Legal Due Diligence Checklist
Small C-Corp Legal Due Diligence Checklist
Legal review items for small, closely-held C-corporations. The checklist applies to private C-corps without public reporting obligations and skips items relevant only to large or public companies. Defining issues are clean stock records, equity plan compliance, board governance, and change-of-control consents.
Why a C-Corporation-Specific Checklist
- •Capitalization tables and stock ledgers in small C-corps are often outdated and need reconciliation before market.
- •Equity plans (options, restricted stock, RSUs) and 409A valuations are common cleanup items in C-corp deals.
- •Stockholder agreements often include drag-along, ROFR, co-sale, and approval provisions that affect deal mechanics.
- •Convertible notes, SAFEs, and warrants from earlier financings often have anti-dilution or change-of-control provisions buyers must address.
The Checklist
Items a buyer or seller in a c-corporation transaction should expect to request, produce, or review.
1. Formation and Corporate Records
Articles of Incorporation and all amendments
State-stamped copies of original articles and every amendment.
Certificate of Designation for any preferred stock
If the corporation has issued preferred stock with special rights.
Bylaws and amendments
Current bylaws and amendment history.
Certificate of good standing
Current certificate from state of incorporation and each foreign-qualified state.
Foreign qualification filings
Each state where the corporation has registered to do business.
Annual report filings for last 5 years
All states.
EIN assignment letter
Form CP-575 or equivalent.
DBA / fictitious name registrations
Any operating names.
2. Capitalization and Stock Records
Capitalization table (cap table)
Fully diluted cap table showing all classes of stock, options, warrants, convertible instruments, and ownership percentages.
Stock ledger from inception
Issuances, transfers, redemptions, and cancellations with dates and consideration.
Stock certificates (if certificated) or ledger entries
Current and historical certificates with restrictive legends.
Stock subscription and purchase agreements
Original subscription documents for each issuance with consideration documented.
Authorized but unissued shares
Reconciliation of shares authorized in articles to shares issued and outstanding plus reserved.
Treasury stock and redemption history
Redemption agreements, board approvals, and source-of-funds analysis.
Convertible notes and SAFEs
All outstanding convertible instruments with conversion mechanics, valuation caps, and any change-of-control provisions.
Warrants outstanding
Warrant agreements, exercise terms, and any anti-dilution provisions.
Preferred stock rights
If preferred stock issued, full review of preferences, dividends, anti-dilution, and protective provisions.
3. Stockholder and Investor Agreements
Stockholders agreement
Current agreement and amendments.
Investor rights agreement (IRA)
Information rights, registration rights, pre-emptive rights, board observer rights.
Voting agreement
Board composition agreements and voting commitments.
Right of First Refusal and Co-Sale Agreement
ROFR, co-sale, and tag-along provisions.
Drag-along provisions
Threshold to trigger drag, scope, and any conditions.
Buy-sell provisions
Triggers, valuation methodology, and funding mechanism (especially for closely-held C-corps).
Spousal consents
Where applicable in community property states or otherwise required.
Side letters with major investors
Any individual side letter modifications to standard rights.
4. Governance Records
Board composition and director appointments
Current directors, dates of appointment, and any open seats.
Board meeting minutes for last 3-5 years
Every meeting and written consents in lieu of meetings.
Stockholder meeting minutes and consents
Annual meetings, special meetings, and written consents.
Major corporate actions properly authorized
Significant decisions documented in minutes (financings, M&A, equity issuances, indebtedness).
Officer appointments
Current officers, scope of authority, indemnification arrangements.
Indemnification agreements
Standalone indemnification agreements with officers and directors.
Board committee charters and minutes
Audit, compensation, or other committees if applicable.
5. Equity Compensation
Stock option plan (incentive and non-qualified)
Plan documents, board approvals, and stockholder approvals.
Option grant agreements and vesting schedules
All outstanding option grants by holder.
409A valuations
Independent appraisals supporting fair-value strike prices, with refresh frequency.
Restricted stock and RSU agreements
Vesting schedules, repurchase rights, 83(b) elections.
Section 422 ISO compliance
Holding period requirements, $100K vesting limit, qualifying disposition tracking.
Section 83(b) election copies and timely filing
All elections by employees with restricted stock.
Equity awards approaching post-termination exercise expiration
Any options that may expire if not exercised before closing.
Single-trigger and double-trigger acceleration provisions
Change-of-control acceleration in equity awards and any 280G exposure.
Phantom stock and SAR plans
Any cash-based equity-equivalent arrangements.
6. Material Contracts and Change of Control
Top customer contracts (top 10 or top 80% of revenue)
With assignment and change-of-control provisions.
Top supplier and vendor agreements
Critical inputs and sole-source dependencies.
Real estate leases
Landlord consent on M&A.
Distribution and reseller agreements
Territory, exclusivity, term, termination provisions.
Bank loans and credit agreements
Acceleration triggers, covenants, prepayment terms.
Government contracts
Anti-Assignment Act and novation requirements.
Software and SaaS licenses
Assignment restrictions and audit rights.
Joint ventures and strategic alliances
Co-venturer consent rights.
Insurance arrangements including any captives
If any in-house insurance or captive arrangements.
7. Intellectual Property
Trademark, copyright, and patent registrations
Federal and state filings with chain of title.
Founder, employee, and contractor IP assignments
Standard assignment language and any gaps.
Domain registrations
All domains, expirations, registrant info.
Trade secret program
NDAs, confidentiality protocols, marking.
Open source software inventory
License compliance, GPL exposure.
Inbound and outbound IP licenses
Technology licensed to or from the corporation.
8. Employment and Labor
Employee roster and classifications
Names, titles, hire dates, comp, exempt vs. non-exempt.
Employment agreements
All written employment documentation, especially for executives.
Independent contractor agreements
All 1099 relationships with classification analysis.
Restrictive covenants
Non-compete, non-solicit, confidentiality.
Executive change-of-control and severance arrangements
Single-trigger or double-trigger provisions and 280G analysis.
Section 280G golden parachute tax exposure
Compensation, benefits, and equity acceleration tested against base amount.
Section 409A deferred compensation arrangements
Plan documents and ongoing compliance.
Employee handbook and policies
Current handbook and state-specific addenda.
Retirement plans and ERISA compliance
Plan documents, Forms 5500, top-heavy and nondiscrimination testing.
Pending or threatened employment claims
EEOC, wage and hour, OSHA, unemployment.
Workers compensation claim history
Last 3-5 years.
9. Real Estate, Permits, and Compliance
Owned real property
Deeds, surveys, title insurance, encumbrances.
Personal property leases
Vehicles, equipment, IT.
Operating permits and licenses
Industry-specific licenses and registrations.
Environmental compliance
Phase I or II reports if applicable; remediation history.
Health and safety compliance
OSHA / MIOSHA inspection history.
Data privacy compliance
Privacy policies, breach history, GDPR/CCPA.
Regulatory compliance for industry
Any sector-specific regulators (FDA, FCC, FINRA, banking, healthcare, etc.).
10. Litigation and Insurance
Pending litigation
All cases by caption, court, status, exposure, counsel.
Threatened litigation
Demand letters, pre-suit demands.
Settlement agreements
Last 5 years with continuing obligations.
Government investigations
Any open or recently closed inquiries.
Insurance policies
GL, property, professional, cyber, D&O, EPL, workers comp.
Insurance claim history
Last 5 years.
Representations and warranties insurance considerations
If RWI is being explored, the insurer's diligence will overlay the buyer's.
11. Closing Schedule and Approvals
Master consent schedule
All third-party consents required to close, with status.
Stockholder approvals required
Voting thresholds under bylaws, stockholder agreements, and applicable corporate law.
Anti-assignment provisions in material contracts
Each contract with assignment restrictions, with negotiation status.
Lender notice and consent requirements
Notice provisions and acceleration triggers.
Regulatory filings (HSR, foreign investment)
HSR Act analysis, CFIUS analysis if foreign buyer, and any industry-specific approvals.
Frequently Asked Questions
Why does cap table cleanup come up so often in C-corp diligence?
Many small C-corps have grown through informal stock issuances, founder splits, friends-and-family rounds, and convertible notes that converted at varying prices. Reconciling all of this into a clean fully-diluted cap table is harder than it sounds. Issues like missed 83(b) elections, undocumented option grants, and convertible instruments with ambiguous conversion mechanics commonly surface and need cleanup before any sale or major financing.
What are 409A valuations and why do buyers care about them?
Section 409A of the tax code requires that stock options be granted with strike prices at or above fair market value at the time of grant. Without an independent 409A valuation, the IRS can challenge the strike prices and impose penalty taxes on the option holders. Buyers care because (a) they may inherit unhappy option holders, (b) the company may have unaccounted tax exposure, and (c) the cap table may need restating. Refresh frequency (every 12 months or after material events) is also a diligence point.
Should I worry about Section 280G golden parachute exposure?
Maybe. Section 280G applies a 20-percent excise tax on excess parachute payments to disqualified individuals (officers, large shareholders, highly compensated employees) when a change of control results in total payments exceeding three times the individual's base amount. The corporation also loses the deduction for those payments. For most very small C-corps with no executive equity acceleration, 280G is not an issue. For C-corps with executive equity, severance, or change-of-control bonuses, the analysis is essential before deal terms get finalized.
How is this different from due diligence on a venture-backed startup?
Venture-backed startups usually have additional layers: preferred stock with anti-dilution, registration rights, board observer rights, and protective provisions. Convertible notes and SAFEs from earlier rounds add complexity. Investors' rights agreements and side letters often modify standard rights. The core checklist is the same; the depth on cap table, equity plans, and investor agreements is much greater.
What about board minutes that are missing for older years?
Common. The pragmatic solution is usually a ratifying consent at closing, where the current board confirms past actions and any necessary stockholder approvals. Major missing items (financings, M&A activity) get more attention than routine operations. Buyers usually accept reasonable cleanup if no actual disputes exist over the underlying decisions.
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