Before your next raise: the people questions diligence will ask

Founders prepare for diligence by tidying the financials. The people side gets a folder called HR with an org chart in it. Then the investor's counsel sends a request list, and the first ten items are about employment.

Here is what they ask, and why.

Who is actually an employee

The request will be for a list of every worker, employee or contractor, with location, start date, and classification. Then they will look at the contractors and ask why each one is not an employee. If the answer is "because it was easier", expect a reserve against the purchase price or a condition to close.

What the offer letters promise

Every offer letter, every amendment, every side agreement. They are reading for promised equity that was never granted, severance that was never budgeted, and titles that imply authority the person does not have. European templates are a particular problem here, because they often carry notice periods and protections that a US investor will read as liabilities.

Whether the IP is yours

Every employee and contractor should have signed an agreement assigning inventions to the company, in a form that works in the state where they sit. This is the single most common gap in European companies operating in the US, and it is the one that stops a deal cold, because an investor cannot value a product the company may not own.

What the handbook says, and whether anyone follows it

If there is no handbook, that is a finding. If there is one and it was written for a different jurisdiction, that is a finding. If there is one and the actual practice differs from it, that is the worst of the three, because it shows the company has written down a standard it does not meet.

How people are paid, and whether it is defensible

Pay bands, or the absence of them. Any pattern that looks like two people in the same role paid differently without a documented reason. Pay transparency compliance in the states that require it. Bonus plans with no written terms.

Who is at risk of leaving

The investor will ask about key person risk and retention. They want to know who matters, what they are being paid, what they have been promised, and whether any of it is written down.

The practical point

None of this is exotic. Every item on the list is a document that either exists or does not. The difference between a clean people diligence and a painful one is whether someone assembled the folder before the request list arrived, or after.

Assembling it before is a few weeks of work. Assembling it after is a few weeks of work with a deal waiting on it.