A term sheet is not a deal. Between signing and money in the bank sits due diligence, where the investor's accountants and lawyers go through your company looking for reasons to renegotiate the valuation or walk away. Most founders treat this as a document-gathering exercise. The investors treat it as a risk hunt. The gap between those two views is where deals die.
This checklist is written from the investor's side of the table. It tells you what they actually look for, and which findings cause a discount, a delay, or a dead deal.
The Documents Every Diligence Team Will Demand
Before any analysis begins, the investor's team asks for a data room. If you cannot produce these quickly and cleanly, the process stalls and confidence drops before the numbers are even reviewed.
- Audited financial statements for the last three years, plus the latest management accounts.
- All GST returns (GSTR-1, GSTR-3B, GSTR-9) and a reconciliation against the books.
- TDS returns, challans, and Form 26AS or the TRACES compliance record.
- Income tax returns and assessment or notice history.
- ROC filings: AOC-4, MGT-7, board resolutions, and statutory registers.
- The cap table, share certificates, ESOP scheme documents, and all prior funding agreements.
- Material contracts, IP assignment agreements, and a litigation summary.
The Red Flags That Move Valuation
Here is what the diligence team is genuinely scanning for, ranked by how badly each one hurts.
The Compliance Items Founders Most Often Miss
A few of these deserve a closer look because they are recent or commonly misunderstood.
MSME dues, Section 43B(h). From FY 2023-24, any amount owed to a registered micro or small enterprise that is not paid within the time limit agreed (capped at 45 days) is disallowed as an expense until actually paid. Diligence teams now test this directly because it both inflates taxable profit and reveals how a company treats its small suppliers.
Foreign investment, FC-GPR. If your startup has ever issued shares to a non-resident, you were required to report it to the RBI by filing Form FC-GPR within 30 days of allotment. Many early-stage founders raised a foreign angel round and never filed. This surfaces immediately in diligence and requires compounding with the RBI before a fresh foreign round can close.
Angel tax, Section 56(2)(viib). The angel tax, which taxed share premium above fair market value as income, was abolished for all classes of investors from April 2025. This removed a long-standing diligence headache for startups that raised at a premium. Valuation reports still matter for governance, but the specific angel-tax exposure is gone.
Cash and related-party hygiene. Section 269ST disallows cash receipts of Rs 2 lakh or more in aggregate from a person in a day. Diligence teams look for cash transactions near these limits and for any commingling of personal and business funds, which is one of the most common findings in founder-run companies.
How to Be Ready Before You Need to Be
You cannot manufacture clean compliance in the fortnight before a term sheet. The companies that sail through diligence do four things continuously:
The investor is not looking for perfection. They are looking for evidence that you run a disciplined company whose numbers mean what they say. Build that evidence over years and diligence becomes a formality instead of a threat to your raise. If you are based in Telangana, our guide to CA services for startups in Hyderabad explains what to expect from a CA at each funding stage.
Sources: Income Tax Act 1961, Section 40(a)(ia), Section 43B(h), Section 56(2)(viib) as amended by the Finance Act 2024, and Section 269ST; Companies Act 2013, Section 164(2); Foreign Exchange Management Act and RBI FC-GPR reporting requirements; MSMED Act 2006 payment timelines. Compliance rules change frequently, so confirm current requirements with a qualified professional before relying on them. This article is general information and not advice on your specific situation.
