Investors conduct due diligence to analyze the credibility of the startups.Being prepared with all the required documents and legal compliance in place improves the chances of closing a successful funding round. Here comes the role of professional due diligence services in India.

What are the important requirements of Due Diligence in Fundraising?

Due Diligence is the comprehensive review and verification of the startup’s legal, financial, operational and compliance documents.

This process is conducted by professional due diligence experts and involves verification of legal, financial, operational and compliance documents to ensure credibility and transparency before the investors.

It also helps the startups to build investor confidence, streamline the funding process, and reduce the chances of delays or deal breakers during the investment negotiations.

Startup Due Diligence Checklist in India

1. Corporate Structure and Legal Documents: Investors begin by verifying the legal identity of startups and structural integrity. The startup must be ready with the following documents –

1. Certificate of Incorporation.
2. Memorandum and Articles of Association
3. Board resolutions and shareholder agreements
4. Details of directors, promoters and shareholders
5. List of subsidiaries or affiliated companies if any
6. ROC filing and annual returns.

2. Intellectual Property Ownership: It is a startup’s most important valuable asset, especially for tech, SaaS and creative sectors. The documents include-

1. Registered trademarks, patents, copyrights and designs.
2. IP agreements if founders or employees developed key assets before incorporation.
3. IP strategy documents and licensing agreements
4. Ownership proof or right to use third-party software or tools.

3. Financial Statements: The transparency financial statements build trust. Startups need to prepare past and projected financial data clearly. The documents include-

1. Audited financial statements of the past 2 or 3 years
2. Trial Balance
3. P&L Account
4. Cash Flow Statement
5. Balance Sheets
6. GST Filing and Income Tax Returns
7. Revenue projections for 3 to 5 years are based on realistic assumptions.
8. Cap Table showing the shareholding pattern and past funding rounds.

4. Compliance and Taxation: Indian investors, especially foreign investors are cautious about regulatory lapses. Startups need to maintain these compliance and tax documents –

1. Startup India Recognition Certificate
2. GST registration and filings
3. Income tax filing
4. TDS payment proof
5. FEMA and RBI Filings (if foreign funding is received)
6. ESI, EPF and other labor law compliance
7. SEBI filings

5. Founders Details: Investors bet on two significant parameters before investing- founders and business ideas.

1. KYC documents of all directors and co-founders.
2. Educational and professional background of key members
3. ESOP policy
4. Employment contracts and offer letters
5. Non-Disclosure and Non-Compete Agreements

6. Business Model: It is important the business model and traction are backed by real data. The documents include –

1. Pitch deck and business plan
2. Pricing Model
3. Unit Economics
4. Customer Acquisition Strategy
5. Market Research
6. Customer Testimonials, Project Reports and Case Studies
7. Conversion Funnel Analysis.

7. Customer and Vendor Contracts: Commercial contracts showcase the depth of the startup’s commitments and operations.

1. Customer agreements and MOUs.
2. Vendor contracts and service agreements
3. Term sheets with partners or channel distributors
4. Lease or rental agreements for office space
5. Subscription terms of SaaS products.

8. Litigation and Risk Disclosures: Disclosing risks helps build credibility.

1. List of pending litigations
2. Show-cause notices or legal notices from authorities
3. Insurance coverage documents
4. Risk Management policies

9. Previous Funding Rounds: In case the startup has raised funds earlier, it needs to submit documents from the previous funding rounds

1. Valuation Reports
2. Details of Convertible Notes
3. Proof of Fund Utilization
4. Investor Rights and Board Observer Details

10. Data Room Organization: Prepare a virtual data room for secure and seamless access by organizing folders by sections, ensuring all the documents are labelled, dated and up to date. This impresses the investors and speeds up the decision-making process.

How Do Due Diligence Experts Support Fundraising for Startups in India?

• Legal Support: The experts draft and review the key documents. They ensure Registrar of Companies filings and company law compliance are up-to-date. They also help in IP protection, transfer and registration. The due diligence experts also identify and reduce legal risks or pending litigations that may affect the funding.
• Financial Advice: The specialists provide financial and accounting advice to the startups. They prepare and audit financial statements in a format acceptable to investors. They also ensure accuracy in tax filings and regulatory reports. The experts build detailed financial projections, unit economics and ROI models. Also, they prepare the cap table and evaluate the company’s valuation.
• Compliance Services: The due diligence experts verify compliance with laws like FEMA, FDI, RBI, SEBI and startup norms. They help with labour law filings. They also ensure the proper documentation of board resolutions and meeting minutes. They also update MCA records and maintain statutory registers.
• Data Room Preparation: The experts organize all the due diligence documents in a secure, investor-ready digital folder. They create checklists and document indices for easy navigation. They also help maintain version control and access protocols.
• Strategy Advisory: They also guide Indian startups on the best structures for equity dilution and fundraising terms. They help in negotiation support with investors and VCs. The specialists provide insight into market readiness, valuation, benchmarking and pitch refinement.

Fundraising for startups in India is a challenging process because it involves intense scrutiny by the investors.Due Diligence is about building confidence in the startup’s ability to scale, generate funds and comply with regulations. By preparing well in advance, the Indian startups can reduce delays, address red flags and showcase professionalism to the investors. The fundraising checklist is the action plan for the startups in the process.

Engaging professional services ensures the startups present a clean, well-documented and investor-friendly profile.

FAQs

1. Why is due diligence important for startup fundraising in India?
The legal due diligence for startups in India helps the investors assess the credibility, financial health, legal compliance and scalability of the venture. Anbac Advisors helps startups to be due-diligence ready building trust, avoiding delays and increasing their chances of closing the funding successfully.

2. What documents are required during due diligence?
The key documents include Incorporation certificates, financial statements, tax filings, founder KYC, IP ownership proof, compliance reports and prior investment agreements.

3. Can a startup raise funds if it has incomplete due diligence documents?
It can, but the process is risky. Incomplete documents can raise red flags, delay funding or lead to reduced investor confidence. Anbac Advisors help startups with a due diligence checklist for fundraising.