Due Diligence for Funding – Unknown facts

Due Diligence is the process which is done by the Investors to obtain information about the firm or company in which they are planning to Invest, both from a legal and business perspective. It is done to assess the amount of risk involved, hence once you are planning to get investment take your time to prepare due diligence.


For doing so, you need to know the stages of funding

  • Term Sheet Negotiation
  • Business Valuation & Business Plan
  • Due Diligence
  • Agreement Signing
  • Issuance of funding instrument- Share Based and Debt Based Funding
  • Corporate Law and RBI Compliances


As you can see after you clear due diligence the agreement is signed so taking care of due diligence is very important. So, people have queries such as why due diligence is done? What is the process involved? What should be taken care of ? In this article all your queries will be answered.


Why Due Diligence?

  • Check the Internal Control Systems are in place or not
  • To calculate the financial risk involved
  • Judge the awareness of the business owners
  • Assess the team structuring and Operational Processes in place
  • Verify the claims of the pitchers
  • Excavate undisclosed risks

Process of Due Diligence:

  • Investor appoints a team
  • Definite Mandate is set for the team
  • Confidentiality Agreements are formulated between parties
  • Due Diligence Questionnaire and checklist is prepared and circulated
  • Investigation takes place
  • Due Diligence Report is formulated and circulated


Things you need to take care of:

  • Your Company should be Incorporated as it not only provides Professionalism but also a sense of security to the other transacting party
  • Registration and filing under PF, ESI, VAT, Service Tax must be in place
  • Any Legal issue must be resolved beforehand
  • Maintain Income and Expenditure statement, P&L Accounts, other financial statements
  • Ownership of Intellectual Property, including non-exclusive licenses, infringement, inappropriate use and potential action, has to be dealt and agreed upon.
  • If you have previously raise funds, all your documents regarding it should be in order

 It is a summarization of an article written from Tax mantra. For more information, visit https://taxmantra.com/unknown-facts-about-due-diligence-for-funding/

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