Due diligence: meaning, types and common red flags
Due diligence is an investor's or buyer's review of a company's legal, financial, tax and compliance records before investing or acquiring.
Short answer
Due diligence is the investigation an investor, acquirer or lender carries out on a company before completing a transaction, to verify its legal standing, financial position, tax compliance, contracts, intellectual property and regulatory filings. Findings shape the price, the conditions to closing, and the warranties and indemnities in the definitive agreements.
- Done by
- Investors, acquirers, lenders and their advisers
- Covers
- Legal, financial, tax, secretarial, IP, HR, FEMA
- Output
- Report with red flags and conditions
- Usually after
- Signing the term sheet
Types of due diligence
Investors usually appoint separate lawyers and accountants to review different areas of the business, and each produces its own findings. The main streams of a typical startup due diligence are these.
- Legal and secretarial: incorporation, ROC filings, registers, minutes, share issues
- Financial: accounts, revenue quality, liabilities, projections
- Tax: income tax, TDS, GST, transfer pricing, notices
- Intellectual property: ownership, registrations, assignments
- Employment: contracts, ESOPs, EPF and ESIC compliance
- Regulatory: FEMA filings, licences, sector rules
- Commercial: key contracts, customers and litigation
Common red flags in Indian startups
Typical findings include missed or late ROC filings, share allotments without proper resolutions or PAS-3, late FC-GPR or FC-TRS reporting, TDS not deducted on rent or professional fees, IP created by founders or freelancers not assigned to the company, unstamped agreements, and informal ESOP promises. Most can be fixed through rectification, compounding or confirmatory documents, but each takes time and may become a condition before closing.
Why it matters for startups
A clean diligence shortens the closing and protects valuation. Before fundraising, run a self-diligence: organise a data room, reconcile the cap table with statutory registers, file overdue forms, collect IP assignments and fix TDS and GST gaps. Disclose known issues upfront in the disclosure letter rather than letting investors find them. Keep the data room updated after closing so the next round is quicker.
Related services
Sources
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
How long does due diligence take?
It depends on the company's size and record quality. Well-organised startups finish faster, but no fixed duration can be assumed.
What is a data room?
A secure online folder where the company shares documents with investors and advisers during diligence.
What is a disclosure letter?
A document in which the company discloses exceptions to the warranties in the transaction agreements, limiting its liability for disclosed matters.