Series A Preparation: The Financial Due Diligence Playbook

# Series A Preparation: The Financial Due Diligence Playbook

When founders think about series a preparation, most immediately picture the pitch deck and product demo. But here's what we've learned working with dozens of companies raising Series A capital: your financial operations will face more scrutiny than your pitch.

Investors spend 70% of their diligence time on financial and operational details—not your market opportunity. They're trying to determine if your financial house is in order, if your unit economics make sense, and if your team can execute at scale.

This guide covers the financial due diligence playbook that investors will run on your company, so you can prepare accordingly.

## Why Financial Due Diligence Is Your Real Series A Preparation

Unlike earlier stages where investors largely trust your vision, Series A investors are making a $2-10M+ bet on your ability to execute. They need proof that:

- Your financial records are accurate and auditable
- Your accounting is materially correct (not perfect, but clean)
- Your metrics are real and tracked consistently
- Your team understands the business financially
- Your burn rate is sustainable and predictable

We've seen founders lose months of momentum because they treated financial preparation as an afterthought. One SaaS founder we worked with had strong metrics but couldn't quickly provide clean financial statements—it took an additional 6 weeks to organize records, which delayed closing by a full quarter.

Proper series a preparation means getting your financials investor-ready before you start pitching.

## The Five Areas Investors Dig Into During Due Diligence

### 1. Historical Financial Accuracy

Investors will reconstruct your last 12-24 months of financials from scratch. They want to verify:

**Revenue Recognition**: Does your revenue match what customers actually paid? We've found inconsistencies where founders recorded invoices as revenue before customers signed, or included discounts incorrectly.

**Expense Categorization**: Are expenses properly classified? Investors care less about absolute spend and more about whether you understand where money goes. A $5K monthly software bill misclassified as "office supplies" raises red flags.

**Cash vs. Accrual**: Your accounting method matters. Most Series A companies should be on accrual accounting by this stage—it tells a more honest story than cash accounting.

**Common mistakes we see**:
- Recording revenue in the wrong month
- Owner expenses mixed with business expenses
- Loan forgiveness (PPP, etc.) not properly accounted for
- Grant revenue treated inconsistently

### 2. Bank Reconciliation and Cash Position

This sounds basic, but it's where many founders stumble. Investors will:

- Reconcile your declared cash to actual bank statements
- Trace large transactions to supporting documentation
- Identify unusual transfers or related-party transactions
- Verify that restricted or committed cash is properly noted

For series a preparation, ensure:
- Monthly bank reconciliations are completed and reviewed
- All reconciling items are documented and explainable
- You have clear records of any loans from founders or friends
- Credit card statements are reconciled and reviewed

One founder we worked with had $200K in her business account that was actually earmarked for Q4 taxes but wasn't disclosed. Investors caught this during diligence and it became a negotiating point.

### 3. Metrics Traceability

Investors verify that your key metrics—revenue, MRR, churn, CAC, LTV—actually derive from your financial data. This is where series a metrics preparation matters most.

You'll need to demonstrate:

**Data integrity**: Where does each metric come from? Is it pulled from your product database, billing system, or calculated manually? Manual calculations are red flags—they suggest inconsistency.

**Consistency**: Are you measuring the same thing each month? We've seen founders change how they calculate churn mid-year, which makes it impossible to trust the trend.

**Supporting documentation**: Can you show the work? If MRR is $150K, investors want to see the customer list with subscription amounts that adds up to that number.

**Common metric problems**:
- Including free tier users in active user counts
- Counting trials as customers
- Changing the definition of "customer" or "churn" mid-year
- One-time revenue boosting annual recurring metrics

For proper series a preparation, audit your metrics now. Pull your top 5 metrics and verify each one traces directly to source data.

### 4. Operational Expenses and Burn Rate

Investors model your runway obsessively. They want to understand:

**Fixed vs. Variable costs**: What expenses are locked in (salaries, rent) versus what scales with growth (payment processing, hosting)?

**Burn rate trends**: Is your burn accelerating or moderating? Investors forgive high burn if it's declining or directly tied to growth investments.

**Personnel costs**: They'll verify your team count against payroll records. If you claim 10 employees but only show 8 on payroll, that's a problem.

**Related-party transactions**: Any payments to founders, consultants, or related entities get intense scrutiny. Document the business purpose clearly.

For series a preparation, prepare a 24-month burn analysis showing:
- Monthly operating expenses
- Revenue growth
- Runway at different burn rates
- Plans to reach profitability or extend runway

### 5. Cap Table and Equity Complications

Funders will reconstruct your cap table independently. Common problems we see in series a preparation:

- Inconsistent share counts between documents
- Unvested founder stock not reflected
- Options issued but not formally documented
- Founder disputes over ownership
- Dilution from previous rounds not properly reflected

Before you start fundraising, obtain a fully signed cap table showing:
- All shareholders and share counts
- Vesting schedules and cliff periods
- Unexercised options and strike prices
- Any liquidation preferences or special rights
- Proof of incorporation and all stock certificates

## The Series A Preparation Timeline: When to Start

Investors move quickly once they decide to invest. But proper financial preparation takes time.

**3-4 months before you want to close**:
- Hire a [fractional CFO](/blog/when-does-your-startup-need-fractional-cfo/) or accountant to audit financial records
- Implement clean accounting processes if not already in place
- Reconcile all bank accounts and credit cards
- Document all revenue and understand customer concentration

**2-3 months before**:
- Prepare 24-month historical financials (P&L, balance sheet, cash flow)
- Build 3-year financial projections
- Document all key metrics and their source data
- Start compiling the data room

**1 month before**:
- Conduct internal financial due diligence—identify weak spots before investors do
- Prepare explanations for any unusual items or variances
- Verify cap table is accurate
- Have lawyer review stock documents and cap table

**During fundraising**:
- Respond promptly to diligence requests
- Prepare Q&A document explaining any red flags
- Have metrics reconciliation documentation ready

## What Belongs in Your Financial Data Room

Investors will ask for a secure data room containing:

**Financial statements**:
- Last 24 months of monthly P&Ls
- Most recent balance sheet
- Cash flow projections (12-24 months)
- 3-year revenue projections with assumptions documented

**Accounting records**:
- General ledger (current and prior year)
- Monthly bank reconciliations
- Bank statements (12 months)
- Credit card statements and reconciliations
- Accounts receivable aging
- Fixed asset register

**Revenue and customer data**:
- Customer list with: name, start date, monthly/annual contract value, churn status
- Top 10 customer concentration
- Explanation of any large or one-time deals
- Customer acquisition cost calculations
- Lifetime value analysis

**Operational records**:
- Cap table and stockholder agreements
- Employee list with: title, start date, salary, equity grants
- Payroll records (last 6 months)
- Current insurance policies
- Any debt agreements or credit facilities
- All material contracts (customers, vendors, partners)

**Legal and compliance**:
- Articles of incorporation and bylaws
- All board minutes
- Any litigation or disputes
- Tax returns (last 2 years)
- Regulatory compliance status

Organize everything clearly with a master index. Use consistent naming conventions. Make it easy for investors to find what they need—it signals financial maturity.

## Red Flags That Derail Series A Preparation

In our work with Series A startups, we've identified patterns that investors notice immediately:

**Inconsistent metrics**: "Our monthly active users are 50K, but I can only identify 30K in our database." This kills investor trust in *all* your metrics.

**Unexplained expenses**: If investors find $30K monthly payments to an LLC with no explanation, they'll assume the worst. Document everything.

**Revenue recognition games**: Recording annual contracts as monthly revenue, or booking deals that haven't actually closed. Investors will restate your financials conservatively—better to be conservative yourself.

**Messy cap table**: If you can't quickly answer "what's my fully diluted ownership," that's a problem. Get your cap table clean before fundraising.

**Owner-business confusion**: Personal expenses mixed with business expenses, or founder loans without formal terms. Separate these clearly.

**Changing your story**: If your metrics or assumptions differ between documents, investors assume you're hiding something.

## How to Audit Your Financial Readiness Now

Don't wait for investors to find problems. Conduct your own financial due diligence:

1. **Pull 24 months of financials** from your accounting software and verify they're accurate
2. **Reconcile your metrics** to source data—is your MRR calculation reproducible?
3. **Verify your cap table** against corporate records—is it signed and final?
4. **Review your top 10 customers**—do they represent too much revenue risk?
5. **Check your cash position** against bank statements—does it match?
6. **Document unusual items**—any large expenses, related-party transactions, or one-time events need explanation
7. **Test your burn calculation**—can you explain monthly operating expenses clearly?

If you find problems during this self-audit, you have time to fix them before investors start digging.

## Series A Preparation Is About Financial Maturity, Not Perfection

Investors don't expect your financials to be perfect—they expect them to be honest. The goal of series a preparation is demonstrating that:

- You understand your business financially
- Your numbers are reliable
- Your team can execute against financial plans
- Your financial operations can scale

This is as much about your financial discipline as your financial performance.

One founder we worked with had relatively modest metrics (just $50K MRR), but his Series A investors were impressed by how precisely he could explain unit economics, customer cohort performance, and burn rate. Strong financial rigor outweighed modest scale.

Conversely, we've seen founders with impressive revenue growth lose deals because their financial records were disorganized and metrics weren't traceable.

## Start Your Series A Preparation Today

If you're planning a Series A raise in the next 6-12 months, the time to prepare financially is now. Most founders wait too long, then scramble to organize records while simultaneously pitching investors.

Start with the financial self-audit above. If you identify gaps—messy accounting, untraceable metrics, or disorganized records—address them now when you have time.

For founders building a Series A-ready financial operation for the first time, a [fractional CFO](/blog/what-is-a-fractional-cfo-and-when-do-you-need-one-2/) can accelerate the process significantly. They've guided this journey with dozens of companies and know exactly what investors will scrutinize.

**Ready to assess your fundraising readiness?** Inflection CFO offers a free financial audit specifically designed for founders planning capital raises. We'll review your current financial operations, identify gaps, and create a concrete preparation plan. [Schedule your free audit today](#cta) to ensure your Series A preparation is complete before you start pitching.