What are the red flags investors look for in due diligence?

A red flag is a gap between what a founder said and what the documents show. Most are paperwork rather than business problems: an incomplete shareholders' register, convertible instruments with no signed terms, technology owned by the parent with no licence, staff on the wrong payroll, or a beneficial owner never filed.

Investors rarely walk away because a company turns out to be worse than the pitch. They walk away, or slow down, because the documents do not line up with the story, and nobody can say why. That is what a red flag is: an unexplained difference between two things that should match.

This guide describes the differences that come up most often, with the cross-border ones set out separately, because a company with a parent outside Europe hits a different set. It is general information about how a check works, not legal, tax or investment advice, and it contains no claims about how often deals fall over.

What counts as a red flag?

Anything an investor cannot reconcile. A signature missing from a deed. A customer named in the deck who has no contract. A shareholding described in a meeting that does not appear in the register. None of those is proof of a problem, and most turn out to be administration.

What turns them into a real finding is a vague answer, a promised document that never arrives, or a second version of the same file that quietly differs from the first.

The practical test founders can apply themselves is simple: for every number and every name in the deck, is there a signed document that produces it. Where there is not, that is the item to explain before it is discovered.

Which red flags show up in the cap table?

The ones that are hardest to fix late, because they need other people to sign. In a Dutch BV the shareholders' register is handed over by the civil-law notary at incorporation and kept by the company, so nobody outside checks whether it stays up to date. An investor treats it as the record of who owns what, and any gap in it becomes their problem too.

The recurring ones:

• Convertible loans or similar instruments with no signed document setting the discount, the cap and what they convert into.
• Options promised in an offer letter or a chat message but never granted, and never counted in the pool.
• An advisor or early contributor who was told they would get shares, with nothing signed either way.
• A share transfer agreed abroad that was never put through a Dutch notarial deed, which is how shares in a BV move.
• A parent company holding shares that the parent's own shareholders have not approved.

Rounds raised between priced rounds are a common source of the first item, because they are often documented in a hurry: see what a bridge round is.

Source: Business.gov.nl, Private limited company (BV) in the Netherlands

Which red flags come from a cross-border structure?

The ones about location: where an asset, a person or a payment actually sits, as opposed to where the plan says it sits. A domestic company never has to prove this, so founders arriving from outside Europe often have no file for it.

• Technology in the parent with no licence to the European company. The investor is funding a company that does not own what it sells.
• A licence at no charge. Under article 8b of the Dutch Corporate Income Tax Act 1969, transactions between related companies have to be priced as they would have been between independent parties, so a free or backdated arrangement is a finding for the tax adviser as well as the lawyer.
• Engineers on the parent's payroll while the plan counts them as Dutch staff. This also decides whether their hours can count towards Dutch research schemes, as set out in WBSO for foreign-owned companies.
• Customer contracts signed by the parent while the revenue is presented as the European company's.
• Beneficial owners not filed. A Dutch BV registers the people who own more than 25% of the shares, hold more than 25% of the voting rights, or are the statutory directors, and changes have to be filed within 7 days. Residence and nationality make no difference.
• Personal data flowing to a country with no adequacy decision from the European Commission, with no other safeguard documented.

Sources:
Wet op de vennootschapsbelasting 1969, article 8b (wetten.overheid.nl, in Dutch)
Business.gov.nl, UBO register for ultimate beneficial owner
European Commission, Adequacy decisions

Which red flags are about the numbers?

Mostly the ones where a number in the model cannot be traced to a document. Revenue booked from a related company without saying so. A pilot counted as a contract. A pipeline figure that moves between two versions of the same deck. Grant income presented as revenue rather than as a subsidy.

There is a quieter one that catches foreign groups in particular: costs carried by the parent that never appear in the European company's accounts, which makes the European company look cheaper to run than it is. Investors normalise for that, and they prefer to be told first.

Can a red flag be fixed?

Most can, and the timing decides how expensive it is. A missing licence between parent and subsidiary can be drafted. A shareholders' register can be reconstructed with the notary. A beneficial-owner filing can be brought up to date. What none of these can do is happen quickly once a check has started, because each needs a third party, and some need the counterparty's agreement at exactly the moment the company has least leverage.

That is the whole argument for doing the tidying before the term sheet rather than after it. What a full check covers is in what European investors check in due diligence, and the folder-by-folder version is in what belongs in a data room. Which entity should own what in the first place is a setup question: see the Dutch holding BV.

Sources

1. Business.gov.nl, Private limited company (BV) in the Netherlands, checked 22 September 2026
2. Business.gov.nl, UBO register for ultimate beneficial owner, checked 22 September 2026
3. Wet op de vennootschapsbelasting 1969, version of 1 January 2026 (wetten.overheid.nl, in Dutch), checked 22 September 2026
4. European Commission, Adequacy decisions, checked 22 September 2026

Checked on 22 September 2026. This page is general information, not legal, tax or investment advice. Rules change: check the official source, or ask an adviser, before you act on it.