Mergers and acquisitions are high-stakes undertakings, particularly when an established company acquires a startup. While financials, legalities and product synergies often dominate early conversations, the people dimension is equally critical. When done right, HR due diligence uncovers risks that are not always visible in spreadsheets but have deep implications for integration, stability and long-term success. Drawing from nearly 18 years of experience in strategic HR and M&A scenarios, here are five recurring red flags I have encountered during the acquisition of startup teams, often subtle yet profoundly impactful.

1. Inconsistent or Informal Employment Contracts

Startups typically operate in a high-growth, agile mode and as a result, employment documentation is often informal or incomplete. From an acquirer’s standpoint, this poses significant risks around compliance, severance obligations, and role clarity, especially if the transaction results in structural changes. Example: In one acquisition, over 40 percent of employees had only offer letters, with no formal contracts outlining terms of employment. Post-acquisition restructuring became legally and ethically complex, delaying integration timelines by several months.

2. Undefined or Unstructured Compensation Models

Creative compensation practices are common in early-stage ventures including equity-linked incentives, undocumented bonuses, or discretionary payouts. However, in the absence of formal frameworks, this leads to internal pay inequity, unclear liabilities, and difficulties in aligning total rewards post-merger. The biggest warning sign is the absence of a compensation grid, unclear ESOP documentation, verbal bonus promises or inconsistent variable pay policies.

3. Lack of Performance Management or Talent Visibility

Without a structured performance or talent review process, it becomes difficult for the acquiring company to assess who the key contributors are, what leadership potential exists, and where to invest. Biggest Red flag is if leadership cannot confidently identify their top ten percent of talent and explain why, there is a significant risk of overestimating organisational strength.

4. Fragile Culture

Startups often build a culture around their founder, passionate and fast-moving but sometimes overdependent on individual leadership. During HR due diligence, it is important to evaluate whether the culture is scalable or whether it breaks without the founder’s direct involvement. Warning signs: Centralised decision-making, informal hierarchies, unclear accountability, or apprehension about introducing structure and process.

5. Hidden Attrition Risk and Passive Disengagement

Low visible attrition in a startup is not always a sign of high engagement. Deferred rewards, burnout, and lack of career clarity can create silent disengagement, where key talent is already exploring opportunities elsewhere. How to detect it: Analyse Glassdoor reviews, observe trends in profile updates on LinkedIn, review exit data if available and assess the retention of critical roles post-announcement.

HR due diligence is not just a checklist, it is a strategic lens into the health, readiness, and resilience of the people behind the product. Startups bring innovation, speed, and entrepreneurial energy. But acquirers must intentionally de-risk the human element early by asking tough questions, surfacing hidden risks, and planning people integration before the deal closes. In many cases, the success of an acquisition hinges not on what the startup has built, but who built it, why they stayed, and whether they will thrive in the next chapter.