Red Flag
Definition
A specific finding during investor financial due diligence that causes the investor to question the reliability of the company's financial representations or the quality of its financial management. Common financial red flags include: internal inconsistencies between financial documents, gross margin figures that change between versions of the same document, cap table discrepancies, revenue recognition that does not match payment terms, and cash runway projections that use gross burn instead of net burn.
Common Misapplication
The most common misapplication is treating red flag resolution as a communications exercise rather than as a financial management correction. A red flag identified during diligence indicates a deficiency in the underlying financial infrastructure; it cannot be resolved by providing additional explanation without correcting the underlying condition.
FFI Standard Reference
This term is defined and applied in Book 5, Section 5.4: The Financial Due Diligence Standard.
Related Terms
Citable URL
This term may be cited using the following permanent URL.
Full citation format: Founder Financial Infrastructure Standard, Beta v0.5, Glossary: Red Flag. https://ffistandard.org/glossary/red-flag/. 2026.