12 Due Diligence Red Flags That Kill a Deal After the Term Sheet
The term sheet is signed and the founder has already told the team. Then the diligence questions begin, and four weeks later the investor sends a polite email saying the fund has decided not to proceed.
Deals rarely die in the pitch meeting. They die in the data room, when an investor finds something the founder never mentioned. At VSURE, we prepare founders for financial due diligence before they raise capital, and these are the 12 red flags we look for first.
Key takeaways
- Most red flags are about trust. The issue matters less than the fact that it was hidden.
- Money, ownership and compliance are the three areas investors examine hardest.
- Almost every flag here can be fixed or explained if you find it before the investor does.
Red flags in the money
Numbers that do not reconcile
Revenue in the deck says ₹12 crore, the audited accounts say ₹9 crore and GST returns say ₹8 crore. Investors compare all three with bank statements. A gap they cannot explain usually ends the conversation. Reconcile them yourself and keep a one-page note explaining any difference.
Revenue that is not really revenue
Sales to group companies, one-off projects shown as recurring income or invoices raised just before year end. Investors strip these out, and they start doubting the rest.
Loans nobody mentioned
Unsecured loans from relatives, personal guarantees and overdue lender payments often surface late. Disclose every borrowing upfront. If the debt itself is the problem, restructure it through debt syndication before the raise.
Personal expenses in the books
Family travel, home rent and a relative on the payroll are common in Indian promoter-led companies. To an investor, they suggest the founder does not separate the company’s money from their own.
Red flags in the business and its ownership
One customer carrying the company
If a single client brings in 50% of revenue, the investor is really betting on that relationship. Show a pipeline that reduces the dependence. Long-term contracts with that client help too.
Related-party deals
A vendor owned by a brother-in-law or an office rented from a parent is not illegal. Undocumented, above-market arrangements are what worry investors. Move them to written contracts at market rates.
A messy cap table
Verbal promises of equity, unsigned share transfers and angels who cannot be traced make investors nervous about future claims on the company. Put every holding in writing and close out old promises.
IP that sits outside the company
Code written by a freelancer without an assignment agreement, or a trademark in the founder’s name, means the company does not fully own what the investor is paying for. Get assignment agreements signed and transfer registrations to the company.
Red flags in compliance, founders and behaviour
Statutory dues and filings
Unpaid PF, late TDS, pending GST notices and missed ROC filings are individually small. Together, they tell an investor how the company is run. Clear the dues and keep the challans ready.
Founders who are not fully in
A co-founder with a second business, an unresolved dispute between founders or a recent quiet exit will come out in reference calls. Settle roles and commitments before you start the raise.
Projections with no link to history
A business plan that shows 5x growth next year after 20% last year needs a very good explanation. Without one, investors discount every other number too.
Slow or shifting answers
Taking ten days to share a document, or giving a different figure each time, is the biggest red flag of all. Investors read it as either weak control or something to hide.
What to do if you spot one
Fix what can be fixed, and disclose the rest before the investor finds it. A problem you raise yourself, with a plan attached, is a discussion point. The same problem discovered in the data room is a reason to leave.
Where VSURE fits in
We have supported 40+ businesses and enabled ₹125 Cr+ in capital, and we run this same review on every company before it meets an investor. We look at the business the way a diligence team would, then help the founder clean up what we find.
Want your company checked before an investor does it? Write to info@vsure.info.
Frequently asked questions
What is due diligence in startup funding?
Due diligence is the investor’s detailed check of a company’s financials, legal standing, ownership and operations before money is transferred.
Why do investors back out after signing a term sheet?
Usually because diligence reveals something that was not disclosed, such as unreconciled numbers, hidden liabilities or ownership disputes.
How long does due diligence take in India?
Typically four to eight weeks, depending on how organised the company’s records are.
Can a deal survive a red flag?
Yes, if the founder discloses it early and shows a clear plan to fix it.
