Rather than presenting exhaustive details a Red Flag Report focuses on priority issues that require urgent attention, enabling deal teams to make informed decisions swiftly. These red flags typically revolve around technological scalability, cybersecurity governance, intellectual property (IP) practices, IT development methodology, and team structure.
For investors operating in a highly competitive tech M&A landscape, identifying and mitigating such risks early in the transaction lifecycle is essential.
What is a Red Flag report?
A Red Flag Report is a short-form summary of the most significant findings uncovered during the technical due diligence process. Delivered quickly—often within a few days of assessment—it provides a clear, executive-level view of the major technical risks and liabilities that could impact deal viability or future value creation.
While a full Tech DD dives deeply into systems architecture, development pipelines, IP and open source litigation risks, and compliance frameworks, the Red Flag Report condenses the analysis to the most pressing issues, those that could derail a transaction, reduce the asset’s valuation, or require significant remediation post-acquisition.
As the Tech Due Diligence Report, the Red Flag report is structured around the following core risk areas:
Scalability and technical debt
Is the technology stack strong and modular enough to support future growth, or does technical debt pose a barrier to integration, innovation, or expansion?
Cybersecurity and data protection
Are there poor encryption practices, or inadequate access controls that could expose the business to breaches or regulatory fines?
Team and development practices
Are software development processes well-managed and documented? Does the team follow secure coding, CI/CD, and DevOps best practices?
Intellectual Property ownership and licensing
Does the target company hold clear, enforceable rights over its proprietary software? Is the usage of open-source software well documented? Are developers trained and aware of the risks?
Why the Red Flag Report matters to investors
A well-executed Red Flag Report brings speed to the investment process. In competitive deals, waiting several weeks for a full due diligence report could mean missing out on a time-sensitive opportunity. With a Red Flag Report in hand, dealmakers can:
Make go/no-go decisions early
If critical flaws are identified, such as missing IP rights or poor IT organisational processes, the investor can step away before investing more time and resources.
Negotiate value and risk allocation
Red flags often become points for negotiation, whether through deal repricing, escrow arrangements, or requiring remedial actions pre-close.
Inform the integration and value-creation roadmap
Even when risks aren’t dealbreakers, early visibility into technical limitations helps in planning post-acquisition improvements and resource allocation.
Red Flag Report vs. Full Tech Due Diligence: why a Red Flag report is not enough
As we have seen in this article so far, a Red Flag Report is a rapid, high-level review designed to surface the most critical issues in a short timeframe, typically summarised in a handful of slides. It flags priority concerns that could affect valuation or derail a transaction, enabling investors to make early decisions on whether to proceed or investigate further. While it’s well adapted to financial and legal due diligence, it may have its limits when using it to assess tech.
In contrast, a full Tech Due Diligence, provides a deep-dive analysis of the company’s technology, especially when supported by tools such as source code and git scanning, that allow to dive deep into the tech and make thorough assessments of cybersecurity vulnerabilities, scalability limits, open-source software litigation risks, team performance, tech obsolescence etc. This in-depth process allows for a deeper and more thorough understanding of technical risks and long-term implications and value creation.
Below is how each type of report typically handles key risk areas:
Insecure code and poor cyber hygiene
Red Flag Report: Can highlight the absence of formal cybersecurity policies or lack of basic protection measures, based on documentation and interviews with the key stakeholders.
Full Tech DD: Uses automated code scans to detect all vulnerabilities in the code, outdated libraries, and gaps in encryption or access control. It may include a network footprint or full penetration test to go deep into assessing cyber vulnerabilities.
Lack of scalability or legacy architecture
Red Flag Report: Flags outdated technology or architectural choices based on interviews and a surface-level review.
Full Tech DD: Through source code and git scanners, it analyses the full system architecture, deployment environments, and code modularity. It evaluates the scalability of the stack and identifies technical debt that could hinder future growth or integration.
Team performance and over-reliance on key individuals
Red Flag Report: May identify concentration risk if technical operations depend heavily on one or two team members.
Full Tech DD: A scan of the git history provides invaluable insights on how the team performs, on leadership and methodology, developing practices, and planning. It also gauges how knowledge is shared across the team to reduce operational dependency.
Non-compliant use of open-source components
Red Flag Report: May raise concerns over lack of open-source policies, lack of awareness of the dev teams on risks associated with OSS use, or use of unvetted components based on interviews with the teams
Full Tech DD: Runs source code scan to detect all open-source components in the codebase, checking for licence compliance and identifying potential legal or security risks.
Conclusion
When the goal is to understand not just the risks, but the true potential for value creation, a Red Flag Report alone is not enough and will only scratch the surface.
To gain a comprehensive view of a company’s technology, from the scalability of its architecture to the quality of its code and compliance with IP and cybersecurity standards, a full Tech Due Diligence with source code and git scanning is the only option. This deeper analysis uncovers hidden liabilities, validates technology claims, and informs post-deal strategy, ensuring that investors are equipped to unlock long-term growth.
At Vaultinum, we combine speed and precision. Our full Tech Due Diligence swiftly delivers the insights needed to make confident, value-driven investment decisions, supported by expert analysis and proprietary source code scanning.
