Avoid Diligence Pitfalls with Gust’s new Corporate Diligence Tool

Peter Swan , CEO , Gust INC

21 Mar 2025

Raising capital is never easy—especially at the early stages. Yet too many deals fall apart, not because of the idea, team or traction, but due to avoidable mistakes in corporate structure and equity that surface during due diligence. Founders can’t afford to let unforced errors become dealbreakers. By proactively addressing these risks before entering fundraising diligence, founders can eliminate easy “no”s and keep momentum on their side. At the same time, investors—especially new angels—need to recognize these risks early to protect their returns.

The Hidden Dealbreaker: Structural Risk

Traction is king in fundraising. Investors want proof that a big market is hungry for what your startup is building. But at the pre-seed and seed stages, traction is often limited—or even nonexistent. That’s why investors look for other ways to gauge opportunities and de-risk deals, like team capability, clarity of the growth plan, execution, and startup structure.

At Gust, we often say that early-stage fundraising is about selling a compelling hard science fiction—a well-structured narrative about how a capable team will achieve incredible business outcomes with investor capital. But even an ace team with a flawless flight plan won’t make it to the moon if their rocket isn’t built to handle the force of launch.

While the perfect corporate and equity structure won’t win a startup investment, mistakes that make it difficult to align the team, foster collaboration, and protect investment can make an otherwise promising company an easy pass for investors during the due diligence process.

Common Risks that Jeopardize Deals during Fundraising Diligence

Founders often underestimate how structural issues can derail their fundraise. Here are a few of the most common red flags that come up in fundraising diligence:

• LLC Formation – Delaware C-Corps are the standard for venture-backed startups. They offer a well-understood framework for ambitious, equity-financed growth. Many early-stage investment instruments (like SAFEs and Convertible Notes) are designed specifically for this structure and many serious early-stage investors won’t invest in LLCs.
• No Corporate Governance – Incorporation is just the first step. Startups also need appointed officers, elected board members, adopted bylaws, and issued shares. Without proper governance, there’s no limited liability, no structured decision-making, and no ability to take in investment.
• Equity Misalignment – Ownership should reflect contribution. Unclear or undocumented equity promises, missing vesting schedules, and misaligned ownership can lead to disputes, disincentivized teams, and legal claims down the road.
• Intellectual Property Issues – If a startup doesn’t have clear ownership of the assets that make the business valuable, what exactly are investors investing in?
• Tax Pitfalls – A simple paperwork misstep—like failing to file an 83(b) election—can create major income tax burdens. Losing qualification under Section 1202 can wipe out significant capital gains tax advantages for both founders and investors.

Get Ahead of Issues with Gust’s Corporate Diligence Review Tool

At Gust, we’ve seen all of these issues kill deals—and these aren’t the only risks that can jeopardize a fundraise. That’s why we built the Corporate Diligence Review tool.

This tool helps founders and early-stage investors quickly assess corporate setup and identify risks before they become dealbreakers. Answer a set of simple, plain-language questions about corporate and equity structure to generate a report card highlighting potential red and yellow flags. Whether you’re a founder preparing to raise or an investor evaluating a deal, you’ll get clarity on exactly where a startup stands.

Fundraising is hard enough. Don’t let avoidable mistakes make it harder! Avoid easy “no”s with Gust’s Corporate Diligence Review. Try it free here.

Gust's Corporate Diligence Review tool helps founders get ahead of structural risks before they kill deals in due diligence.

Try it today!