The term sheet is signed — now a stranger's lawyer decides whether the money actually moves
Founders treat the signed term sheet as the win. It is not. Between the term sheet and the money hitting your account sits due diligence — three to six weeks where the investor's lawyers and accountants pull apart everything you have built and check whether it holds together on paper. Most rounds do not die here, but plenty stall here, and a stall at diligence is expensive: it delays the wire, it hands the investor leverage to renegotiate, and in the worst case it surfaces a problem serious enough to walk away from. The single most common thing that trips a startup up is not fraud or a fatal flaw — it is a cap table that does not reconcile. Here is what investors actually check, how to have it ready before they ask, and the reconciliation that quietly decides whether your round closes on time.
What due diligence actually is
Due diligence is the investor verifying, from primary documents, that the company they agreed to fund is the company that actually exists. The term sheet is based on what you told them; diligence is where they confirm it. It runs across a few parallel workstreams — corporate and legal, financial and tax, regulatory, intellectual property, and people — usually managed through a shared data room (a structured online folder) that the investor's advisors work through. The cleaner and more complete that data room, the faster diligence closes and the less room there is for the investor to argue the valuation down. A messy data room does not just slow things; it signals weak governance, and weak governance is precisely what makes an investor nervous about writing a large cheque.
The data room: what goes in, and how it is organised
Investors expect the data room to mirror the diligence workstreams, so build it that way from the start. A well-structured room has separate folders for: corporate (certificate of incorporation, MoA and AoA, board and shareholder resolutions, statutory registers), cap table and securities (the share register, share certificates, allotment filings, ESOP records), material contracts (customer, vendor and lease agreements), intellectual property (trademark and IP assignments), regulatory and licences, FEMA and RBI (for any foreign money), labour and HR, tax, and litigation. You do not need every folder to be thick; you need every folder to be honest and current. The goal is that when the investor's lawyer asks for something, it is already there — because the questions they ask are almost entirely predictable.
The reconciliation that trips everyone: your cap table against four sources
This is the part founders underestimate. The investor's lawyer does not take your cap table spreadsheet at face value. They reconcile it against four independent records, and every shareholder must tie to the same number across all four:
- the PAS-3 allotment filings lodged with the MCA for every issue of shares (the allotment paperwork behind each round);
- the physical or digital share certificates actually issued;
- the board and shareholder resolutions that authorised each allotment; and
- the register of members, the statutory register the company is required to maintain under Section 88 of the Companies Act, 2013.
If your spreadsheet says a founder holds 40% but the register of members was never updated after the last round, or a PAS-3 was filed late, or share certificates were never issued, those four records disagree — and the round cannot close until they agree. Cleaning this up mid-diligence, under time pressure, with an investor watching, is the worst time to discover that your statutory registers were never properly maintained. The founders who close fast are the ones whose cap table already reconciles to the MCA record before diligence even starts.
Governance and ROC filings: the MCA21 history they pull on day one
An investor's advisor will pull your company's entire filing history from the MCA portal on the first day. Every gap tells a story. A missed annual return (MGT-7), a late financial-statement filing (AOC-4), a skipped event-based form — each one signals that the governance is loose and that there may be penalties outstanding, since default under the Companies Act, 2013 carries per-day late fees and, for many defaults, penalties adjudicated under Section 454. None of these is usually fatal on its own, but a pattern of them is a red flag, and each unresolved default is something the investor may insist you clear (at your cost) as a condition of closing. Keeping your annual ROC filings current is not just compliance hygiene — it is fundraising readiness.
FEMA diligence: if any of your money came from abroad
If you have already taken foreign investment, the regulatory folder gets serious scrutiny. The investor's lawyers check that every past foreign issue was reported correctly: Form FC-GPR filed within thirty days of allotment, shares priced at or above fair value under the FEMA methodology, no breach of sectoral caps, and inward remittance received through banking channels with valid FIRCs (Foreign Inward Remittance Certificates). An unreported or mis-priced past FDI is a FEMA contravention that has to be regularised before a new foreign investor will come in on top of it — which is exactly why getting FC-GPR reporting right at the time is so much cheaper than fixing it under diligence pressure. A clean FIRMS record is part of what the next investor's lawyers are checking.
Financial, tax, IP and people
The remaining workstreams are where an accountant and an IP lawyer earn their fee. On the financial and tax side, expect scrutiny of audited financials, the GST and TDS filing trail, income-tax returns, and any tax positions taken — including the valuation support for past share issues. On intellectual property, the check is whether the company actually owns what it runs on: are the trademarks registered to the company, and — critically — has the founders' and employees' work been assigned to the company rather than sitting personally with them? On people, diligence looks at employment agreements, PF/ESI and professional-tax compliance, and the ESOP pool — how big it is, whether grants were properly approved, and how it dilutes the incoming investor. Each of these connects back to a document that should already be in the data room.
Where this sits in the startup journey
Due diligence is the exam that tests everything you set up along the way. It reconciles the cap table you built, checks the FEMA reporting on any foreign money, pulls the ROC filings you did (or did not) keep current, reads the term sheet and shareholders' agreement you negotiated, and prices the ESOP pool you created. It is the moment the whole compliance stack of a funded startup is graded at once. The founders who breeze through it are not the ones who scramble to prepare — they are the ones who kept the record clean from incorporation, so that diligence is a formality rather than a fire drill.
How we handle it at RDA, Baner
At RDA Advisory, Baner, we get startups diligence-ready before the term sheet is even signed — and run the process cleanly when it is. We reconcile your cap table against the MCA record, the share certificates, the resolutions and the register of members so the four tie out; we clear any backlog of ROC filings before an investor pulls your MCA21 history; we make sure past FC-GPR and FEMA reporting is clean; and we build and maintain the data room so that when the investor's lawyers arrive, everything they ask for is already there. Office No. 102, Snehraj Apartment, Baner, Pune 411045 · call +91 77570 45059.
Raising a round? Get diligence-ready before it stalls the wire
Signed a term sheet, or about to? RDA reconciles your cap table, clears your ROC and FEMA backlog, and builds a clean data room so due diligence closes on time instead of stalling. Book a consult at rdatax.in or call +91 77570 45059, or see our company registration and startup service. RDA Advisory, Baner, Pune.
Verification note: The statutory obligations referred to here arise under the Companies Act, 2013 — including the maintenance of the register of members under Section 88, the filing of Form PAS-3 for allotment of shares, the annual filings AOC-4 (financial statements) and MGT-7/MGT-7A (annual return), and penalties for default (including adjudication of penalties under Section 454) — and, for foreign investment, under the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, under which Form FC-GPR reports a fresh issue of shares to a person resident outside India within thirty days of allotment at a price not below fair value. Due diligence scope, data-room expectations and timelines are commercial practice set by each investor and vary from deal to deal; the compliance requirements, thresholds and forms cited are periodically revised. Confirm the current position for your company and transaction with your CA or advisor before relying on it. This is general information, not legal or professional advice.
