A signed term sheet is not money in the bank. It is an invitation to due diligence, the phase where the investor's lawyers and accountants verify every claim you made across the table. Deals rarely collapse here because of a single ugly fact. They collapse because of surprises, things the investor discovers on their own that you should have disclosed first. Your goal is not to be flawless. It is to be organized, honest, and one step ahead, so diligence confirms your story rather than unraveling it.
The three tracks run in parallel
Once the term sheet is signed, the investor typically opens three workstreams at the same time. Expect them to move together, not one after another.
- Legal diligence: corporate structure, cap table, share issuances, contracts, intellectual property, regulatory compliance, and litigation.
- Financial diligence: revenue quality, burn, unit economics, tax filings, and reconciliation of your reported numbers to bank statements and your accounting records.
- Business diligence: market, product, and the reference calls that test whether customers and past colleagues back up your pitch.
Build the data room before you need it
A data room is simply a secure shared folder holding everything an investor will ask for. Organize it into clear sections so nothing looks hidden: Corporate, Financial, Tax, Legal, HR, Intellectual Property, and Operations. Populate it during the fundraise, not after the term sheet, because a slow or chaotic data room signals that the underlying company is slow and chaotic too.
The India compliance items investors will check
For an Indian private company, a few recurring issues surface in almost every legal diligence. Fix these before an investor's counsel finds them.
- Cap table versus MCA records: your internal cap table must reconcile exactly with your Registrar of Companies filings, including Form PAS-3 for allotments and MGT-7 annual returns. Discrepancies are a classic red flag.
- Foreign investment reporting: if you have taken money from a non-resident investor, Form FC-GPR must be filed on the RBI FIRMS portal within 30 days of allotment of shares. Late filing attracts a Late Submission Fee, and an unfiled FC-GPR from an earlier round is a common late surprise.
- IP assignment: founders, employees, and contractors should have signed agreements assigning all intellectual property to the company. Missing assignments are one of the most frequent deal problems.
- ESOP hygiene: option grants must sit under a Board and shareholder approved scheme, with a clean grant register.
- Director and statutory checks: confirm no director is disqualified under Section 164 of the Companies Act, 2013, and that GST, TDS, and income tax filings are current with no unresolved demands.
One point of relief: the angel tax under Section 56(2)(viib) of the Income Tax Act was abolished for all classes of investors in the 2024 Union Budget, with effect from assessment year 2025-26, so premium pricing on new rounds no longer triggers it. Assessments for earlier years can still arise, so keep prior valuation reports handy.
Reference calls
Investors run on-list references you provide plus off-list, back-channel calls you never see, often speaking to your largest customers and former colleagues. A classic late-stage deal killer is a customer contradicting the pitch, for example a "flagship" account quietly saying they may not renew. Give a real, warm heads-up to your references and brief them on context, but never script their answers. Experienced investors detect coached responses instantly, and it costs you trust.
Avoiding late surprises
The single most powerful move in diligence is proactive disclosure. Everything you and the investor agree on gets captured in the Disclosure Schedule to the Shareholders' Agreement or Share Subscription Agreement. Anything disclosed there is accepted. Anything that surfaces later and was not disclosed becomes a breach of your representations and warranties, which can trigger indemnity claims. So surface the messy pending litigation, the one late statutory filing, the informal side letter, early and in writing. Unresolved issues often become Conditions Precedent that must be cleared before the money moves. Disclose early, close on time.