Common due diligence mistakes made by startups in India

Investment in a startup business could be risky and thus, venture capitalists and angel investors appoint startup consultants having the relevant expertise in the area to conduct startup due diligence before making such an investment. A potential investor in startup companies should gain a holistic understanding of the startup business they are investing in and performing a startup due diligence furthers the cause.

Startup Due Diligence is most often performed by potential startup investors before making the decision of capital entry into a startup business. During this process, the financial, commercial, legal, tax and compliance conditions of the startup are thoroughly analyzed based on historical data in order to objectively assess the operational situation of the company in the near future. This allows the startup investors to estimate the potential risks, SWOT directly or indirectly affecting the value of the target company. Due diligence immediately precedes the negotiation stage, after which the startup due diligence report prepared by the startup consultants is reviewed by the investors and the shareholder’s subscription agreement (SSA) is signed if everything goes smoothly. 

Here are a few common mistakes we have observed after working on startup due diligence for multiple startup business: 

1. Legal:

• Inconsistent terms in agreements
• Agreements inadequacy
• Stamp duty not paid on agreements
• Equity promises without documentation
• Reproduced agreements
• Inadequate IPR protection

2. Financial:

• Irregularities in filing returns
• Book of accounts not updated on a regular basis
• Adhoc accounting treatments 
• Statutory payments not made
• No compliance for foreign payments
• TDS non compliances

3. Compliance:

• Failure to maintain minutes and update statutory registers
• Missing share certificates
• Statutory forms not filed
• Lack of govt registrations
• Failure to cope up with the dynamic requirements 

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