What do investors check during startup due diligence?
A legal due diligence review examines the company's ownership, corporate records, founder and employee arrangements, intellectual property, contracts, compliance and material disputes. The scope depends on the business, investor and proposed transaction.
Prepare by building a coherent record of the business. A folder containing hundreds of files is less useful than a smaller, organised collection that explains what has happened and identifies what is missing.
The aim is to help an investor assess risk and complete the transaction. No checklist can guarantee investment or an issue-free diligence report.
1. Make the cap table traceable
Start with the current shareholding table. Show the issued position and a separate fully diluted view incorporating options and relevant conversion assumptions.
For each issue or transfer, locate the supporting approvals, transaction documents, payment evidence and formal ownership records. Include informal equity promises on an issues list so they can be resolved rather than overlooked.
For illustration, if your deck says a founder owns 70% but the records support 60%, establish which transactions or assumptions explain the difference before sharing both documents.
Connect the cap table to your ESOP records, including ungranted reserves, outstanding grants and exercises. A percentage without a defined denominator can be misleading.
2. Assemble the corporate record
Collect incorporation documents, the current Memorandum and Articles, relevant approvals, registers, filing acknowledgements and material corporate changes.
Check that the documents are signed versions and that later amendments are easy to identify. Label draft and superseded versions clearly.
Review whether any company or transaction-specific dematerialisation requirements affect the proposed investment. Do not assume the same treatment applies to every private company.
3. Resolve founder and IP questions early
Prepare the founders' agreement, employment or service arrangements, and any departure settlements.
Map the ownership of the technology and brand. Include founder contributions, contractor work, licences and dependencies. Record material open-source or third-party restrictions for specialist review where relevant.
An investor should be able to understand what the company owns, what it licenses, and whether a key person could withdraw something the business needs to operate.
Missing paperwork should become a remediation task with an owner and timeline. Do not backdate documents or describe unsigned drafts as completed agreements.
4. Review the contracts that drive the business
Start with your largest customers, critical suppliers and any contract that the company depends on disproportionately.
Prepare a short summary of duration, termination, payment, liability, exclusivity, IP ownership and any consent requirement relevant to the investment. Identify side letters and important email variations.
For example, if a key customer can terminate when ownership or control changes, check whether the proposed investment triggers the clause. That is a transaction question, not something the founder should guess from the contract heading.
5. Organise compliance, people and disputes
Include the company's compliance tracker, financial and tax records requested for the review, employment documents and relevant registrations. Record material notices, claims and threatened disputes accurately.
Data, employment and sector-specific requirements depend on what the business does. A software company handling customer information and a regulated financial-services business need different diligence workstreams.
Use the post-incorporation checklist as an organising foundation, then expand it for your actual activities.
6. Check the proposed funding instrument and investor
Agree what instrument the investor will receive and what conversion, economic and governance terms apply. The name of an instrument is not a substitute for reviewing its terms.
For foreign investment, check the applicable entry route, sectoral conditions, investor restrictions, pricing, payment and reporting requirements. The RBI framework treats fully and mandatorily convertible preference shares and debentures differently from instruments that do not meet those conditions. RBI Master Direction—Foreign Investment in India, paragraphs 3–4 and 5.
Do not accept funds first and assume the appropriate legal route can be selected afterwards. Coordinate the proposed process with your advisers and authorised dealer bank where relevant.
A practical data room structure
| Folder | What to include |
|---|---|
| 01 Corporate | Incorporation, constitutional documents and corporate approvals |
| 02 Ownership | Cap table, securities records, investment history and ESOP records |
| 03 Founders and team | Founder, employee, consultant and departure documents |
| 04 Intellectual property | Assignments, licences, registrations and asset ownership map |
| 05 Commercial | Material customer and supplier agreements and summaries |
| 06 Compliance and finance | Relevant filings, accounts, registrations and correspondence |
| 07 Issues and transaction | Issues list, remediation plan and proposed investment documents |
Limit access to the people who need it. Avoid uploading unnecessary personal information or confidential customer data merely because it is available.
When should I start preparing?
Before you need the money urgently. Begin with ownership, IP and material contracts; missing signatures and third-party consents can take time to resolve.
Does a signed term sheet mean funding is guaranteed?
No. Review its binding provisions and completion conditions. Diligence, definitive documents and closing requirements may remain outstanding.
Preparing for your first funding round? Book a free consultation with Corpernicus to identify the legal preparation your business needs before investor review.
This article is a general preparation guide. Transaction requirements depend on the company, investor, instrument and applicable law.