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Due Diligence Guide for Startups
Pre-DD preparation, red flag management, data room setup and investor readiness checklist for Series A+ rounds.
7 Steps to Investor-Ready Due Diligence
1. Gap Analysis
Identify missing documents, statutory non-compliances, litigation and related party transaction gaps across 8 diligence categories.
2. Financial Clean-Up
Reconcile books, clear outstanding creditors, rationalize revenue recognition, fix provisioning gaps and prepare management accounts.
3. Cap Table Reconciliation
Verify share allotments, ESOP grants, convertible instruments. Eliminate dead equity. Update PAS-3 filings and issue duplicate certificates.
4. Legal Document Collection
Collect MoA/AoA, board minutes, shareholder agreements, IP assignments, vendor contracts, employee agreements and litigation status.
5. FEMA Compliance Audit
Verify FC-GPR/ODI/APR filings, ECB compliance, LRS utilisation, related party cross-border transactions and downstream investments.
6. Data Room Setup
Create indexed virtual data room with access controls. 8 folders: Corporate, Financial, Legal, Tax, IP, Commercial, FEMA, Cap Table.
7. Management Presentation
Prepare data room index, key metrics summary, red flag disclosures and management responses for diligence queries.
Due Diligence FAQs for Founders
What documents are required for financial due diligence?
Last 3 years audited financials, management accounts, bank statements, tax returns (GSTR/ITR), debtor/creditor ageing, revenue contracts and capex schedules.
What are the most common legal red flags in startup diligence?
Pending litigation, IP ownership disputes, unfiled statutory returns, related party transactions without approval, non-compliance with labour laws.
How long does investor due diligence typically take?
4-8 weeks for Series A/B rounds. Legal diligence 2-3 weeks, financial/tax 2-4 weeks, commercial/tech diligence 1-2 weeks (parallel).
What is vendor due diligence and when is it used?
Independent third-party report commissioned by target company. Used in competitive auctions or complex transactions to build buyer confidence.
Which FEMA compliances are checked during diligence?
FC-GPR filing status, ODI/APR compliance, ECB filings, LRS utilisation, related party cross-border transactions and downstream investments.
What cap table issues cause term sheet withdrawals?
Dead equity (>2 years unvested), excessive ESOP pool (>20%), multiple share classes without clear rights, undisclosed side letters with founders.
How should startups organize data room for diligence?
Virtual data room (Dropbox/Venly/SmartRoom) with folders: Corporate, Financial, Legal, Tax, IP, Commercial, Employees, FEMA, Cap Table. Index + permissions.
What tax diligence red flags stop funding rounds?
Unassessed income tax demands, service tax disputes, TDS defaults, transfer pricing non-compliance, ESOP tax leakage on exercise.
How much does pre-DD preparation typically cost?
₹1-5 lakhs depending on size of startup for comprehensive pre-DD covering financial clean-up, legal gap analysis, FEMA compliance and cap table reconciliation.
What is the typical timeline for pre-DD preparation?
4-6 weeks for first-time founders. 2-3 weeks for repeat founders with organized records. Parallel execution across legal/financial/tax teams.
Pre-DD Readiness Checklist
- 3 years clean audited financials
- Cap table fully reconciled
- All FC-GPR/ODI/APR filed
- No material litigation pending
- Tax assessments completed
- IP ownership documents collected
- Data room indexed + permissions set
- Management presentation ready
Pre Due Diligence Readiness Review
Get your financials, cap table, FEMA compliance and documentation gaps reviewed within 48 hours.
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