By stage
Series A diligence
What an angel should check when joining a round led by an institution — where the data is finally meaningful and your job is different from the lead's.
Realistic time Six to twelve hours, most of it reading
By Series A there is real data: eighteen months or more of revenue history, cohorts long enough to mean something, a sales motion that either repeats or does not. There is also, almost always, an institutional lead who will spend weeks on diligence with resources you do not have.
That changes your job. You are not duplicating the lead's work — you cannot, and attempting it wastes everyone's time. You are answering two different questions: is this a good investment at this price for me, and is there anything the lead's process might not surface or might not care about.
The second question is more useful than it sounds. Institutional leads optimise for their own fund's position, which is not identical to yours. They will negotiate terms that suit a large preferred holder, and they are indifferent to whether small cheques get pro-rata rights or the same share class. Reading the term sheet from your own position is diligence that nobody else is doing.
01
What the data can now tell you
Cohort retention over eighteen to twenty-four months is the single most informative chart in a Series A pack. It shows whether customers stay, whether the ones who stay spend more, and whether the business has the compounding property that venture returns depend on.
Unit economics become assessable too, with caution. The cost of acquiring a customer and the gross profit that customer generates over their life are now calculable, though the lifetime half of the calculation still involves extrapolation. Treat payback period — how long until a customer has repaid their acquisition cost — as the more honest metric, because it uses only observed data.
Sales efficiency is the third: how much revenue each unit of sales and marketing spend produces, and whether that ratio is improving or deteriorating as the company scales. Deterioration is normal to a point; sharp deterioration means the early channel is saturating.
Check
- Cohort retention charts by month, over the full available history.
- Net revenue retention — is spend from existing customers growing?
- Payback period on customer acquisition cost.
- Gross margin, and how it has moved as the company has scaled.
- Sales efficiency over the last four to six quarters.
- Pipeline coverage and win rates, if there is a sales team.
02
Reading the round from your own position
This is the part of Series A diligence that is genuinely yours. The lead is negotiating a package that suits a large preferred holder with a board seat. Your position is different, and nobody in the process is looking at it for you.
The specific things to establish: which share class you will receive, what the total liquidation preference stack will be after this round, whether the preference is participating, whether you have pro-rata rights and whether they survive, and what the drag-along threshold and warranty obligations are.
Then do the waterfall arithmetic at three exit values. A Series A that raises $15m on top of $6m of earlier preferred creates a $21m stack. If your realistic exit scenario is a $60m trade sale, your ordinary shares are worth considerably less than your percentage suggests, and that is worth knowing before you wire rather than after.
Check
- Which share class are non-lead investors receiving?
- Total preference stack after this round, and whether any class participates.
- Do you have pro-rata rights, and do they survive future rounds?
- Drag-along threshold, and your warranty obligations under it.
- Build the exit waterfall at a poor, a decent and a good exit value.
03
The lead, and what their involvement means
The identity of the lead is one of the more consequential facts about a Series A, and it is knowable without any diligence at all. They will take the board seat, they will hold the protective provisions, and in a difficult moment their decisions will bind you.
What is worth establishing: whether this is a typical investment for them or an outlier in stage, sector or geography; how much of their fund this represents, since a small position in a large fund gets less attention; and whether they have reserves for follow-on, because a lead who cannot support the next round leaves the company exposed.
It is entirely reasonable to ask the founders these questions, and their answers tell you whether they know. Founders who have diligenced their lead as carefully as the lead diligenced them are demonstrating good judgement.
Check
- Who is leading, and is this a typical deal for them?
- Do they have reserves allocated for follow-on rounds?
- Who from the firm takes the board seat, and what else are they on?
- What do other founders in their portfolio say about them?
04
What you can skip
The lead will commission or perform legal, technical, financial and commercial diligence, and their work will be more thorough than anything you could do. Duplicating it is not diligence, it is anxiety with a spreadsheet.
What is worth doing is asking the lead — or the founders — whether anything material came out of that work. A one-line answer to that question is worth more than twenty hours of your own analysis, and it is a normal thing for a participating investor to ask.
Check
- Ask whether the legal, technical or financial diligence surfaced anything material.
- Ask to see the disclosure letter, or at least a summary of what was disclosed.
- Confirm whether any closing conditions remain outstanding.
Stop and think
Red flags
- Net revenue retention below 100% in a subscription business that describes itself as compounding.
- A payback period that has lengthened materially over the last four quarters.
- Non-lead investors offered ordinary shares at the preferred price.
- A preference stack that makes any realistic exit worthless to ordinary holders.
- A lead with no reserves for follow-on rounds.
- Growth driven entirely by one acquisition channel whose cost is rising.
- Reluctance to say what came out of the lead's diligence.
The other side of the table
What founders are taught about this
How to Sell by Tyler Bosmeny
How founder-led sales works before there is a sales team. The transition away from it is the most common place a promising seed company stalls, so knowing what the starting point looks like matters.
Published by Y Combinator. Channel verified from ycombinator.com, and YouTube's own oEmbed response names that channel as this video's author. Pressing play loads content from YouTube.
Take these into the room
Questions to ask the founders
- What did the lead's diligence turn up that surprised you?
- Which cohort is your best, and what was different about it?
- What happens to growth if your main acquisition channel doubles in cost?
- What is the plan if the next round is harder to raise than this one?
- Which share class are the smaller investors in this round receiving?
- What are the terms of the option pool refresh in this round?
- What does this round need to prove before Series B?
From the decoder