The due diligence (DD) phase is the make-or-break checkpoint after securing a term sheet. For first-time founders in India, approaching this with meticulous preparation is the key to a fast, successful closure. DD is the process where investors and their legal/financial advisors verify every claim, document, and compliance status of your startup. A clean DD signals trust and professional management.
Phase 1: Pre-DD Preparation – Tidy Up Your House 🧹
The biggest mistake is waiting for the term sheet. Start preparing your documentation now, focusing on a robust, well-organized Virtual Data Room (VDR).
1. The Legal Foundation (Corporate Hygiene)
Your legal setup must be impeccable, compliant with the Companies Act, 2013, and other Indian regulations.
| Document Category | Key Checklist for Indian Founders | Why It Matters |
| Corporate Records | Certificate of Incorporation (CoI), MoA/AoA (latest), and all statutory registers (members, directors, charges). | Proves the company’s legal existence and powers. |
| Shareholding | Capitalization Table (Cap Table) detailing every share issuance, transfer, and current ownership. | Verifies investor ownership and prevents future disputes. |
| ROC Filings | Proof of timely filing of Annual Returns (MGT-7) and Financial Statements (AOC-4) with the Registrar of Companies. | Demonstrates ongoing compliance. |
| FEMA Compliance | All filings (e.g., FC-GPR, FC-TRS) related to past foreign investments (if any) with the RBI. | Crucial for cross-border transactions and future foreign investment. |
2. Intellectual Property (IP) Clarity
For any tech or product-based startup, the IP is your core asset.
- IP Assignment Agreements: Ensure all founders, employees, and contractors have signed agreements assigning 100% of the IP (code, design, content, etc.) developed for the company, to the company.
- Registration: Have documents for all registered or applied-for trademarks, patents, and copyrights ready.
3. Human Resources & Compliance
Investors will assess liabilities related to your team.
- Standardized Contracts: Ensure all employees have proper employment contracts, offer letters, and non-disclosure agreements (NDAs).
- Labour Laws: Provide compliance proof for EPF (Employee Provident Fund), ESI (Employee State Insurance), and Professional Tax (PT) where applicable.
- ESOPs: If you have an Employee Stock Option Plan, ensure the scheme document is approved by the Board/Shareholders and grant letters are properly issued.
Phase 2: The Core Due Diligence Streams 🔎
Once the VDR is shared, the investor’s team will begin simultaneous deep dives into three main areas: Legal, Financial, and Business.
A. Financial Due Diligence (FDD)
This is a deep audit conducted by the investor’s Chartered Accountant to verify the quality and integrity of your financials.
- Historical Performance: Provide Audited Financial Statements (P&L, Balance Sheet, Cash Flow) for the last 2-3 fiscal years. Be prepared to explain year-on-year growth and margin changes.
- Tax Compliance: Proof of all GST (registration and filings), TDS (Tax Deducted at Source), and Income Tax Returns (ITR) filings. Any pending notices or disputes with tax authorities must be disclosed.
- Unit Economics: This is critical for early-stage companies. Clearly define your CAC (Customer Acquisition Cost), LTV (Lifetime Value), Gross Margin, and Payback Period. Investors want to see a profitable path, ideally where LTV is substantially greater than CAC.
- Projections: Your 3-5 year financial forecasts must be realistic and justifiable with clear assumptions based on your historical data and market analysis.
B. Legal Due Diligence (LDD)
The legal team checks for liabilities that could compromise the company post-investment.
- Founders’ Agreement: A well-drafted and signed Founders’ Agreement is essential, clearly outlining roles, responsibilities, vesting schedules, and termination clauses.
- Litigation: Disclose any past, pending, or threatened lawsuits, arbitrations, or significant regulatory notices.
- Material Contracts: Key contracts with major customers, suppliers, and partners will be reviewed for termination clauses, liability caps, or “change of control” provisions that could be triggered by the new investment.
- ESOP Structure: The legal validity and proper administration of your ESOP scheme will be verified, ensuring compliance with both company law and tax regulations.
C. Business and Operational Due Diligence (BDD/ODD)
This is the non-quantifiable check on market fit, product, and the team.
- Product & Market: Provide detailed metrics on user traction (MAU/DAU), retention cohorts, churn rate, and your product roadmap. A formal Total Addressable Market (TAM) analysis validates the growth potential.
- Team: The backgrounds (KYC), domain expertise, and execution track record of the founders and key management personnel are scrutinized. Investors are looking for chemistry and commitment.
- Go-to-Market (GTM) Strategy: Be prepared to detail your customer acquisition funnels, pricing strategy, and competitive advantages.
Phase 3: Keys to a Smooth Closing 🔑
The manner in which you handle the DD process is as important as the documents themselves.
- Transparency is Paramount: Never hide a problem. Disclose known issues early with a Mitigation Plan (e.g., “We missed an ROC filing, but we have engaged counsel and are filing for compounding/rectification next week.”). Investors respect honesty and proactivity.
- Assign a DD Manager: Appoint one responsible person (often the CEO or CFO) to be the sole point of contact with the investor’s legal counsel. This centralizes communication, ensures consistency, and speeds up response times.
- Use External Counsel: Engage an experienced CA and corporate lawyer who specialize in startup funding in India. They can conduct an internal DD beforehand and anticipate investor requests, ensuring your VDR is “investor-ready.”
- Be Responsive: Delays are the number one killer of momentum in a funding round. Aim for a 24-48 hour turnaround on information requests.
By treating due diligence as a comprehensive self-audit and demonstrating a commitment to corporate governance, you not only secure your funding but also establish the strong operational foundation necessary for massive scale.
