Claims from former employees, disputes with contractors, or tax audits generally do not pose a problem for investors in and of themselves. What matters to an investor is to assess the potential consequences in advance and understand how such disputes might affect future joint ownership of the business.
When you enter into a deal with an investor, one of the items in the due diligence questionnaire will simply say: pending litigation. But keep in mind that the investor’s lawyers will look for any information about ongoing or potential disputes—with employees, contractors, clients, or regulatory authorities.
Even a minor dispute with an employee or contractor can become sensitive during a deal. Sometimes it concerns amounts that place a significant burden on a startup; other times it may reflect an organizational issue within the team. The investor will assess how materially the dispute could impact the business, what consequences it may have for the investor, and how realistic it is to resolve it before or after the transaction.
Potential claims—when someone is dissatisfied but has not yet filed a lawsuit—can also come under scrutiny. Investors (or, more precisely, their lawyers) know how to read between the lines: a letter from a dissatisfied client, a pre-litigation claim, or a hint of dismissal “for cause”—all of these may surface during due diligence.
Therefore, it is important to:
If you are involved in a dispute, don’t conceal it. It is far better to disclose it upfront, explain the context, and demonstrate that you are in control of the situation. This will give the investor confidence that there are no “skeletons in the closet” that might emerge at the worst possible moment.
Authors: Viktoria Markova, Irina Kuheika
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