HR Due Diligence: Compliance as Your First Line of Defense and Culture Metrics

The Two Sides of the HR Due Diligence Coin

For early-stage US startups, an investor's first due diligence request can feel like a sudden, high-stakes exam. While founders are ready to defend their cap table and financial models, the HR folder is often a scramble of PEO reports, scattered documents, and hastily assembled spreadsheets. The key challenge isn't a lack of information, but consolidating reliable retention and culture metrics from these disparate sources into an investor-ready format. This process moves HR from a background function to a core part of the fundraising narrative, proving you have a durable team capable of building a valuable company.

Investor diligence on HR splits neatly into two categories. First is Risk Mitigation, which covers compliance essentials to ensure the company isn't hiding legal liabilities. Second is Growth Potential, which assesses the people and culture for evidence of a strong, scalable organization. A company that excels in both areas demonstrates it has not only minimized legal risk but also built a foundation for sustained growth powered by its team.

Your HR Compliance Checklist for US Startups: The Essentials

This first part covers the non-negotiables. These are the foundational documents and records that prove your startup is operating on solid legal ground. Think of this as the table stakes for any serious funding round, particularly as you approach a Series A.

The Employee Handbook as Your First Line of Defense

An employee handbook is far more than a welcome packet; it is a critical risk-management tool that codifies company policies and sets clear expectations for conduct. For most startups without in-house HR expertise, navigating complex federal and state labor laws to build a fully compliant handbook is a significant pain point. While PEOs like Gusto or Rippling provide excellent templates, a one-size-fits-all approach is risky for companies with a distributed workforce.

The pragmatic approach for most pre-seed to Series B startups is to start with a strong PEO template but customize it with state-specific addendums. Your handbook must include several core policies. The At-Will Employment doctrine, fundamental in most US states, should be clearly stated. An Equal Employment Opportunity (EEO) policy is mandatory, as are clear Anti-Harassment and Discrimination policies with a defined reporting procedure. Complexity multiplies with multi-state employment, as states like California, New York, and Illinois have specific requirements that must be addressed.

Auditable Harassment Prevention Training Requirements

Having an anti-harassment policy is only the first step; you must prove your team has been trained on it. This is a critical distinction many founders miss until a due diligence checklist arrives. Keeping accurate, auditable records of mandatory harassment-prevention training for every employee is essential. Investors need to see you are proactively mitigating a significant area of legal and cultural risk. An auditable record is a log showing each employee's name, training completion date, course name, and a digital acknowledgment. You should also retain Form I-9s per federal inspection expectations.

This is not just best practice; in many places, it is the law. Several states require recurring, mandatory harassment training. For instance:

• California's SB 1343 requires one hour of training for all non-supervisory employees and two hours for supervisors within six months of hire and every two years thereafter.
• New York, Illinois, and Connecticut also have specific, recurring training mandates that must be followed.

The practical consequence tends to be that without a centralized system, this data becomes almost impossible to reconstruct accurately. This creates a significant red flag for investors, who see it as a sign of weak internal controls.

Proving Value with People and Culture Metrics

Once compliance is covered, the focus shifts to telling a story with data. This section answers the investor question: How can you use data to prove your company is a great place to work? Here, you move beyond preventing risk and start proving value.

The Two Employee Retention Metrics That Matter Most

Investors want to see that you can not only attract talent but also retain it. Vague assurances are not enough; you need metrics. For useful context, see these key hiring metrics for tech. The first and most fundamental metric is your Employee Turnover Rate, which provides a high-level view of team stability. It is calculated using data from your PEO or payroll system.

Employee Turnover Rate = (Number of Separations / Average Number of Employees) x 100 for a given period.

While this number is a useful starting point, its real power comes from segmentation. The critical distinction for investors is between regretted and unregretted turnover. This reframes the conversation from a simple number to a strategic narrative about talent management. Regretted turnover involves the loss of high-performers, while unregretted turnover refers to the departure of low-performing or poorly-aligned employees. Segmenting your data this way shows investors that you are actively managing performance and retaining your most valuable people, which tells a very different story than a simple, blended rate.

From Vague "Culture" to a Simple, Quantifiable Metric

Every founder claims to have a great company culture, but the best founders can prove it with data. The most effective tool for this is the Employee Net Promoter Score (eNPS). It is a single-question survey sent to your team: "On a scale of 0-10, how likely are you to recommend this company as a place to work?" Employees are categorized as Promoters (9-10), Passives (7-8), or Detractors (0-6). The score is the percentage of Promoters minus the percentage of Detractors.

This simple metric, gathered using tools from Google Forms to Culture Amp, provides a powerful snapshot of team morale and a benchmark for improvement. In practice, we see that eNPS scores can be benchmarked for startups.

An Employee Net Promoter Score (eNPS) above +30 is considered solid, and a score above +50 is exceptional.

Presenting a strong eNPS score and showing its trend over time gives investors confidence that your team is engaged, motivated, and aligned with the company’s mission.

Mastering Equity and Compensation Records

A messy equity and compensation history is a common diligence bottleneck. The solution is a clean, up-to-date 'census file', which is a master spreadsheet listing every employee with key details about their compensation and equity. This file should include name, hire date, title, current salary, bonus eligibility, and all equity grant information: grant date, number of options, type, and vesting schedule. While your PEO and cap table software hold this information, investors want it consolidated. Maintaining it proactively saves immense stress and demonstrates strong operational discipline.

Actionable Steps for Investor Readiness

To prepare for HR due diligence, focus on three actionable steps:

1. Start with your PEO's employee handbook template, but engage legal counsel to draft state-specific addendums for every state where you have an employee, especially in places like California or New York.
2. Implement a formal system to track harassment prevention training. Whether it is a feature within your PEO or a simple LMS, the goal is a centralized, exportable record. Use a secure virtual data room for shared documents.
3. Begin calculating your two key culture metrics today: Employee Turnover Rate (segmented by regretted and unregretted) and eNPS. Building this habit early is far easier than trying to reconstruct data under pressure.

Final Word

HR due diligence is not just a compliance hurdle to clear; it is an opportunity to showcase the strength and stability of your team. By building a foundation of clear policies, auditable records, and data-driven cultural insights, you tell a compelling story of a well-run company poised for growth. For broader preparation, see the investor due diligence hub.