Investor Due Diligence Readiness and Checklist: For Startups

Most founders treat due diligence as a document collection exercise that starts when the investor sends a checklist. That framing costs them weeks, and sometimes costs them the deal. By the time a term sheet lands and a 45 to 60 day exclusivity clock starts ticking, you have no time to fix structural problems. You only have time to explain them, and investors price gaps they discover themselves very differently from gaps a founder discloses upfront.

The pattern of what goes wrong is consistent across deals: a cap table that lives in a spreadsheet with no supporting board resolutions, IP built by founders before the company was incorporated and never formally assigned, FC-GPR filings that were never made to the RBI after early angel rounds, ESOP schemes that were approved by the board but never ratified by shareholders. None of these are unusual. All of them are fixable. The difference between a founder who closes a round in eight weeks and one who watches it drag to six months, or watches it reprice, is almost always preparation that happened before the data room opened.

This guide covers what investors actually verify across every DD track, what causes deals to stall or reprice, the investor-side mechanics that most founders never see, and how to get your company genuinely data-room-ready before the term sheet arrives.

What is investor due diligence and why do founders need to prepare for it

Investor DD is the structured verification process an investor or acquirer runs before closing a transaction. It covers legal title to shares, corporate governance, tax and regulatory compliance, IP ownership, key contracts, and financial health.

For founders, preparing for DD means auditing your own company the way an investor’s lawyer would. You are looking for the same gaps they will find, so you can address them before the data room opens rather than explaining them mid-process.

The stakes are specific. A cap table discrepancy does not just slow the deal. It raises questions about who actually owns the company. An undisclosed tax demand under Section 156 of the Income Tax Act 1961 can trigger a price adjustment clause. A founder who has not assigned IP to the company gives every subsequent investor a live argument that the core asset is not owned by the entity they are buying into.

How due diligence depth changes by funding stage

Not all investor due diligence looks the same. The depth, timeline, and document count scale sharply with round size and investor type. A founder preparing for a seed round needs roughly 40 documents in the data room. A Series A or Series B round expects 90 to 120 documents, including at least three years of audited financial statements, multiple sets of board minutes, and employment agreements for every employee.

Due diligence timeline and depth by funding stage

Funding stage	Typical full DD duration	Depth of review	Approx. data room documents
Angel / Pre-Seed	1 to 2 weeks	Team credibility, basic legal hygiene, cap table	20 to 30
Seed	2 to 4 weeks	Legal, basic financials, team, product, IP	35 to 50
Series A	4 to 8 weeks	Comprehensive: legal, financial, IP, commercial, HR	90 to 120
Series B+	6 to 12 weeks	Institutional-grade across all categories with full audit trails	120+

The 45 to 60 day exclusivity period written into most term sheets assumes a clean, pre-populated data room. Founders who start gathering documents after the term sheet is signed routinely lose 3 to 4 weeks before investors lose patience. A seed round term sheet signed in early March, with a clean data room, typically closes by end of May. The same round with a scrambled data room often drags to July or August, by which point investor appetite can shift.

What happens inside investor DD: the six parallel tracks

Most founders think of DD as a document request. It is actually six workstreams running simultaneously, each staffed by a different team on the investor side, each producing a formal memorandum of findings.

Track	Who runs it	What it produces
Legal	Investor’s lawyers	Legal DD report: corporate records, contracts, IP, litigation
Financial	Chartered accountant retained by investor	Financial DD report: revenue quality, cash, working capital, debt
Tax	CA (same or separate firm)	Tax DD report: direct tax, GST, TDS, transfer pricing, notices
Regulatory	Lawyers and CA in combination	Regulatory compliance status, sector-specific licences
IP	Lawyers and technical reviewers	IP ownership, assignment completeness, open-source risk
HR	Investor’s operations or legal team	Employment agreements, PF/ESI compliance, ESOP records, POSH

After each track concludes, the responsible adviser compiles a memorandum of findings. These memoranda collectively feed the disclosure schedule, which becomes Schedule A of the share subscription agreement (SSA). Every gap that surfaces during DD and is not addressed before closing must appear in the disclosure schedule. Gaps disclosed after signing but before closing may give the investor rights to renegotiate. Founders who understand this structure know exactly what each team is looking for and can populate the data room accordingly.

What founders must fix before the data room opens

Your term sheet is in. The investor has sent a DD checklist. And your first instinct is to start gathering documents.

That is already too late. Founders who treat investor due diligence as a document collection exercise lose weeks to back-and-forth, watch valuations reprice on findings they could have fixed in advance, and sometimes lose deals entirely. Investor DD readiness is the work you do before the investor asks.

• Investor DD covers cap table, corporate records, tax compliance, contracts, IP ownership, and regulatory status
• Most deal delays come from fixable gaps: missing board resolutions, unissued share certificates, GST defaults, or undocumented founder IP assignments
• A structured DD readiness exercise takes 3 to 4 weeks and saves multiples of that in deal time

Cap table and corporate records: the most common deal blocker

The cap table must be clean, current, and defensible. Investors will verify it against the Register of Members, every allotment resolution, every share transfer form, and every ESOP grant.

What to check:

• Register of Members matches the cap table exactly, including fractional shares and partly paid shares
• Every allotment has a board resolution and, where required, a special resolution filed with the Registrar of Companies (ROC)
• Share certificates have been issued and are in the possession of the correct holders
• ESOPs are documented with a scheme approved by special resolution under Section 62(1)(b) of the Companies Act 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules 2014, and a registered valuer’s report at each grant date
• Convertible instruments (CCPS, CCDs, SAFEs, or convertible notes) have corresponding board resolutions and shareholder approvals, and the conversion terms are unambiguous
• Any previous share transfers have SH-4 forms filed and stamp duty paid in the relevant state
• All prior allotments to Indian residents have a Rule 11UA valuation report under the Income Tax Rules 1962 to address any historical Section 56(2)(viib) exposure

A cap table that exists only in a spreadsheet, with no underlying corporate records to support it, is not a cap table an investor can rely on. The SHA and prior SSA must reconcile with the cap table. Investors frequently find shares on the cap table with no corresponding board resolution; those shares are legally unenforceable.

Corporate secretarial compliance: ROC filings and board records

An investor will pull your MCA21 filing history on day one. Any gap in annual return filings (MGT-7), financial statement filings (AOC-4), or event-based filings tells them two things: the governance is weak, and there may be penalties outstanding under Section 454 of the Companies Act 2013.

What to check:

• MGT-7 and AOC-4 filed for every financial year since incorporation
• All charge registrations (CHG-1) and charge satisfactions (CHG-4) filed within prescribed timelines
• Director appointments and resignations filed in DIR-12
• Board meeting minutes and shareholder resolutions maintained in a bound minute book, not loose folders
• Statutory registers (register of directors, register of charges, register of contracts) updated and available

The most common gap is minutes that were never formally approved or are missing entirely for key decisions. Investors routinely request certified copies of board resolutions for ESOP grants, key contracts, and funding rounds. If they do not exist, the corporate action is unenforceable or disputed.

Tax compliance: what the income tax and GST checks reveal

Tax gaps are the second most common deal-killer after cap table issues. Investors check both direct tax and GST compliance as part of standard DD.

Income tax checks:

• Form 26AS and AIS current and reconciled
• No outstanding demands under Section 156 of the Income Tax Act 1961
• TDS deducted and deposited correctly, particularly on salaries (Section 192), professional fees (Section 194J), and rent (Section 194I)
• Transfer pricing documentation in place if the company has related-party international transactions (Sections 92A to 92F of the Income Tax Act 1961)

GST checks:

• GSTR-1 and GSTR-3B filed for all periods since GST registration
• ITC claimed matches GSTR-2B; no unreconciled mismatches
• No show cause notices or adjudication orders outstanding
• If the company operates across states, all required GST registrations in place

A company with two years of clean income tax returns but six months of unfiled GST returns is a yellow flag that investors will price in.

IP ownership and assignment: the gap most founders miss

Most early-stage companies are built on code, product, or content created by founders, freelancers, or early employees before formal employment agreements were in place. If that IP was never formally assigned to the company, the investor is buying a company that may not own its core asset.

What to check:

• Founder IP assignment agreements in place, covering all work done before formal employment or directorship
• Employee invention assignment clauses in all employment agreements (not just recent ones)
• Freelancer and consultant contracts include IP assignment language, not just confidentiality
• Any third-party libraries, open-source components, or licensed software used in the product are documented and compliant with the relevant licence terms
• Trademarks filed in the company’s name (not a founder’s name) and renewed

The specific risk: if a founder built the core product before the company was incorporated or before a formal agreement was signed, that IP may belong to the founder individually. An investor’s lawyers will ask for the assignment. If it does not exist, the fix requires a retroactive agreement, a valuation of what was assigned and a tax analysis covering potential capital gains in the founder’s hands and Section 56(2)(x) implications in the company’s hands, depending on how consideration is structured.

Key contracts: what investors read and why

Investors review key commercial contracts for three things: change of control provisions, assignment restrictions, and revenue concentration risk.

Change of control clauses in customer agreements, SaaS contracts, or distribution agreements may give the counterparty a right to terminate or renegotiate on a change of ownership. In a funding round this may not trigger. In an acquisition it almost certainly does.

Assignment restrictions in vendor or technology licence agreements may prevent the company from transferring the benefit of the contract to an acquirer’s entity without consent.

Revenue concentration is a financial risk marker. Best practice is no single customer above 20 to 25% of total revenue. Where a customer exceeds this threshold, the investor will examine the contract length, minimum commitment clauses, and notice period. A 60%+ concentration with a 30-day termination clause can reprice a deal significantly or require a risk mitigation plan as a closing condition.

Check every contract above INR 25 lakhs annual value for these provisions before the data room opens.

What the investment due diligence checklist covers

The investor’s CA runs a financial DD track separately from the legal track. This section covers what that track examines. For the full depth of financial statement analysis, QoE adjustments, P&L line-by-line review, burn rate and runway calculations, and sector-specific financial checks, see our financial due diligence checklist for startups.

The financial track in an investment due diligence checklist focuses on three questions: are the numbers real, are they sustainable, and does the story in the management accounts match the story in the audited statements?

Documents the investor’s CA will request:

• Audited financial statements for the last 2 to 3 years (balance sheet, P&L, cash flow, notes to accounts)
• Monthly management accounts for the last 12 to 24 months in the same internal format founders use
• Bank statements for all operating accounts for the last 12 months
• Revenue breakdown by customer, product, geography, and channel (monthly)
• Debt schedule: all outstanding loans, credit lines, founder loans, and convertible notes with all terms and outstanding balances
• Statutory dues schedule: all outstanding GST, TDS, PF, and ESI with evidence of most recent payment
• 3 to 5-year financial projections with monthly breakdowns for year one, quarterly thereafter, and explicit underlying assumptions listed separately

What triggers a yellow flag vs a red flag:

A delta of more than 10% between management accounts and audited statements is a yellow flag. A delta above 20% triggers a full additional workstream into revenue recognition. Investors also cross-verify reported revenue against GST returns and bank statements. Any material discrepancy between these three sources can derail a deal entirely. Reconcile all three before the data room opens.

Key metrics investors benchmark in the investment due diligence checklist:

Metric	What investors look for	Red flag threshold
MRR growth (SaaS)	Consistent upward trend verified against bank statements	Declining for 2+ consecutive months
LTV/CAC ratio	3x or higher	Below 2x
Gross margin	Healthy and trending upward; SaaS benchmark 65%+	Declining quarter on quarter
Net revenue retention	100%+ indicates expansion revenue	Below 80% signals churn risk
Burn multiple	Revenue added per rupee burned; below 1.5x is efficient	Above 2x at Series A stage
Customer concentration	No single customer above 20 to 25%	Single customer above 40%
Management vs audit delta	Below 10%	Above 20%

Commercial DD: market, customers, and competition

Commercial due diligence validates whether the business opportunity is as large and defensible as presented. Investors run this alongside legal and financial tracks, often using their own network rather than founder-provided documents alone.

What investors examine:

• TAM, SAM, and SOM estimates with credible, citable data sources (not founder-estimated market sizes)
• Competitive landscape covering direct and indirect competitors, pricing comparisons, and switching costs
• Customer reference calls: investors speak directly with 3 to 5 key customers to validate retention, satisfaction, and likelihood of expansion
• Product-market fit signals: NPS scores, usage data, cohort retention curves, and net revenue retention
• Sales pipeline: qualified leads, conversion rates, and average sales cycle length
• Regulatory moat or tailwinds: any regulatory advantage, required licence, or barrier to entry that structurally protects the position

How to prepare:

Brief your key customers before the investor calls them. They will be asked about contract value, renewal intention, whether they would recommend the product, and whether they depend on the startup as a critical supplier. A customer who says “we are evaluating alternatives” in a reference call is a more damaging red flag than most financial gaps.

Prepare a market sizing memo with citable sources. Investors do not expect perfection, but they do expect a coherent methodology. Bottom-up calculations tied to real customer data are more credible than top-down TAM slides.

HR and operational DD: what investors check beyond IP

The HR track is often under-prepared by founders because it feels administrative. Investors check it for two reasons: employment agreements are where IP ownership either gets secured or gets lost, and PF/ESI defaults create contingent liabilities that need to be priced.

Employment and contractor records:

• Complete employee list with roles, joining dates, and compensation
• Employment agreements for every employee containing both an IP assignment clause and a confidentiality clause
• Contractor and consultant agreements with IP ownership clauses, not just scope-of-work terms
• ESOP grant letters, vesting schedules, and exercise price documentation for every optionee
• Any pending employee disputes, claims, or threatened labour action disclosed

Labour law compliance:

• PF monthly ECR filings current and No Default Certificate obtained from the EPFO portal
• ESI monthly contribution filings current
• Professional Tax registration and payment evidence in each state where employees are based
• Shop and Establishment Act registration for each office location
• POSH Act 2013 compliance: Internal Committee formed, annual report submitted by 31 January to the District Officer; non-compliance carries a penalty of INR 50,000 and repeated non-compliance can result in licence suspension

Sector-specific regulatory licences:

Missing or lapsed licences that are material to the business are treated as closing conditions. The investor will require them to be reinstated or substituted before funds transfer.

Sector	Licence or registration investors check
Fintech / payments	RBI authorisation (PPI, PA, NBFC as applicable)
Food and beverage	FSSAI registration and licence
Import / export	IEC (Importer Exporter Code) from DGFT
EdTech (certain categories)	State-specific approvals
Pharma / medtech	CDSCO licences
DPIIT-recognised startups	Recognition certificate and Section 80-IAC exemption status
MSME-registered companies	Udyam registration certificate

FEMA and cross-border compliance

For companies that have raised foreign investment, received ODI funding from a foreign parent, or have cross-border intercompany arrangements, FEMA compliance is a mandatory DD area.

What to check:

• All foreign investment received has corresponding FC-GPR filings with the RBI within the prescribed timeline (30 days of allotment for equity)
• Annual return on foreign liabilities and assets (FLA return) filed every year since the first foreign investment
• Any external commercial borrowings (ECB) have RBI reporting compliance under the FEMA 3(R) framework
• Downstream investments, if any, have the required approvals and filings
• No contraventions outstanding under FEMA 1999 that have not been compounded
• FC-TRS filed for any secondary share transfers involving a foreign investor

An FEMA contravention does not prevent a deal from closing but it does need to be disclosed, and compounding the violation before closing is cleaner than leaving it as a disclosure item.

What investors do when DD uncovers issues

This is the mechanics most guides skip. Finding a gap is not automatically a deal-breaker. What matters is the nature of the gap, when it surfaces, and whether the founder discloses it proactively.

The three outcomes when DD finds something:

1. The investor demands remediation as a closing condition. The deal proceeds once the gap is fixed. Common for compoundable FEMA violations, late ROC filings, and missing IP assignments that can be documented retroactively.
2. The investor reprices. A material adverse finding, typically defined as remediation cost above 5% of the round size, gives the investor the right under the term sheet’s DD clause to adjust valuation, reduce the cheque, or require additional escrow or indemnity provisions in the SSA.
3. The investor walks away. Structural issues that cannot be fixed, such as a genuine dispute over who owns the core IP, a pre-existing undisclosed debt, or a regulatory licence that cannot be reinstated, can kill a deal even at late stages.

What typically triggers a price adjustment:

• Unreconciled GST and book revenue where the delta cannot be explained by timing or accounting treatment
• TDS defaults that create an unknown tax liability for the company and potentially the investor’s entity post-closing
• Undisclosed related-party transactions, particularly founder loans not on arm’s-length terms
• Customer contracts with change-of-control clauses that require consent before the investment closes
• Outstanding tax notices or assessments where the quantum is uncertain and cannot be estimated

What proactive disclosure achieves:

Every disclosure schedule item that a founder puts in before the investor finds it independently is treated very differently from one that surfaces during DD. A disclosed gap with a remediation plan reads as competent governance. A gap the investor discovers independently, particularly one the founder knew about, reads as bad faith and can reprice aggressively or end the process.

Investor DD readiness timeline: 6 weeks to data room ready

Week 1: Cap table audit. Verify shareholding, option pools, and issuances against the Register of Members. Identify all allotments without supporting board resolutions and Rule 11UA valuation reports.

Week 2: Secretarial review. Statutory registers, minutes, and MCA filings. File all pending forms and obtain DIN KYC acknowledgements for all directors.

Week 3: Tax and IP audit. Income tax compliance, GST filings and ITC reconciliation, transfer pricing documentation. IP portfolio verification and assignment agreement review for founders, employees, and contractors.

Week 4: Contracts and FEMA. Material contracts review for change-of-control and assignment clauses. FEMA filings audit and compounding initiation where needed.

Week 5: Gap remediation. Address audit findings, update documentation, execute retroactive agreements, secure board approvals for previously undocumented actions, obtain sector-specific licence renewals.

Week 6: Data room ready. Indexed data room with version control. Secure access configured for investor team. Management presentation and financial projection model with stated assumptions finalised.

How to structure your data room and what investor DD costs

A well-organised data room is your first opportunity to demonstrate operational discipline. It also reduces DD timeline because the investor’s team spends less time chasing documents.

Recommended data room folder structure:

Folder	Contents
01. Corporate	Certificate of incorporation, MOA/AOA, board minutes, shareholder registers, ROC filings
02. Cap table and equity	Cap table, share certificates, previous funding docs, ESOP scheme and grant register, Rule 11UA valuation reports
03. Financial	Audited financials, management accounts, bank statements, projections with assumptions
04. Tax	ITR, GST returns, TDS records, Form 26AS, AIS, tax notices and replies
05. Legal	Material contracts, litigation details, regulatory licences, DPIIT certificate
06. HR and team	Employee list, employment agreements, PF/ESI records, POSH documentation, org chart
07. IP	Trademark and patent records, IP assignments, domain ownership, open-source documentation
08. Product and technology	Architecture docs, security assessments, uptime records, third-party dependencies
09. Commercial	Market sizing, customer references, competitive analysis, sales pipeline
10. FEMA and foreign investment	FC-GPR filings, FLA returns, ECB reporting, FC-TRS records

Use version control and maintain an index file. At seed stage, Google Drive with folder-level access controls is adequate. Series A and above typically warrant a purpose-built virtual data room with audit trails showing which documents were viewed and when.

What DD costs and who pays:

The lead investor pays its own lawyers and CAs, typically deducted from the cheque at closing. For Series A, this runs INR 15 to 40 lakhs, capped in the term sheet. For angel and seed rounds, INR 3 to 8 lakhs. The founder pays separately for their own counsel and CA, typically INR 5 to 20 lakhs depending on deal complexity. A DD readiness engagement run before the term sheet is a separate, earlier cost, almost always recovered many times over in deal timeline and valuation protection.

Common mistakes founders make before investor DD

1. Treating DD as a document collection exercise. Documents without underlying corporate records are not enough. An investor asking for the ESOP scheme wants the original board resolution, the shareholder approval, the scheme document, each individual grant letter, and the valuation report used to determine exercise price. Producing a spreadsheet summary and saying “the documents are being prepared” costs two weeks and raises questions about governance quality.

2. Fixing things mid-process. Retroactive fixes made after a DD request has been sent are a red flag. A board resolution backdated after the investor asked for it is discoverable and creates trust issues. Fix gaps before the data room opens, not after.

3. Not knowing what is in your own contracts. Founders routinely do not know whether their top three customer contracts have change of control clauses. The discovery of a termination right in a key contract mid-DD can reprice a deal by 15 to 20% or kill it. Read your contracts before your investor does.

4. Assuming the cap table is fine because the spreadsheet adds up. A cap table spreadsheet that adds up to 100% but is not backed by corporate records, allotment resolutions, and issued share certificates is not clean. The Register of Members is the legal record of ownership, not the Excel file.

5. Leaving FEMA filings for later. FC-GPR filings made late or not at all are a common gap in early-stage companies that raised small angel rounds without structured legal support. The RBI compounding process for FEMA violations is available and well-used, but it takes time. Identify and compound late filings before the data room opens.

Investor due diligence checklist [Updated 2026]

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Area	Item	Status
Cap table	Register of Members matches cap table exactly, including fractional and partly paid shares
Cap table	Every allotment backed by a board resolution and, where required, a special resolution filed with ROC
Cap table	Share certificates issued and held by correct shareholders
Cap table	ESOP scheme approved by special resolution under Section 62(1)(b), Companies Act 2013, with registered valuer report at each grant date
Cap table	Rule 11UA valuation report in place for all allotments to Indian residents (historical rounds)
Cap table	Convertible instruments (CCPS, CCDs, SAFEs, convertible notes) have board and shareholder approvals with unambiguous conversion terms
Cap table	SH-4 forms filed and stamp duty paid for all prior share transfers
Corporate secretarial	MGT-7 and AOC-4 filed for every financial year since incorporation
Corporate secretarial	CHG-1 and CHG-4 filed within prescribed timelines for all charges
Corporate secretarial	Director appointments and resignations filed in DIR-12
Corporate secretarial	Board minutes and shareholder resolutions in a bound minute book, not loose folders
Corporate secretarial	Statutory registers (directors, charges, contracts) updated and available
Income tax	Form 26AS and AIS current and reconciled
Income tax	No outstanding demands under Section 156, Income Tax Act 1961
Income tax	TDS correctly deducted and deposited: salaries (Section 192), professional fees (Section 194J), rent (Section 194I)
Income tax	Transfer pricing documentation and Form 3CEB in place for related-party international transactions (Sections 92A to 92F)
GST	GSTR-1 and GSTR-3B filed for all periods since registration
GST	ITC claimed reconciles with GSTR-2B with no unresolved mismatches
GST	No show cause notices or adjudication orders outstanding
GST	GST registrations in place for all states where the company operates
IP ownership	Founder IP assignment agreements cover all work done before formal employment or directorship
IP ownership	Employee invention assignment clauses in all employment agreements
IP ownership	Freelancer and consultant contracts include IP assignment language, not just confidentiality
IP ownership	Third-party libraries, open-source components, and licensed software documented and licence-compliant
IP ownership	Trademarks filed and renewed in the company’s name, not a founder’s name
Key contracts	All contracts above INR 25 lakhs annual value reviewed for change of control clauses
Key contracts	Vendor and technology licence agreements reviewed for assignment restrictions
Key contracts	Revenue concentration assessed: no single customer above 20 to 25% without minimum commitment
HR and operations	Employment agreements for all employees with IP assignment and confidentiality clauses
HR and operations	PF monthly ECR filings current, No Default Certificate from EPFO portal
HR and operations	ESI monthly filings current
HR and operations	POSH Internal Committee formed and annual report filed by 31 January
HR and operations	Shop and Establishment Act registration for each office location
HR and operations	All sector-specific licences current: RBI, FSSAI, IEC, DPIIT recognition, Udyam as applicable
Financial (investment DD)	Audited financials for last 2 to 3 years with notes to accounts
Financial (investment DD)	Monthly management accounts for last 12 to 24 months
Financial (investment DD)	Management accounts reconciled to audited statements (delta below 10%)
Financial (investment DD)	Revenue reconciled across books, GST returns, and bank statements
Financial (investment DD)	Debt and statutory dues schedule current
Financial (investment DD)	Financial projections with explicitly stated assumptions for 3 to 5 years
FEMA	FC-GPR filed with RBI within 30 days of allotment for every foreign investment round
FEMA	FLA return filed by 15 July every year since first foreign investment
FEMA	ECB reporting compliant under FEMA 3(R)
FEMA	FC-TRS filed for secondary share transfers involving foreign investors
FEMA	No uncompounded contraventions outstanding under FEMA 1999

FAQs on Investor Due Diligence

Q: What does investor due diligence cover in India?

A: It covers six areas: cap table and share ownership, corporate secretarial records, tax compliance (income tax and GST), IP ownership, key contracts, and FEMA/regulatory compliance. Institutional investors running an investment due diligence checklist also run a financial track covering revenue quality, management account reconciliation, and debt structure. Acquirers run all of the above plus a deeper review of financial representations and contractual liabilities.

Q: How long does DD readiness preparation take?

A: Three to four weeks for a company with reasonably clean records. Six to eight weeks if there are gaps in ROC filings, FEMA compliance, or IP documentation. The earlier you start, the more options you have for fixing issues before the investor finds them.

Q: What documents go into a data room?

A: At minimum: certificate of incorporation, MOA/AOA, all board and shareholder resolutions, cap table with supporting allotment documents, last three years of audited financials, ESOP scheme and grant register, key customer and vendor contracts, IP assignment agreements, all FEMA filings, sector-specific licences, and a litigation summary. For acquisition processes, add all employment agreements, lease agreements, and a statutory dues schedule.

Q: Does DD differ for fundraising versus acquisition?

A: Yes. In a fundraising round, the investor is buying a minority stake and focuses on ownership clarity, governance, and growth risk. In an acquisition, the buyer is assuming all liabilities and runs a deeper review of contracts, employee obligations, regulatory licences, and financial representations. Acquisition DD typically takes three to four times longer and involves more negotiation on representations and warranties.

Q: What are the cross-border FEMA requirements investors check?

A: Investors check: FC-GPR filings for every foreign investment round (filed with RBI within 30 days of allotment), annual FLA returns (filed by 15 July each year), any ECB reporting under FEMA 3(R), FC-TRS for secondary transfers, and whether any downstream investments have the required approvals. Missing FC-GPR filings are the most common FEMA gap in early-stage companies.

Q: What happens if my ESOP scheme was never properly filed?

A: An ESOP scheme not filed as required under Section 62(1)(b) of the Companies Act 2013 can be regularised through the ROC’s compounding process. The company needs to pass the requisite resolutions, file the relevant forms, and pay the applicable late filing fees. Investors will accept a disclosed-and-resolved finding more readily than an open item.

Q: What is angel tax and does it affect investor DD?

A: Angel tax under Section 56(2)(viib) of the Income Tax Act 1961 was abolished with effect from 01/04/2025 via the Finance (No. 2) Act 2024. It no longer applies to share issuances by unlisted companies. For rounds completed before that date, Rule 11UA valuation reports are still required because historical assessments may be pending, and those create a closing condition for new investors.

Q: What if a co-founder left without a formal exit?

A: A co-founder departure without a formal buyout, vesting acceleration waiver, and share transfer documentation is a significant gap. Depending on how much equity the departing co-founder held, they may still be a shareholder of record, entitled to information rights and potentially blocking certain corporate actions. The fix requires a formal SH-4 transfer, a separation agreement, and board documentation. This is one of the most time-consuming gaps to clean up mid-DD.

Q: What does the investment due diligence checklist look for in financial projections?

A: Investors look for internal consistency (growth rates that tie to stated headcount plans and CAC assumptions), a clearly stated revenue recognition policy, scenario analysis (base, bull, bear), and a use-of-funds breakdown. Projections not grounded in unit economics or that assume growth rates inconsistent with historical cohort data will be challenged in management meetings. For full financial DD preparation including QoE, P&L line-by-line review, and burn rate analysis, see our financial due diligence checklist for startups.

Q: Who pays for due diligence in an Indian fundraise?

A: The lead investor pays its own DD lawyers and CAs, typically deducted from the cheque at closing (INR 15 to 40 lakhs for Series A, capped per the term sheet). The founder pays separately for their own counsel and CA (INR 5 to 20 lakhs). A DD readiness engagement before the term sheet is a separate, earlier cost that typically saves multiples of its fee in deal time and valuation protection.

Q: Can a startup receive investor DD readiness support before they have a term sheet?

A: Yes, and Treelife recommends it. Companies that run a DD readiness exercise 6 to 12 months before a planned fundraise have time to fix structural issues without time pressure. Companies that start when the term sheet arrives are fixing things with an investor watching.

Q: What is a disclosure schedule and why does it matter?

A: The disclosure schedule is Schedule A of the SSA. It contains every exception to the representations and warranties the company makes to the investor. Every DD gap that cannot be fixed before closing must be disclosed here. A gap disclosed in the schedule limits the investor’s ability to claim a warranty breach post-closing. A gap not disclosed that later surfaces can trigger indemnity obligations and, in serious cases, rescission of the investment.

Regulatory references

• Companies Act 2013: Section 62(1)(b), Section 92, Section 134, Section 164(2), Section 248, Section 454
• Companies (Share Capital and Debentures) Rules 2014: Rule 12
• Income Tax Act 1961: Sections 56(2)(viib), 56(2)(x), 92A to 92F, 115BAA, 156, 192, 194I, 194J, 271B, 271F, 234A/B/C, 234E, 80-IAC
• Income Tax Rules 1962: Rule 11UA
• Finance (No. 2) Act 2024: abolition of angel tax w.e.f. 01/04/2025
• FEMA 1999 and FEMA (Non-Debt Instruments) Rules 2019: FC-GPR, FC-TRS, FLA return
• FEMA 3(R): ECB framework
• GST Act 2017: GSTR-1, GSTR-3B, GSTR-9, GSTR-9C
• POSH Act 2013
• EPF Act 1952 and ESI Act 1948
• Digital Personal Data Protection Act 2023

External sources

• mca.gov.in (MCA21 filings)
• rbi.org.in (FEMA/FIRMS portal)
• incometaxindia.gov.in
• startupindia.gov.in