What Investors Look for in HR During Series A Due Diligence
A practical guide to the HR documentation, compliance, and people infrastructure that venture investors audit before closing a round.
Most founders are surprised by how thoroughly investors scrutinize HR during Series A due diligence. This guide covers exactly what they look for and how to get ready before the process starts.
Why investors care about HR at Series A
Series A investors are making a multi-year bet on the company's ability to scale. The people infrastructure is foundational to that scale. Compliance gaps create liability that reduces the value of the investment. Cultural problems drive attrition that undermines the growth plan. And poorly structured compensation creates cap table complications and future HR crises.
The HR diligence process at Series A is not a formality. It is a substantive review, and the gaps it surfaces are real negotiating points.
Documents investors typically request
The HR document request list in a Series A process typically includes:
- Organizational chart: Current org chart showing all employees, contractors, and open roles, with reporting relationships.
- Employee census: Full list of all current and departed employees with start dates, titles, compensation, and departure dates and reasons.
- Offer letters and employment agreements: Copies of offer letters for all current employees, plus any employment agreements with special terms.
- Equity and compensation summary: Current cap table with all grants, vesting schedules, and strike prices. Investors look closely for underwater options, cliff issues, and accelerated vesting provisions.
- Non-compete and IP assignment agreements: Confirmation that all employees have signed IP assignment agreements. Non-competes get scrutinized for enforceability by state.
- Employee handbook: Current handbook with evidence that all employees received and acknowledged it.
- Pending claims or complaints: Disclosure of any pending or threatened employment claims, EEOC charges, DOL investigations, or employee complaints.
Worker classification is the highest-risk item
Nothing gets more attention in HR due diligence than worker classification. If you have contractors who function as employees, investors and their legal counsel will find it. The liability for misclassification, back payroll taxes, penalties, and potential class action exposure can be material enough to affect deal terms.
If you have any classification risk on your cap table, address it before you start a fundraising process. Investors prefer to find clean books. Discovering misclassification during diligence gives them leverage and creates uncertainty about what else might be wrong.
Equity and compensation red flags
Common equity and compensation issues that surface in Series A diligence include options granted outside of a formal plan, vesting schedules that differ materially from market standard, employees whose compensation is significantly above or below market without a clear rationale, and key person risk where one or two people hold disproportionate institutional knowledge with no documented succession.
How to prepare before the process starts
The companies that get through HR diligence cleanly are the ones that have been building their people infrastructure intentionally from early on. Three to six months before a fundraising process is the right time to conduct an internal HR audit, resolve any classification issues, update your handbook, confirm all agreements are signed, and build the documentation package you will need to provide.
TalentForge360 has helped multiple Triangle-area companies prepare for Series A due diligence. A free HR audit is the right first step if you are starting to plan for a raise.