Once a term sheet is signed, most seed rounds move into due diligence, the stage where an investor verifies that your company is really what your pitch claimed. At seed this is lighter than at Series A, but it is not a formality. Diligence typically runs for four to eight weeks and covers three areas: legal, financial and business. A clean, well organised process builds investor confidence and lets money hit your bank account faster. A messy one stalls the close, invites price cuts, or kills the deal outright. This lesson explains what gets checked and how to get ready.
The three areas investors examine
Legal diligence
Investors confirm that your company legally exists, is properly owned, and controls what it claims to own. Expect scrutiny of your incorporation documents, your capitalisation table, board and shareholder resolutions, and your filings with the Registrar of Companies. Your cap table must match your statutory registers and your ROC filings exactly, including Form PAS-3 (return of allotment) and your annual return in Form MGT-7. Any employee stock option pool must sit under a scheme approved by shareholders, not just promised in emails. If you took foreign investment, they check that Form FC-GPR was filed on the RBI FIRMS portal within 30 days of allotment, backed by a Foreign Inward Remittance Certificate, since late filing attracts a Late Submission Fee.
Financial diligence
Here investors test whether your numbers are real and your liabilities are known. They review bank statements, your monthly burn and runway, revenue recognition, and outstanding dues. Statutory compliance matters as much as growth: GST returns, TDS deducted and deposited on time, and provident fund and ESI payments. Unpaid or disputed tax demands and open notices create contingent liabilities that investors will carve out, escrow against, or use to renegotiate.
Business diligence
This validates the story: customer contracts, key vendor and partner agreements, your core metrics, and the standing of your founders and directors. Investors may take references and confirm that no director is disqualified under Section 164 of the Companies Act, 2013.
Common red flags
- Cap-table discrepancies. Ownership recorded in your internal sheet does not match your statutory registers or ROC filings. This is the single most common deal-slower.
- IP not assigned to the company. Code, designs or products built by founders before incorporation, or by consultants and freelancers, do not automatically belong to the company. Without a signed assignment agreement, the company may not own its own product.
- Undocumented ESOPs. Option grants made without a scheme approved by the board and shareholders.
- Unpaid statutory dues. Pending GST, TDS, PF or ESI, or unresolved tax notices.
- Legacy valuation gaps. Angel tax under Section 56(2)(viib) was abolished for share issuances from 1 April 2025, so new rounds no longer attract it. Older allotments are still examined, and pre-2025 issuances without valuation support can carry historical exposure.
How to prepare so diligence does not stall your close
Do the work before you raise, not during. Build a clean data room, a single organised folder, containing: incorporation certificate and charter documents, an up-to-date cap table reconciled to your ROC filings, board and shareholder resolutions, PAS-3 and MGT-7 filings, audited or management financials, GST and TDS returns, employment and consultant agreements that assign all IP to the company, your ESOP scheme, material customer and vendor contracts, and any FEMA filings.
Fix problems early. Get every founder and contractor to sign IP assignment agreements. Reconcile your cap table against your registers. Clear or clearly disclose any statutory dues. If you are DPIIT recognised under Startup India, keep that certificate handy, since recognition allows self-certification under specified labour and environmental laws and signals compliance readiness. Answer investor queries quickly and honestly. Disclosing a known issue upfront costs you far less trust than having the investor discover it themselves.