Picture this: You’ve just closed a promising term sheet. Your metrics are strong, your product-market fit is undeniable, and your investors are excited. Then, during due diligence, the request comes: “Please provide I-9 documentation for all employees.”
Your stomach drops. You hired three people in your first frantic months. You think they filled out their forms. But where are they now? Lost in a filing cabinet? Saved in someone’s personal email? Never completed at all?
I’ve lived this nightmare firsthand. Early in my career, I joined a startup that had been operating for several years before bringing me on to automate their records. At the time, we were in active negotiations to divest a piece of the business to Amazon, a transformational deal that would have validated years of work and opened doors we’d only dreamed about.
Then came the due diligence request: produce I-9 documentation for all employees, including those who had left the company years earlier. We couldn’t do it. Those early hires and the scrappy first team that built the foundation had their records scattered, incomplete, or simply missing. Some forms were never completed properly. Others vanished when that first office manager left.
The Amazon deal didn’t fall through solely because of missing I-9s. It was a constellation of issues: poor record-keeping, inadequate documentation systems, gaps in operational infrastructure. But those missing I-9 forms became the visible symptom of a deeper diagnosis, this company couldn’t demonstrate the operational maturity required to be a reliable partner to Amazon. The I-9 gap wasn’t the disease; it was the fever that revealed it.
I watched that opportunity slip away. Not because our product wasn’t good enough. Not because the business case wasn’t compelling. But because we couldn’t produce basic employment paperwork that should have been filed away years ago.
This isn’t an isolated case. It’s a pattern that plays out more often than founders realize.
Why I-9 Compliance Matters More Than You Think
Form I-9 employment eligibility verification seems mundane compared to your cap table or intellectual property. It’s the kind of administrative task that founders deprioritize when they’re laser-focused on growth. But this is exactly why it becomes a red flag during due diligence.
Investors conducting due diligence examine employment contracts, legal compliance, and documentation integrity any inconsistencies can delay or jeopardize funding deals, particularly in regulated industries. Legal due diligence is essential for uncovering risks that may impact a startup’s success or value, including reviewing legal compliance.
When investors discover missing or improperly completed I-9 forms, they’re not just seeing paperwork violations. They’re seeing evidence that:
- You may lack operational rigor in areas they can’t directly audit
- You could be exposed to significant federal penalties that would drain precious runway
- Your leadership team might overlook critical compliance requirements in other domains
- You haven’t built scalable systems that work beyond the founder’s direct involvement
The Real Financial Stakes
The cost of non-compliance isn’t theoretical. As of 2024, I-9 paperwork violations range from $281 to $2,789 per form, with penalties for knowingly employing unauthorized workers ranging from $698 to $27,894 per violation. In 2015, Hartmann Studios received the largest I-9 penalty to date, $605,250 for more than 800 paperwork violations—primarily due to repeatedly failing to sign Section 2 of the I-9 form.
For a startup with 20 employees and a 50% I-9 error rate, even modest penalties could mean $15,000-$30,000 in fines. That’s runway. That’s a critical hire. That’s the difference between extending your Series A or starting a bridge round under duress.
But the indirect costs dwarf the direct penalties:
- Extended due diligence timelines that create deal fatigue and allow competitors to move faster
- Valuation haircuts as investors discount for perceived operational risk
- Reputational damage that follows you to future rounds and acquisition discussions
- Management distraction when you should be focused on product and customers
What Investors Are Really Looking For
Due diligence is an opportunity to showcase startup strengths and demonstrate commitment to transparency and thoroughness and this approach significantly influences investor confidence and can make the difference between securing funding or not.
When investors request I-9 documentation, they’re testing several hypotheses:
1. Can this team build systems that scale? Early-stage chaos is expected. But investors need confidence that founders can transition from “doing everything themselves” to building repeatable processes. Clean I-9 compliance suggests systematic thinking.
2. Do these founders understand risk? Missing I-9s exposes the company to federal penalties, ICE audits, and potential employment disputes. Founders who dismiss this risk may underestimate other compliance obligations and especially important in regulated industries like fintech or healthcare.
3. Is this company acquisition-ready? M&A due diligence scrutinizes I-9 compliance intensely. In mergers and acquisitions, if an employer treat acquired employees as continuing employment, the new employer assumes responsibility for any mistakes or omissions on previous Forms I-9. Buyers don’t want to inherit liability.
4. How does leadership respond to gaps? The response to compliance gaps matters as much as the gaps themselves. Founders who acknowledge issues transparently, demonstrate remediation efforts, and show learning capacity build trust. Those who minimize, blame others, or scramble defensively raise concerns.
Building Founder-Friendly Compliance
The irony is that I-9 compliance isn’t actually difficult, it’s just systematic. Every U.S. employer must complete Form I-9 for each employee, verifying identity and employment authorization within three business days of hire. The form has three sections: employee attestation, employer verification, and reverification/rehire documentation when needed.
But “simple” doesn’t mean “easy” when you’re a founder juggling product development, fundraising, and customer acquisition. This is where building the right infrastructure pays dividends:
Before you hire your first employee:
- Set up a digital I-9 management system (many HRIS platforms include this)
- Create a simple checklist that lives in your onboarding workflow
- Designate someone, even if it’s you, as responsible for verification
- Establish a secure, centralized filing system (digital is better than paper scattered across desks)
As you scale:
- Conduct quarterly self-audits to catch errors early (finding your own problems is infinitely better than ICE finding them)
- Document your I-9 process in writing, so it survives employee turnover
- Train anyone involved in hiring on proper I-9 procedures
- Consider engaging immigration counsel for an annual compliance review
Before fundraising:
- Run a comprehensive I-9 audit 3-6 months before approaching investors
- Correct any identified issues (most technical errors can be fixed if caught during self-audit)
- Document your compliance process for due diligence requests
- If you discover substantial problems, engage counsel immediately—attorney-client privilege matters
The Broader Pattern: Compliance as Competitive Advantage
I-9 forms are just one piece of a larger puzzle. Companies with strong compliance frameworks build stakeholder trust, attract quality partnerships with established financial institutions, and position themselves advantageously for funding rounds where due diligence scrutiny is intense.
The startups that successfully navigate due diligence share common characteristics:
- They treat compliance as infrastructure, not overhead
- They implement systems before they’re absolutely necessary
- They view investor requests as opportunities to demonstrate operational maturity
- They recognize that compliance excellence becomes a moat in regulated markets
Consider Stripe’s approach: from day one, they built financial compliance into their DNA. This wasn’t just about meeting requirements, it became a trust signal that enabled partnerships with banks, enterprises, and ultimately made them a multi-billion dollar company.
Your Action Plan
If you’re a founder currently building toward a funding round, here’s what you should do this week:
Immediate (next 48 hours):
- Locate your current I-9 forms all of them
- Verify you have properly completed documentation for every W-2 employee (contractors don’t require I-9s, but that’s a different compliance area)
- Identify any obvious gaps or missing forms
Short-term (next 30 days):
- Conduct a thorough internal I-9 audit or hire counsel to do one under attorney-client privilege
- Correct technical errors where permissible
- Complete missing I-9s for current employees (though note: this must be done carefully to avoid discrimination concerns)
- Implement a systematic process for all future hires
Before fundraising:
- Prepare a “compliance package” for due diligence that demonstrates your I-9 process, audit history, and remediation efforts
- Be prepared to discuss any identified issues transparently, along with how you addressed them
- Show investors your systematic approach to compliance generally—I-9s are just one indicator
The Bottom Line
The ghost of I-9s past doesn’t have to haunt your funding round. Unlike many startup challenges, this one is entirely within your control. It doesn’t require proprietary technology, genius-level insight, or venture-scale capital. It just requires systematic execution, which, conveniently, is exactly what investors want to see.
Missing I-9 forms won’t kill a company with incredible traction and a massive market opportunity. But they will slow you down, cost you money, and raise questions about operational maturity at the worst possible moment. In the competitive fundraising environment of 2025, that delay might be all it takes for a competitor to sprint ahead while you’re stuck in extended due diligence.
Build the boring infrastructure. Document your processes. Take compliance seriously from day one. Your future self, the one closing that Series A on schedule, will thank you.
Call to Action
Don’t let administrative gaps derail your growth trajectory. BackPocket Talent help founders build compliance infrastructure that scales from first hire to IPO. Our approach combines automation, expert guidance, and founder-friendly workflows that integrate seamlessly into your operations.
Ready to audit-proof your startup? Schedule a confidential compliance assessment and learn how to turn HR compliance from a liability into a competitive advantage.
Appendix: Key Sources & Legal References
I-9 Penalties and Enforcement
U.S. Citizenship and Immigration Services (USCIS)
- Handbook for Employers M-274 – Official guidance for completing Form I-9
- Penalties for Prohibited Practices (February 2025) – Current penalty schedules and enforcement procedures
- Website: https://www.uscis.gov/i-9-central
2024 Penalty Increases
- Foley & Lardner LLP, “Employers Get Ready: I-9 Fine Increases Are Here — and More I-9 Inspections Are on the Horizon” (July 2024)
- Documents current penalty ranges: $281-$2,789 per I-9 paperwork violation; $698-$27,894 per unauthorized employment violation
Notable Cases
- Hartmann Studios (2015) – OCAHO ordered $605,250 fine for 800+ I-9 violations, primarily failure to sign Section 2
- Source: SHRM, “Company Hit with Largest I-9 Paperwork Penalties to Date”
Due Diligence and Startup Fundraising
Legal Due Diligence Requirements
- Visible.vc, “Startup Due Diligence: What Every Founder Needs to Prepare For”
- Jamieson Law, “Legal Due Diligence for Startups: Investor Checklist” (April 2025)
- Cambridge Management Consulting, “Due Diligence Services”
Due Diligence Timelines and Process
- Dealroom.net, “Startups Due Diligence: Guide for Founders” (January 2025)
- Documents typical 2-8 week process that can extend to 2+ months when irregularities arise
Compliance as Competitive Advantage
- Phoenix Strategy Group, “2025 FinTech Compliance Checklist for Startups”
- Emphasizes how strong compliance frameworks attract quality partnerships and position startups favorably in funding rounds
M&A and I-9 Transfer Requirements
Jackson Lewis P.C.
- “Mergers and Acquisitions and Compliance with Form I-9 Employment Eligibility Verification” (April 2023)
- Details successor employer liability for I-9 errors in acquired workforce
Internal Audit Guidance
U.S. Department of Justice
- Guidance for Employers Conducting Internal Employment Eligibility Verification Form I-9 Audits
- Official guidance on conducting privileged internal audits
- Website: https://www.justice.gov/crt
Current Enforcement Environment
- HR Dive, “Why employers can’t afford to wait for an I-9 audit or an ICE raid” (September 2025)
- Documents increased ICE workplace enforcement in 2025 and preparation strategies
Additional Resources
Immigration and Customs Enforcement (ICE)
- Form I-9 Inspection procedures and enforcement statistics
- Website: https://www.ice.gov/factsheets/i9-inspection
Recent Updates
- Business.com, “How to Deal With a Form I-9 Audit From ICE” (January 2025)
- Practical guidance on audit preparation and response
Disclaimer: This article provides general information and should not be construed as legal advice. For specific guidance on I-9 compliance aPicture this: You’ve just closed a promising term sheet. Your metrics are strong, your product-market fit is undeniable, and your investors are excited. Then, during due diligence, the request comes: “Please provide I-9 documentation for all employees.”
Your stomach drops. You hired three people in your first frantic months. You think they filled out their forms. But where are they now? Lost in a filing cabinet? Saved in someone’s personal email? Never completed at all?
I’ve lived this nightmare firsthand. Early in my career, I joined a startup that had been operating for several years before bringing me on to automate their records. At the time, we were in active negotiations to divest a piece of the business to Amazon, a transformational deal that would have validated years of work and opened doors we’d only dreamed about.
Then came the due diligence request: produce I-9 documentation for all employees, including those who had left the company years earlier. We couldn’t do it. Those early hires and the scrappy first team that built the foundation had their records scattered, incomplete, or simply missing. Some forms were never completed properly. Others vanished when that first office manager left.
The Amazon deal didn’t fall through solely because of missing I-9s. It was a constellation of issues: poor record-keeping, inadequate documentation systems, gaps in operational infrastructure. But those missing I-9 forms became the visible symptom of a deeper diagnosis, this company couldn’t demonstrate the operational maturity required to be a reliable partner to Amazon. The I-9 gap wasn’t the disease; it was the fever that revealed it.
I watched that opportunity slip away. Not because our product wasn’t good enough. Not because the business case wasn’t compelling. But because we couldn’t produce basic employment paperwork that should have been filed away years ago.
This isn’t an isolated case. It’s a pattern that plays out more often than founders realize.
Why I-9 Compliance Matters More Than You Think
Form I-9 employment eligibility verification seems mundane compared to your cap table or intellectual property. It’s the kind of administrative task that founders deprioritize when they’re laser-focused on growth. But this is exactly why it becomes a red flag during due diligence.
Investors conducting due diligence examine employment contracts, legal compliance, and documentation integrity any inconsistencies can delay or jeopardize funding deals, particularly in regulated industries. Legal due diligence is essential for uncovering risks that may impact a startup’s success or value, including reviewing legal compliance.
When investors discover missing or improperly completed I-9 forms, they’re not just seeing paperwork violations. They’re seeing evidence that:
- You may lack operational rigor in areas they can’t directly audit
- You could be exposed to significant federal penalties that would drain precious runway
- Your leadership team might overlook critical compliance requirements in other domains
- You haven’t built scalable systems that work beyond the founder’s direct involvement
The Real Financial Stakes
The cost of non-compliance isn’t theoretical. As of 2024, I-9 paperwork violations range from $281 to $2,789 per form, with penalties for knowingly employing unauthorized workers ranging from $698 to $27,894 per violation. In 2015, Hartmann Studios received the largest I-9 penalty to date, $605,250 for more than 800 paperwork violations—primarily due to repeatedly failing to sign Section 2 of the I-9 form.
For a startup with 20 employees and a 50% I-9 error rate, even modest penalties could mean $15,000-$30,000 in fines. That’s runway. That’s a critical hire. That’s the difference between extending your Series A or starting a bridge round under duress.
But the indirect costs dwarf the direct penalties:
- Extended due diligence timelines that create deal fatigue and allow competitors to move faster
- Valuation haircuts as investors discount for perceived operational risk
- Reputational damage that follows you to future rounds and acquisition discussions
- Management distraction when you should be focused on product and customers
What Investors Are Really Looking For
Due diligence is an opportunity to showcase startup strengths and demonstrate commitment to transparency and thoroughness and this approach significantly influences investor confidence and can make the difference between securing funding or not.
When investors request I-9 documentation, they’re testing several hypotheses:
1. Can this team build systems that scale? Early-stage chaos is expected. But investors need confidence that founders can transition from “doing everything themselves” to building repeatable processes. Clean I-9 compliance suggests systematic thinking.
2. Do these founders understand risk? Missing I-9s exposes the company to federal penalties, ICE audits, and potential employment disputes. Founders who dismiss this risk may underestimate other compliance obligations and especially important in regulated industries like fintech or healthcare.
3. Is this company acquisition-ready? M&A due diligence scrutinizes I-9 compliance intensely. In mergers and acquisitions, if an employer treat acquired employees as continuing employment, the new employer assumes responsibility for any mistakes or omissions on previous Forms I-9. Buyers don’t want to inherit liability.
4. How does leadership respond to gaps? The response to compliance gaps matters as much as the gaps themselves. Founders who acknowledge issues transparently, demonstrate remediation efforts, and show learning capacity build trust. Those who minimize, blame others, or scramble defensively raise concerns.
Building Founder-Friendly Compliance
The irony is that I-9 compliance isn’t actually difficult, it’s just systematic. Every U.S. employer must complete Form I-9 for each employee, verifying identity and employment authorization within three business days of hire. The form has three sections: employee attestation, employer verification, and reverification/rehire documentation when needed.
But “simple” doesn’t mean “easy” when you’re a founder juggling product development, fundraising, and customer acquisition. This is where building the right infrastructure pays dividends:
Before you hire your first employee:
- Set up a digital I-9 management system (many HRIS platforms include this)
- Create a simple checklist that lives in your onboarding workflow
- Designate someone, even if it’s you, as responsible for verification
- Establish a secure, centralized filing system (digital is better than paper scattered across desks)
As you scale:
- Conduct quarterly self-audits to catch errors early (finding your own problems is infinitely better than ICE finding them)
- Document your I-9 process in writing, so it survives employee turnover
- Train anyone involved in hiring on proper I-9 procedures
- Consider engaging immigration counsel for an annual compliance review
Before fundraising:
- Run a comprehensive I-9 audit 3-6 months before approaching investors
- Correct any identified issues (most technical errors can be fixed if caught during self-audit)
- Document your compliance process for due diligence requests
- If you discover substantial problems, engage counsel immediately—attorney-client privilege matters
The Broader Pattern: Compliance as Competitive Advantage
I-9 forms are just one piece of a larger puzzle. Companies with strong compliance frameworks build stakeholder trust, attract quality partnerships with established financial institutions, and position themselves advantageously for funding rounds where due diligence scrutiny is intense.
The startups that successfully navigate due diligence share common characteristics:
- They treat compliance as infrastructure, not overhead
- They implement systems before they’re absolutely necessary
- They view investor requests as opportunities to demonstrate operational maturity
- They recognize that compliance excellence becomes a moat in regulated markets
Consider Stripe’s approach: from day one, they built financial compliance into their DNA. This wasn’t just about meeting requirements, it became a trust signal that enabled partnerships with banks, enterprises, and ultimately made them a multi-billion dollar company.
Your Action Plan
If you’re a founder currently building toward a funding round, here’s what you should do this week:
Immediate (next 48 hours):
- Locate your current I-9 forms all of them
- Verify you have properly completed documentation for every W-2 employee (contractors don’t require I-9s, but that’s a different compliance area)
- Identify any obvious gaps or missing forms
Short-term (next 30 days):
- Conduct a thorough internal I-9 audit or hire counsel to do one under attorney-client privilege
- Correct technical errors where permissible
- Complete missing I-9s for current employees (though note: this must be done carefully to avoid discrimination concerns)
- Implement a systematic process for all future hires
Before fundraising:
- Prepare a “compliance package” for due diligence that demonstrates your I-9 process, audit history, and remediation efforts
- Be prepared to discuss any identified issues transparently, along with how you addressed them
- Show investors your systematic approach to compliance generally—I-9s are just one indicator
The Bottom Line
The ghost of I-9s past doesn’t have to haunt your funding round. Unlike many startup challenges, this one is entirely within your control. It doesn’t require proprietary technology, genius-level insight, or venture-scale capital. It just requires systematic execution, which, conveniently, is exactly what investors want to see.
Missing I-9 forms won’t kill a company with incredible traction and a massive market opportunity. But they will slow you down, cost you money, and raise questions about operational maturity at the worst possible moment. In the competitive fundraising environment of 2025, that delay might be all it takes for a competitor to sprint ahead while you’re stuck in extended due diligence.
Build the boring infrastructure. Document your processes. Take compliance seriously from day one. Your future self, the one closing that Series A on schedule, will thank you.
Call to Action
Don’t let administrative gaps derail your growth trajectory. BackPocket Talent help founders build compliance infrastructure that scales from first hire to IPO. Our approach combines automation, expert guidance, and founder-friendly workflows that integrate seamlessly into your operations.
Ready to audit-proof your startup? Schedule a confidential compliance assessment and learn how to turn HR compliance from a liability into a competitive advantage.
Appendix: Key Sources & Legal References
I-9 Penalties and Enforcement
U.S. Citizenship and Immigration Services (USCIS)
- Handbook for Employers M-274 – Official guidance for completing Form I-9
- Penalties for Prohibited Practices (February 2025) – Current penalty schedules and enforcement procedures
- Website: https://www.uscis.gov/i-9-central
2024 Penalty Increases
- Foley & Lardner LLP, “Employers Get Ready: I-9 Fine Increases Are Here — and More I-9 Inspections Are on the Horizon” (July 2024)
- Documents current penalty ranges: $281-$2,789 per I-9 paperwork violation; $698-$27,894 per unauthorized employment violation
Notable Cases
- Hartmann Studios (2015) – OCAHO ordered $605,250 fine for 800+ I-9 violations, primarily failure to sign Section 2
- Source: SHRM, “Company Hit with Largest I-9 Paperwork Penalties to Date”
Due Diligence and Startup Fundraising
Legal Due Diligence Requirements
- Visible.vc, “Startup Due Diligence: What Every Founder Needs to Prepare For”
- Jamieson Law, “Legal Due Diligence for Startups: Investor Checklist” (April 2025)
- Cambridge Management Consulting, “Due Diligence Services”
Due Diligence Timelines and Process
- Dealroom.net, “Startups Due Diligence: Guide for Founders” (January 2025)
- Documents typical 2-8 week process that can extend to 2+ months when irregularities arise
Compliance as Competitive Advantage
- Phoenix Strategy Group, “2025 FinTech Compliance Checklist for Startups”
- Emphasizes how strong compliance frameworks attract quality partnerships and position startups favorably in funding rounds
M&A and I-9 Transfer Requirements
Jackson Lewis P.C.
- “Mergers and Acquisitions and Compliance with Form I-9 Employment Eligibility Verification” (April 2023)
- Details successor employer liability for I-9 errors in acquired workforce
Internal Audit Guidance
U.S. Department of Justice
- Guidance for Employers Conducting Internal Employment Eligibility Verification Form I-9 Audits
- Official guidance on conducting privileged internal audits
- Website: https://www.justice.gov/crt
Current Enforcement Environment
- HR Dive, “Why employers can’t afford to wait for an I-9 audit or an ICE raid” (September 2025)
- Documents increased ICE workplace enforcement in 2025 and preparation strategies
Additional Resources
Immigration and Customs Enforcement (ICE)
- Form I-9 Inspection procedures and enforcement statistics
- Website: https://www.ice.gov/factsheets/i9-inspection
Recent Updates
- Business.com, “How to Deal With a Form I-9 Audit From ICE” (January 2025)
- Practical guidance on audit preparation and response
Disclaimer: This article provides general information and should not be construed as legal advice. For specific guidance on I-9 compliance and immigration matters, consult qualified legal counsel.nd immigration matters, consult qualified legal counsel.
0 Comments