Due diligence is a word that is used to describe the process of evaluating a company and its

founders before making an investment. In the due diligence process, the financial, legal and
compliance aspects of the company are usually reviewed and
documented. Every investor approaches due diligence differently. Some angel investors may
request information in a detailed manner all at once, while others may simply request
information at different times or stages. Regardless of an investors method to obtain information
on a potential company, it is a proven fact that exercising thorough due diligence is indicative of
more profitable returns.
Investors performs different kind of due diligence before investing in any startup. To be sure
before investing in any startup, while performing the due diligence the investor requires a
company secretary or financial advisor to check the prospective loss & profit and a lawyer to
check whether the legal and regulatory requirements are fulfilled by the company or not.
This document will provide you the checklists of the documents required before conducting a
legal due diligence of any company. The potential investor shall reviews the corporate
compliance records, finances and taxes, employment and labor issues, business contracts,
intellectual property rights, and litigation concerns.
Documents to be checked under corporate compliance records:

Basic information of Company that includes:

o Date of Incorporation
o Authorised Capital
o Paid up Capital
o Date of Last Annual General Meeting
o Date of Last Balance Sheet
o Status of the Company
Director Information
o Directors of the Company
o Date of Appointment of Directors
Charges Registered
o Details of Secured Lenders of the Company
o Quantum of Secured Loans
Documents
o Certificate of Incorporation
o Memorandum of Association
o Articles of Association

Documents to be checked under financial performance and projections

Get a copy of latest board approved budget, management accounts and audited financials
(if available). Compare revenue and expenses between budget and actual accounts to
identify and explore deviations. This can also be used to analyse future projections.
Review gross margins and net margins for each product line and assess if direct expenses
have been pushed below the line as overheads.

Analyse working capital items (debtors, creditors and inventory). Ageing list can be very
helpful.
Ensure that amounts due to technology and other service providers are accrued and
recorded in accordance with agreements as liability even though they are not paid out.
Obtain details of bank mandates and signatory limits.
Obtain copy of bank statements for all the accounts held in company's name. Match bank
balances with the latest audited/unaudited financials provided.
Ensure that the company has filed all its tax and annual returns with relevant authorities.
Get copies of tax assessment notices.
Carefully look for related party transactions and ensure that they were conducted at arms
length.
Go through the list of fixed assets and verify material items. If there are huge intangible
assets capitalised in the balance sheet, make sure that they are valued realistically.

The following aspects relating to the taxation aspect of a company must be checked:

Income tax return filed

Income tax paid

Calculation of income tax liability by the company

ESI / PF Returns Filed

ESI / PF Payments

ESI / PF Payment Calculation

Service Tax / VAT Returns Filed

Service Tax / VAT Payments

Basis for Service Tax / VAT Payment Calculation

TDS Returns

TDS Payments

TDS Calculations

Documents to be checked under employment and labor issues:

Get a copy of company's organisational chart and list of employees with their roles.

Verify employment contracts, non-disclosure and non-compete agreements (where

applicable).

Look for historical attrition rates to identify unusually high staff turnover.

Ensure that all the employees have the right to work in the country they are based in.
Also, verify that the company has been promptly paying the employer's contributions in
accordance with local laws.

Due diligence of Technology used by the company:

Capability of the technology: To ensure it does what it promises, schedule a demo.

Prepare a walk through of various use cases. For software, go through the functionality
from both front and admin ends and document screen shots

Stability and scalability: This is relevant primarily for software startups where
architecture, algorithms and databases need to be assessed for stability and scalability.
Obtain a list of infrastructure monitoring tools used by the company. Get a description of
redundancies built into the hosting platform and hardware.

Usage data: Obtain monthly traffic reports like site visitors, unique visitors, registered
users, returning users, etc.

Third party tools: Obtain a list of third party tools and/or content utilised by or embedded
within company's products. Ensure that licenses are in place.

Development roadmap: Review company's plans and "Use of capital sheet" to assess if
significant pivot in product direction are anticipated in coming years.

Ownership: Evaluate academic affiliations of Founder/s and/or CTO to assess competing claims
on the technology. If the technology is licensed from a research institute, assess the impact in an
exit scenario.
Miscellaneous and financial checklist:

Look out for the "unfair advantage" and verify that by speaking to at least one or two
industry professionals. It can be the technology, business model or a combination of both.
Obtain a competitor landscape from the founders and verify that independently. Big red
flag if founders have missed out on some prominent ones.
Get details of Strategic alliances, Joint Ventures or other partnerships. Check if any of
that might become a roadblock in future exit plans.
If the company has multiple products, obtain features and pricing details for the entire
product range.
Request for details of "Use of capital and ensure that it makes overall sense.

Investment history

Obtain a Capital structure table (Captable) and verify that with data independently
obtained from government agencies (ROC extracts in India) or independent data
providers. Ensure all convertible notes, stock options, warrants, etc. are fully disclosed to
calculate fully diluted outstanding shareholding pattern of the company.
Ask for a copy of previous Shareholders and Subscription agreements. Go through
previous investor rights/options to participate in the current round.
Meet up with at least all the investor representatives on the board of directors. It is
important to establish that the future board is going to be functional.

Checklist for Intellectual Property:

A schedule of domestic and foreign patents and patent applications.
A schedule of trademark and trade names.
A schedule of copyrights.
A description of important technical know-how.
A description of methods used to protect trade secrets and know-how.
Any "work for hire" agreements.
A schedule and copies of all consulting agreements, agreements regarding inventions, and
licenses or assignments of intellectual property to or from the Company.
Any patent clearance documents.
A schedule and summary of any claims or threatened claims by or against the Company
regarding intellectual property.
Any documents related to registration of trademarks, copyrights, etc.
Any licensing of intellectual property.
Customer Information:
A schedule of the Companys twelve largest customers in terms of sales thereto and a
description of sales thereto over a period of two years.
Any supply or service agreements.
A description or copy of the Companys purchasing policies.
A description or copy of the Companys credit policy.
A list and explanation for any major customers lost over the last two years.
All surveys and market research reports relevant to the Company or its products or
services.
The Companys current advertising programs, marketing plans and budgets, and printed
marketing materials.
A description of the Companys major competitors.
Identity of past and present clients of Target
Correspondence from clients
Insurance Coverage:
A schedule and copies of the Companys general liability, personal and real property,
product liability, errors and omissions, key-man, directors and officers, worker's
compensation, and other insurance.

A schedule of the Companys insurance claims history for past three years.