Here are some considerations for how to set up your data room.
What due diligence can a startup founder expect from investors as he or she is raising private capital for their startup venture? Specifically, what information and documents does the founder need to make available so that the investor due diligence process goes smoothly? What should or should not go into a data room?
What is a data room? A data room is simply a collection of digital file folders containing documents and materials about a startup that an investor would need to know before making a decision to invest. As a founder, it’s important to remember that you are under the investor’s microscope during the due diligence process – they want to know that you are organized, capable and have everything under control. A well-prepared data room can make those points nicely.
What do you do when a prospective investor asks to see your data room? If you don’t have a data room, you can easily set one up using Google Docs or a host of secure file sharing services like Egnyte, ShareFile or SmartVault. Assuming for a moment that you have a data room (which you should if you’re raising money), you want to be confident that the documents you’ve included there are the ones investors want to see.
Some key things to keep in mind as you prepare your data room:
- Make sure all of your startup’s financial information is current and accurate to the best of your ability.
- Organize your data room folders in a way that make sense – create a logical structure that makes the information easy to find.
- Title folders, subfolders and documents clearly – really take some time to think this through.
- Pay attention to detail. Small things make a big impression.
- Don’t forget to include key investor documents.
- Be strategic about what you include – try not to include information that can be used in negotiations against you. While it’s important to be transparent, you also want to be smart about the information you share.
So what exactly goes into a data room? Normally, you would include financial, legal and investor-specific materials. Consider including the following:
- Executive summary.
- Business plan or model.
- Investor deck (probably stick to one version, although you might have many).
- Financial projections (if not included in the investor deck).
- Term Sheet.
- Capitalization table (preferably a summary without specific investor contact info).
- Incorporation documents, including relevant internal governance documents like bylaws and operating agreements.
- All current financial statements, including a P&L and balance sheet –historical financials can also be important depending if they have been requested by investors.
- Biographies of key stakeholders and team members (if not included in the investor deck).
- Development roadmap (if you’re a software startup).
- Material contracts entered into by the company.
- Intellectual property registrations and/or filings.
Of course, every deal is different so you’ll want to tailor your data room to the investor’s needs. You also don’t want to include too much in your data room. You want to give investors the ability to quickly review materials and make a decision. Too much information can be overwhelming and lead to investor fatigue.
Founders sometimes have difficulty deciding what to include in their data room. For instance, do you include the following?
- Personal information about yourself or your team members that is not directly related to the business.
- Trade secrets or otherwise confidential information.
- Any information that could be considered a liability for the startup.
- Sensitive information of any type, such as employment matters.
If you’re not sure what to include in your data room, it’s always a good idea to consult with an experienced startup professional. Afissio can help you navigate the investor due diligence process and make sure you’re including everything investors will want to see.
Do you have any tips for what founders should include in their data rooms? Share them with us in the comments.