Raising capital is stressful and often reveals issues that might otherwise go overlooked. Over time, these patterns emerge, especially when due diligence is involved, and every company metric and projection is put under the investors’ microscope.
In some cases, founders might hide such issues to attract more investor interest. What often happens is that red flags emerge, even when omissions are not malicious, making the facts that emerge far worse than the initial weakness. Once that investor-to-founder trust is broken, the conversation quickly shifts from celebrating a potential partnership to managing risk.
Here are the five issues most founders attempt to downplay or hide, and why those tactics tend to backfire.
Bad unit-economics
An amateur accountant is all it takes to uncover expenses that were excluded or revenue from non-existent “future services.” Investors want the hard numbers on unit economics because they are the most surefire way to determine revenue and cost when acquiring and serving a single customer. It is the pulse of a company’s pure business model, balancing CAC and LTV to signal a healthy business engine.
When cohort analysis and monthly P&L reviews are applied, the truth comes out. Excluded paid advertising or fulfilment expenses come to light, especially when sensitivity models on retention and churn are added. A founder looking to secure more capital must realise investors will back-test everything. Transparency builds trust, even when margins are weak.
Big client churn
The loss of a big client is a hit to any company’s bottom line. It signals to the industry that there is a retention issue. What may have been a significant portion of early revenue is often hidden, while a founder scrambles to replace the revenue source before investors take notice. That tends not to work out during due diligence.
An experienced investment firm is likely to speak with the 5–10 most valuable clients from a prospective company, as well as the Sales & Marketing team. These “customer reference calls” are crucial to determine whether revenue will remain steady, based on client renewal intent and confirmed satisfaction. A major client about to churn will cause deferred revenue to shrink and accounts receivable to spike. That is a clear sign of problems, especially if those clients have conflicting stories compared to the founder.
Hidden debt or undisclosed obligations
Founders need to stop trying to hide debt. There are many situations in which debts owed to earlier investors or initial seed funding must be repaid before capital can be reinvested. That includes paying 10% of any investment to an investment advisor. Bridge loans, deferred payments, and debt arrangements are often “left out” of pitch decks because they are considered temporary or insignificant.
Financial due diligence will uncover these debts, as investors are likely to request legal confirmation that no other debts or obligations exist before releasing the funds. Ultimately, you must disclose them; it’s better to be upfront than to try to hide this information. It is far more damaging when hidden obligations surface later in the process.
That will derail the deal or prompt renegotiations and is unlikely to benefit the founder’s long-term support. Investors know hidden debts may signal incompetence or deceit.
Dysfunction between co-founders or the C-level team
Relationships build businesses. Investors evaluating a company are likely to consider whether any co-founders or C-level executives left after prior funding rounds. In most cases, the team members were only loyal enough to see the deal through, then jumped ship due to internal conflicts. It is relatively easy to detect when checking former employee references or reviewing old industry news reports.
While it may not always be standard practice for VCs to assess team loyalty, it can be a helpful tool for appraising the value of a potential investment. Information back channels, such as industry peers, customers, and employees, help reveal how leadership performs in good and bad times. If these leaders leave after funding, they often take knowledge, morale, and a piece of equity structure with them, something no investor wants to see happen.
The challenges of an unhealthy cap table
Founders tend to “overlook” mentioning any issues in the cap table. These could include hidden or undocumented shares, uneven distributions, or overly diluted founders. Providing a fair and balanced view of your company should also include potential weak points.
Some investors might see those weaknesses not as deal breakers, but as guarantees of transparency and trust signalling. Cap table integrity is frequently scrutinised. Law firms are paid to trace every issuance of equity or options and verify it with regulators and authorities.
Even a minor inconsistency can raise questions about company control and legal compliance. It’s better to identify any misalignment early so the cap table can be cleaned up before, during, and after funding stages, benefiting all stakeholders.
Due diligence doesn’t kill deals — broken trust does.
The common thread: Transparency as a strategic advantage
Founders must understand that any of these five “forgotten” issues does not preclude the company from securing funding. Client churn, bad unit economics, or other pressures can be restructured and resolved. What cannot be easily repaired is broken trust.
Investors are not just evaluating the relationship between VCs and the company. That trust is a competitive advantage. It is an opportunity to demonstrate maturity by owning the current business model and the character and integrity of the founder and their leadership team. The more transparent the due diligence is, the stronger the trust and the more clearly the startup’s strengths and weaknesses are revealed.
Any attempt to manipulate data or conceal liabilities will likely backfire during due diligence, so it makes strategic sense to be upfront about issues and face them with heads held high. The best founders understand that transparency can and should be a growth strategy.
By Nikita Krivelevich, the investment director at Zubr Capital. He leads the deal execution and portfolio management of private equity and venture capital investments in Central and Eastern Europe, with a focus on IT companies. He has strong expertise and experience in the B2B, SaaS, E-commerce, and IT Services sectors, and has been involved in several successful exits and IPOs.
He is also a voting board member at Zubr Capital`s portfolio companies. He supports the company’s strategic direction and growth, as well as its financial and operational performance.
