The Hidden Business Risks That Could Kill a Deal

Discover the legal and insurance red flags that give investors cold feet – Founders Law and Capsule spill the hidden business mistakes they see over and over again, and how to ensure risk management.

You’ve spent years building your business. The team’s buzzing, growth is strong, and you’ve finally got that investor(s) lined up ready to get the deal done. Just as you think it’s all looking peachy, then comes due diligence… and suddenly, the questions start.

It’s not always the numbers that spook investors. More often, it’s the business risks. Those little legal or insurance gaps that feel small day-to-day but, more often than not, give investors cold feet. The good news? With a bit of risk management and prep, most of them can be fixed before they ever show up in a data room.

Here’s a run-through of the most common deal-killers we see you can get ahead of them.

Why Hidden Business Risks Matter More Than You Think

Investors don’t just buy your growth story. They want to buy certainty. They want to know they’re not inheriting a legal mess or a potentially expensive liability.

And the truth is: even if the business risks are fixable, it’s all about perception. Sloppy risk management can kill your leverage in negotiations.

That’s why legal and insurance should be seen as two halves of the same shield.  One that protects your structure and compliance, the other that protects your future liabilities.

“As startups prepare for future funding rounds, comprehensive insurance coverage becomes a critical governance factor. VCs (and the LPs which back them) increasingly scrutinise risk management as a sign of operational maturity. We issue term sheets with specific insurance requirements around D&O, key-man and increasingly – given today’s climate – cyber. Inadequate coverage is a diligence risk factor which can delay deals and, where material risks are identified, increase exposure to liability at company and/or founder level. Getting insurance right early demonstrates to VCs that founders understand the importance of protecting their business interests both now and in the future as the company scales.” Daniel Barrett-Nembhard, Director of Legal at MMC Ventures

Legal Red Flags That Make Investors Twitch

Here are the classics to watch out for:

• Messy contracts. Verbal agreements, unsigned supplier deals, vague T&Cs… what feels casual now can become a due diligence nightmare.
• Shaky IP ownership. If you don’t have clean assignments for your code, trademarks, or brand assets, you risk not even owning the thing you’re selling.
• Employment law landmines. Founders without contracts, “contractors” who are really employees, share option schemes scribbled on napkins – we’ve seen it all.
• Data privacy blind spots. GDPR and other regulatory issues are like landmines. Ignore them, and investors start backing away slowly.
• Pending disputes. Even small claims can make an acquirer think: what else don’t I know?

Insurance Risks That Raise Eyebrows

The hidden risks on the insurance side:

• No D&O cover. If your leadership team isn’t protected, that’s a red flag for anyone putting money in.
• Cyber risk exposure. If you hold customer data but don’t have cyber coverage, it’s like leaving the front door open.
• Outdated policies. Businesses evolve. If your cover hasn’t kept up, it won’t match your current risk profile.
• Product or service liability gaps. Especially dangerous for consumer or tech companies.
• Messy claims history. Undisclosed or poorly handled claims = instant trust issues.

How Investors See Hidden Business Risks

Investors see it too, “we believe it’s fundamental for all our investments to be properly protected by insurance and that having the right cover in place increases our portfolio’s chance to be successful.” says Colin Greene, Partner at Praetura Ventures. “At Praetura, we consider a good insurance programme to be a green flag when we’re doing due diligence on a business – it shows that they have good risk management in place and makes it much easier to make an investment offer.”

Imagine you’re the investor. Would you put millions into a business where the IP ownership is fuzzy, the contracts are half-baked, and a single cyber incident could wipe out months of runway?

This isn’t just about avoiding problems. It’s about signalling maturity. A business that’s legally tight and properly insured shows them that you know what you’re doing. That reassurance of risk management alone can help you close a deal faster and on better terms.

How To Mitigate Business Risks

Do a legal health check. Audit your contracts, IP, and governance docs. Get the house in order before you start to think about your raise.

Review your insurance quarterly. As you grow, so should your cover. Make sure it reflects your current reality.

Be transparent. If there are risks, disclose them early. Surprises kill deals.

Think cross-team. Legal + insurance should be part of your growth strategy, not an afterthought and both can act as a strategic partner, someone who actually adds value rather then a grudge purchase. 

Final Thoughts

Every business has its risks. The difference is in your risk management strategy.

Founders Law and Capsule help founders and leadership teams get their house in order, so that when opportunity knocks, nothing nasty jumps out of the closet.

Want to make sure hidden risks don’t kill your next deal? Let’s chat tilly@founders-law.co.uk

---