Series A Due Diligence: What Investors' Lawyers Will Find and How Founders Must Prepare

Every startup that reaches Series A has survived the product and market validation stages. What many have not survived — at least cleanly — is the accumulation of legal debt that comes from moving fast and deferring documentation. Series A investors' lawyers will find it. The question is whether it kills the deal, delays it, or results in a repricing that founders did not see coming. This post walks through the standard Series A legal due diligence process for Indian startups, the issues most commonly found, and what founders should do before they are sitting across a data room from a partner at a large Delhi or Mumbai law firm. ## What Series A Due Diligence Actually Covers Legal due diligence at Series A is systematic and document-intensive. Investors' counsel will typically examine: **1. Corporate structure and cap table** The corporate structure review verifies the company's registration, the chain of ownership from founders through any holding companies, the cap table (paid-up capital and shareholding pattern), and the current Articles of Association. Discrepancies between the cap table maintained by the company and the ROC records (as reflected in MGT-7 filings and the register of members) are a red flag that suggests either sloppy administration or an undisclosed issuance. **2. ESOP pool and outstanding options** ESOP documentation is scrutinised in detail: the ESOP plan approved by shareholders, the option grant letters issued to employees, the vesting schedules, the exercise prices, and — critically — whether any options have been issued in excess of the plan ceiling without shareholder approval. Under the Companies Act 2013, ESOP grants to employees of listed companies require compliance with SEBI (Share Based Employee Benefits) Regulations; for unlisted companies, Section 62(1)(b) and Companies (Share Capital and Debentures) Rules 2014 apply. Non-compliant ESOPs create a potential liability to employees and an administrative burden at IPO. **3. Founder and employee agreements** Every founder should have a signed Founders' Agreement (or founder SHA) that addresses IP assignment, vesting (with cliff and acceleration), non-compete, and non-solicitation. Investors will look for founders without IP assignment agreements — this is the single most common issue found at Series A, and it can technically mean the company does not own its own technology. Employee NDAs and IP assignment clauses in employment agreements are checked for completeness and coverage. Contractors and consultants who contributed to product development must have signed IP assignment agreements. **4. Intellectual property** For a technology startup, the IP due diligence covers: ownership of all software code (no open-source components used in violation of license terms, no code written by contractors without IP assignment), trademark registrations (or at least trademark applications — the brand name must be checked for third-party conflicts on the Trade Marks Registry database), and domain ownership. Patent applications, if any, are reviewed for ownership and prosecution status. **5. FEMA compliance** This is the area that catches the largest number of Gurgaon and Noida startups. FEMA compliance covers: - Were all prior funding rounds (seed, angel, pre-Series A) properly documented under the NDI Rules? - Were Form FC-GPR filings made within 30 days of share allotment for each foreign investment round? - Were foreign investors issued CCPS (or another FEMA-compliant instrument) or ordinary equity (which may violate pricing rules)? - If the company has a DPIIT Startup India recognition, does the structure comply with the startup definition under Section 2(46A) of the Companies Act 2013 and the DPIIT notification? Late or missing FC-GPR filings are compoundable under FEMA — they can be regularised through the RBI compounding process — but the process takes 6-12 months and the investor will typically require it to be completed before closing. Some foreign investors walk away from FEMA regularisation processes entirely. **6. Material contracts** Revenue contracts with customers, supply agreements, and partnership agreements are reviewed for: change-of-control clauses (which can trigger termination or consent requirements on investment or acquisition), assignment restrictions, indemnity caps, and unusual IP licensing terms. A startup with a standard form customer agreement that assigns IP in deliverables to the customer may have unwittingly divested technology assets. **7. Regulatory and litigation history** Tax disputes, notices from the Provident Fund organisation, notices from the ESIC, pending or threatened litigation, and any notices from SEBI or the RBI are disclosed and assessed. A pending Income Tax demand for a prior year is manageable; a show-cause notice under FEMA for unregularised violations is not. ## The Top Five Issues Found at Series A in Delhi NCR Startups Based on the patterns seen in legal due diligence across early-stage companies: **1. Missing FC-GPR filings** — angel round from a friend in the US, filed without proper FEMA documentation. Needs compounding. **2. Founder IP not assigned** — the CTO incorporated the company but never signed an IP assignment agreement. The code was written before incorporation. The company technically does not own the code. **3. ESOP overissuance** — grants made beyond the shareholder-approved plan ceiling, or plan ceiling not formally amended before grants were expanded. **4. Unregistered trademark** — the brand name has been used for three years but the trademark application was never filed. A search reveals a pending application by a third party in the same class. **5. CAP table inconsistency** — ROC records show a different shareholding from the working cap table because a share transfer from an early investor was not properly documented and filed with the ROC. ## What Founders Should Do Before the Term Sheet The cost of fixing legal issues before a Series A is orders of magnitude lower than fixing them during due diligence under investor scrutiny. **Pre-diligence legal audit (3-4 weeks)**: A clean desk review of all corporate documents, FEMA filings, employment agreements, IP assignments, and material contracts — similar to what the investor's lawyer will do, but conducted at your own pace without negotiating leverage at stake. **Regularise FEMA positions**: File any outstanding FC-GPR forms through your authorised dealer bank. If filings are beyond the compoundable threshold, engage FEMA counsel to initiate compounding with the RBI regional office. **Execute missing IP assignments**: Have founders and all contractors who contributed to the technology sign IP assignment agreements with a specific prior-art carveout assignment clause. **Trademark filing**: File trademark applications before the diligence process begins. An application on file — even pending — is a stronger position than no application. **Data room preparation**: Organise all documents — certificate of incorporation, MOA, AOA, SHA, SSA, ESOP plan, all funding documents, all employment agreements, all material contracts — in a structured data room before sharing the term sheet. An organised data room signals operational maturity. Corpus Juris Legal provides Series A legal preparation services for Delhi NCR startups — from pre-diligence audits and FEMA regularisation to founder agreement drafting and data room organisation. The three to six months before your Series A process begins is the right time to engage.