When an investor starts diligence, a founder usually thinks only about the documents they must produce. The same process should run the other way.
You are about to take on a shareholder, often for a long time. Check who you are getting before you sign:
1. Their record as an investor. Call founders from their portfolio, including those you were not introduced to. Ask how they behaved when the company was under pressure.
2. How they treat later rounds. Ask founders whether the investor supported follow-on rounds, or used their rights to block them.
3. The people. Check the individuals who will sit on your board or call you each month, as well as the fund. Ask how they handle disagreement.
4. Their terms. Read the term sheet and shareholders’ agreement as the next investor would. Terms that are heavy on control or vetoes can end your next raise.
5. Their reputation with advisers. Ask lawyers and other investors who have dealt with them.
I have seen an early investor take shareholder terms so restrictive that the next institutional investor walked away on reading the agreement. I also learned the hard way that the references nobody offers are the ones that matter.
If something worries you, get advice and be prepared to walk away. A good investor will expect you to ask these questions, and will answer them.