verify who is offering what security, at what price and valuation, with which rights, fees, restrictions and legal exemption. Then test the company’s customer evidence, product, competition, team, finances, capitalization and use of funds. In the United States, an offering generally must be registered with the SEC or fit an exemption; that legal status does not prove the investment is sound. Private startup shares can become worthless and may never have a resale market, so commit only money you could lose entirely.
The sequence below turns those principles into a repeatable investigation. It is educational, not individualized legal or investment advice. Rules vary by country, security and investor status; confirm the requirements that apply to your transaction with qualified professionals.
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1. Map the exact offer before analyzing the company
Do not begin with a pitch deck’s market-size slide. Begin by writing down the transaction in plain language. A startup can be genuine while a particular solicitation is unsuitable, illegal or priced far above what its evidence supports.
| Item to identify | Questions to answer | Evidence to request |
|---|---|---|
| Issuer | What legal entity is issuing the security? In which jurisdiction is it formed and in good standing? | Legal name, formation details, current corporate records and the name printed on the subscription or purchase agreement. |
| Seller or solicitor | Who is contacting you, and how are they compensated? Are they acting for the issuer, an intermediary or an existing shareholder? | Written role, compensation disclosure and registration or licensing information where applicable. |
| Security | Are you buying common or preferred stock, a convertible note, a SAFE-like contract, a debt instrument or a fund interest? | Complete governing agreement, term sheet, charter provisions and any side letters. |
| Price and valuation | What exactly does your money buy? Is the valuation pre-money or post-money, and which shares or conversion assumptions are included? | Price-per-share calculation, capitalization table and valuation methodology. |
| Rights and restrictions | What voting, information, conversion, liquidation, dividend, redemption and transfer rights apply? | Security documents, investor-rights agreements and transfer procedures. |
| Costs | Are there placement fees, administration charges, carried interest, expenses or future capital calls? | Fee schedule and a statement showing the net amount invested. |
| Offering status | Is the offer registered, or which exemption is claimed? Is the seller complying with the conditions of that exemption? | Offering memorandum, required disclosures and any applicable regulatory filing. |
The SEC’s Private Placements under Regulation D investor bulletin stresses that investors must understand both the investment and its risks. An SEC filing, a company website or a familiar intermediary is not an SEC endorsement of the deal.
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2. Verify the seller and the U.S. offering pathway
This section is U.S.-specific. A different country may use different regulators, exemptions and investor classifications.
Check the person or firm contacting you
- Search the relevant official registration or licensing database for the broker, adviser, funding portal or other intermediary, if the role requires registration.
- Compare the legal name, email domain, telephone number and payment instructions with independent records. Do not use only contact details supplied in an unsolicited message.
- Ask for written offering documents before sending money or signing. Refusal, unexplained delays or material inconsistencies are reasons to stop.
- Confirm where funds go. A request to pay an individual, an unrelated company or an account in a different country requires an explanation and independent verification.
The SEC’s pre-IPO scam alert warns that many public solicitations for pre-IPO shares may be illegal. A private offering can nevertheless be legitimate when it follows an available exemption; legality is transaction-specific.
Understand what an exemption means
For a U.S. Regulation D offering, ask which rule and safe harbor the issuer relies on, who may invest, how solicitation is conducted and what disclosures are required. In the SEC’s described framework, an issuer selling to non-accredited investors must provide specified information, including financial statements. An issuer selling only to accredited investors has more discretion over disclosure; if non-accredited investors participate, information supplied to accredited investors must also be supplied to them. Non-accredited investors in the relevant offering context must be financially sophisticated or use a qualifying purchaser representative. Investigate any representative’s conflicts and compensation.
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1Repair Windows errors before they cause bigger problems2Scan for outdated or missing drivers - takes under a minute3Clear out junk files and repair common Windows errorsThese are not universal pass/fail tests and they change with the exemption, offering method and date. Review current SEC requirements and obtain legal advice for your transaction. The SEC’s Capital-Raising Building Blocks explains common U.S. pathways, while Research Before You Invest provides general verification guidance.
3. Test the business case instead of repeating the pitch
Treat every material claim as a hypothesis. Ask what evidence would disprove it, then seek that evidence from customers, contracts, product demonstrations and financial records rather than relying on management’s narrative.
Problem and customer
- Who experiences the problem, and how frequently and urgently?
- What do those customers use now, including manual workarounds and competing products?
- Who actually pays, who approves a purchase and how long is the sales cycle?
- What independent evidence shows willingness to pay: collected invoices, renewal records, signed contracts or documented usage?
Interview customers yourself where permitted. Ask what they would do if the startup disappeared, what alternatives they considered and whether the product is mission-critical or merely convenient. Separate a customer’s enthusiasm from a binding commitment.
Product, technology and dependencies
Request a demonstration of the product that exists today, not only a roadmap. Identify features still in development, performance claims that have been tested, and assumptions that depend on a particular platform, supplier, dataset, cloud service, patent or regulatory approval. Ask how outages, security incidents and key-person departures would be handled. If intellectual property is central, confirm that founders and contractors assigned it to the company and that licenses permit the proposed use.
The SEC specifically advises investors to question whether reliance on a particular technology, customer or product claim is reasonable. A technically impressive prototype is not proof of repeatable production, regulatory clearance or a profitable distribution channel.
Market size and competition
Ask management to show the calculations behind total addressable market (TAM), serviceable available market (SAM) and serviceable obtainable market (SOM). The UK Department for Business and Trade’s Investor Readiness Essentials framework calls for evidence-backed sizing, a focused initial niche and clear differentiation.
- Check whether the market figure counts all theoretical spending or only customers the startup can reach with its current product, geography and sales capacity.
- List direct competitors, substitutes, internal build options and likely responses from larger incumbents.
- Test the claimed advantage: lower total cost, superior performance, regulatory access, switching barriers, distribution or another measurable attribute.
- Ask what would cause the niche to be smaller than forecast and how the company would adapt.
Market labels are estimates, not guarantees. A large market can still produce a weak investment if customer acquisition is expensive or differentiation is temporary.
Traction and revenue quality
Classify every metric by what has actually happened:
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| Evidence level | What it demonstrates | Questions to ask |
|---|---|---|
| Collected revenue | A customer paid under an identified contract. | When was cash collected? What are refunds, gross margin, payment terms and customer concentration? |
| Signed contract | A customer made a contractual commitment, subject to its terms. | Is it binding, cancellable or conditional on a pilot, budget or security review? |
| Pilot or letter of intent | Interest or testing, not necessarily durable revenue. | What converts the pilot to paid use, and how often has that conversion occurred? |
| Waitlist, pipeline or forecast | Potential demand or management’s expectation. | How was it counted, dated and independently corroborated? |
Examine retention, repeat use, cohort behavior, gross margin, sales-cycle length and concentration in the largest customers. Request the date and provenance of each metric. A rising user count can conceal falling engagement or heavily discounted access.
Founders, employees and governance
Verify relevant experience, responsibilities and references. Ask who owns key relationships, who can make binding decisions and how disagreements are resolved. Review founder vesting, employment terms, board composition and succession plans. A prominent résumé or charismatic presentation is not evidence of execution. Look for the ability to recruit and retain people in the functions the plan requires, and for unresolved conflicts or related-party transactions.
4. Reconcile financial statements, capitalization and use of funds
Financial condition
Request available financial statements and ask whether they are independently audited, reviewed or unaudited. Understand the accounting basis and how revenue is recognized. Build a simple cash bridge showing starting cash, operating burn, debt, one-time costs and expected runway. Then compare the forecast with observed invoices, hiring, customer conversions and product delivery.
- How much cash is on hand, and what liabilities or repayment dates come first?
- What assumptions drive growth, pricing, gross margin and operating expenses?
- When does the company need more capital under the base case and a slower-growth case?
- Which expenses are discretionary, and what happens if the next round is delayed?
Do not treat a projection as a fact merely because it is presented in a detailed spreadsheet. The SEC investor guidance specifically calls for scrutiny of financial statements, audit status, claim reasonableness and intended use of proceeds.
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Obtain a current, fully diluted capitalization table. It should identify founders, employees, investors, option pools, warrants, outstanding convertibles and any promised equity. Match the table to the instrument you are buying and model at least one future financing.
| Term to model | Why it changes your outcome |
|---|---|
| Pre-money versus post-money valuation | Determines the ownership percentage attributed to the new money. |
| Option-pool increase | Can dilute existing holders before or as part of the financing. |
| Convertible discount or valuation cap | Changes the price at which an earlier instrument converts. |
| Liquidation preference | Determines who receives proceeds first and whether common holders receive anything in a sale. |
| Pro-rata or participation rights | May let some investors maintain ownership by investing more in later rounds. |
| Debt, warrants and side letters | Can create claims or conversion rights not visible in a simple share count. |
Ask a qualified adviser to explain unfamiliar provisions. The private-company due-diligence checklist at StartEngine identifies capitalization and use of proceeds as core review areas; use the actual governing documents, not a summary, for your decision.
Use of proceeds
Require a dollar budget tied to milestones: product development, regulatory work, hiring, inventory, sales, debt repayment and working capital. Ask what changes if the round raises less than planned. Vague promises to “scale” are not a spending plan. Compare the proposed budget with the runway and the next financing need; a round that funds only a few months may leave you exposed to an immediate, dilutive raise.
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5. Review legal, regulatory and operational exposure
The scope depends on the sector and jurisdiction, but request explanations and supporting documents for:
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- Customer, supplier, distribution, lease and financing contracts, including change-of-control and exclusivity clauses.
- Patents, trademarks, copyrights, open-source obligations and employee or contractor assignments.
- Employment, founder, incentive and confidentiality agreements.
- Permits, licenses, product approvals, advertising rules and sector-specific regulation.
- Pending, threatened or settled litigation, investigations, sanctions and tax disputes.
- Privacy, cybersecurity, data-processing, breach-notification and insurance arrangements.
Verify the company’s claimed operating presence independently. The SEC’s 10 Red Flags for an Unregistered Offering alert includes unverifiable company information and poor standing among warning signs. Missing documents do not prove misconduct, but they increase uncertainty; record what is absent and how that affects your decision.
6. Understand the security and the reality of an exit
Read the rights, not just the valuation
Identify whether your security has voting, information, inspection, conversion, liquidation, dividend, redemption or anti-dilution rights. Determine who can amend the terms, whether major decisions require your consent and what happens if the company raises debt or a senior class of shares. For a convertible instrument, model conversion triggers, valuation caps, discounts, maturity, interest and what happens if no qualified financing occurs.
Plan for no liquidity
Ask who may transfer the security, whether company approval is required, whether a right of first refusal applies, and whether legal holding-period or other resale restrictions apply. A private company may prohibit transfers even when you find a willing buyer. Do not rely on an assumed secondary market, acquisition or initial public offering.
The SEC’s pre-IPO alert states: “The company may never go public, a market for the company’s shares may never develop, and investors may be unable to resell their shares.” Build a scenario in which there is no exit, no dividends and no further buyer. If that outcome would damage your finances, the position is too large or unsuitable.
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7. Recognize warning signs and decide what to do
| Warning sign | Response |
|---|---|
| Promises of high returns with little or no risk | Pause. Require evidence for every return and risk claim; treat the combination as a classic fraud indicator. |
| Urgency, unsolicited contact or scripted pressure | Take time to investigate independently. Do not send money or sign while being rushed. |
| No written offering documents or sloppy, contradictory materials | Request complete documents and a written explanation of inconsistencies. Proceed only when they are resolved. |
| Seller registration or identity cannot be verified | Check the appropriate official register. Familiarity, a polished site or a mutual contact is not verification. |
| Company address, operations or ownership cannot be corroborated | Check corporate records, references and operating evidence; treat unverifiable claims as a reason to stop. |
| Social-media enthusiasm or comparisons with famous companies used as proof | Replace them with contracts, customer interviews, financial records and independent technical evidence. |
| Unclear resale path or an assumed IPO date | Read the transfer terms and run a no-exit scenario. Never base affordability on a promised event. |
“Resist the pressure to invest quickly and take the time you need to investigate thoroughly before sending money or signing any agreements.” — SEC Office of Investor Education and Advocacy, Investor Alert: 10 Red Flags That an Unregistered Offering May Be a Scam (August 4, 2014).
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8. Request a focused document pack
A reasonable request is organized and specific rather than an indiscriminate demand for every internal file. Ask for the documents that answer your decision questions:
- Term sheet, subscription or purchase agreement and all amendments.
- Charter, bylaws, investor-rights agreements and transfer restrictions.
- Current fully diluted capitalization table and summaries of outstanding convertibles, options and warrants.
- Historical financial statements, current management accounts, bank-cash summary, debt schedule and forecast.
- Revenue, customer, retention and pipeline schedules with definitions and dates.
- Use-of-proceeds budget and milestone plan.
- Material customer, supplier, licensing, employment and founder agreements.
- Intellectual-property assignments, open-source policy and material security or privacy assessments.
- Formation, good-standing, permit, litigation and regulatory records relevant to the business.
- Management biographies, references and related-party transaction disclosures.
For each missing item, write “not provided,” note the risk created and state what evidence would close the gap. A company that will not provide basic information about itself or its offering may be unsuitable for an investment whose risks you cannot measure.
9. Make the decision record explicit
Before committing funds, create a short memo dated with the version of the documents you reviewed. Use the same headings for every opportunity so an exciting story does not receive easier treatment than a less glamorous one.
- Investment thesis: State the customer problem, why this product can win and what must be true for the investment to work.
- Independent evidence: List verified contracts, customer references, collected revenue, product tests and legal records. Label management assertions separately.
- Key assumptions: Identify dependencies on pricing, conversion, retention, regulation, suppliers, hiring or future financing.
- Downside and liquidity: Describe failure, delay, dilution and no-exit cases, including the maximum amount you could lose.
- Diligence gaps: Record unanswered questions, missing documents and the person responsible for resolving each one.
- Reasons to pause or decline: Set objective stop conditions, such as unverifiable seller identity, contradictory capitalization data, unacceptable transfer restrictions or an unaffordable loss.
- Decision-changing evidence: Specify what new document, customer proof or corrected term would change your conclusion.
Compare opportunities on team; customer and problem; product; market and competition; traction; financial quality; capitalization and dilution; legal and regulatory exposure; instrument rights and price; use of funds; and liquidity. The checklists provide useful dimensions, not universal thresholds. Your risk capacity, time horizon and jurisdiction determine what is acceptable.
10. Keep monitoring after investing
Diligence does not end when money is wired. Store executed documents and confirm the issuer recorded your ownership correctly. Track the reporting and information rights you were promised, upcoming financing or conversion events, material litigation, regulatory changes and cash-runway updates. Revisit concentration: a successful follow-on round can still increase your exposure to one company, sector or geography.
Do not send additional money merely to “protect” an earlier investment without reassessing the company and the new terms. A follow-on decision is a new transaction with its own price, dilution and downside.
Jurisdiction, eligibility and professional advice
The SEC materials cited here address U.S. investors and U.S. offerings. The UK framework is used for business-analysis categories, not as a substitute for U.S. securities law or advice in another country. Investor eligibility, disclosure, tax, anti-money-laundering checks, holding periods and resale rules can differ by location and security type.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallConsult a securities lawyer about the offering exemption and documents when the amount is material, the structure is unfamiliar or a conflict appears. A qualified financial professional can help test concentration, loss capacity and portfolio fit; verify that person’s authorization independently. No adviser can remove startup risk, but proper advice can prevent a misunderstanding of the contract or the law.
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