Lesson 2: Why you need a Dataroom

Why You Need a Data Room

One of the things that investors expect from a start-up is a data room, which is a secure online storage destination that has all the documents that an investor would want to see before investing in or buying a company. Examples of online storage destinations are Dropbox, Box and Google Drive.

When an investor is interested in investing in you and wants to conduct due diligence, you send the link to your data room. The data rooms make it easier for an investor to evaluate your company. Rather than going to a physical room to read all your company documents – which is how it was done decades ago – they have all the material in one place at their fingertips from anywhere, anytime.

Virtual data rooms are the norm now and they come with many benefits. They have strict control functions. Investors can read but not download if you choose. Or anything they download is watermarked with who downloaded the file along with a timestamp so that if confidential information becomes public you can trace where the leak was. You don’t need to spend a ton on a data room solution but find one that fits your needs and is straightforward to use. Since this is not multi-billion-dollar M&A, you don’t need a solution built for those large deals.

A well-organized, well-maintained data room with all the right documents saves investors time; they don’t have to dig around for the data from different sources. This action is part of the due diligence process that an investor does before investing money in your company. They want to confirm that you have given them accurate information and they want to see the official documents as verification. A solid data room keeps the momentum going. You don’t want the investor to ask for something that takes you two days to create, because that is two days more till close. You want the investor to have what they were looking for and maybe more if it makes you look good.

The better your data room is, the faster you could receive your money from investors. If your data room is missing documents or is disorganized, it can cost you valuable time and money. The earlier you start developing your data room and the more time you put into making it well-organized from the start, the easier it will be for you down the road when you do more fundraising, especially securing funds from venture capitalists.

The next big question is: what documents should a start-up have in its data room? Most investors will want to see the following documents in your data room (must-haves):

• Pitch deck

• Financials

• Most recent profit & loss (P&L) statement

• Proforma for the next year

• Staffing

• Employee contracts (past and present)

• Names, titles, and salaries

• Consultant and intern contracts

• Board information

• Board meeting minutes

• Board packs / consents & actions

• Company documents

• Articles of incorporation

• Certificate of Good Standing

• Investor rights agreement

• Cap table

• Voting agreement

• Term sheet

• Asset register

• Audited accounts

• Management accounts

• Share option agreement / shareholder agreement

• Share option grants

• Customer and partner information

• Customer contracts

• Partnership agreements

• Intellectual property

• Patents (existing or pending)

• Trademarks

• Domain name ownership

• Legal

• Any legal disputes (past or present)

• Products and technology

• Product information

• Software license details / any open-source software used.

• Leasing information

• Office lease

Depending on the investor, additional documents may be requested for your data room (nice-to-have):

• Marketing

• Brand guidelines

• Marketing details

• Sample marketing material

• Market Research

• Competitive landscape

• Market dynamics and detailed analysis

• Sales

• Sales pipeline

• Process of selling

• Sample sales material

• Historical Information on Past Fundraising

• Legal documents

• Past term sheets

Best Practices

Now that you know what documents need to be in your data room and you understand the reasons for a data room, the following are four best practices to keep in mind:

• It’s best practice to have a dedicated person own the administering of the data room. The person who administers it needs to be the one person that keeps things clean and maintained. If this process is not enforced, things get unorganized and may cost you an investor. Whoever you choose, the founder needs to continually check on the data room; it’s that important.

• It’s best practice to do a back-up of your data room. Imagine if something happens to your data room and you lose everything in it. You cannot allow that to happen. You should back it up online. You should do it regularly. Virtual data rooms offer backup solutions if you use a service. It is probably not worth the time of a start-up to create their own data room solution.

• It’s best practice to ensure that the right security controls are in place. To protect your data room, you need to actively manage who has access rights to the data room – and when they have access to it. Don’t take it for granted. When you are sharing a link to your data room with an investor, you should be doing it in a secure and confidential way. You can even investigate links that expire if your provider allows for them but give investors ample time to do their due diligence, so don’t set it to five minutes or one day. Due diligence can take some time and investors are busy people. However, giving access forever is not a good idea.

• It’s best practice to use well-organized folders in your data room. Make it easy for investors to find information. The way it’s organized reflects on you as the head of the company. Give folders clear names, and make sure the files have the date it was generated or the time it covers. For example, your balance sheet for 2018 should say 12-31-2018 Balance Sheet.

And if you want certain investors to see more details than other investors, you can have a simplified version of your data room and then a more detailed version of your data room for other investors. Just be careful who you send the appropriate links to. You should also be aware that not only do VCs look at their data room, but their legal team usually reviews it, too. 

Since the goals of a start-up are to move fast and raise money, a data room helps accomplish both feats. When investors like your data room, they like your company, and when they believe in your company, they write you a check. 

In the next topic, we go over how to create your Data Room and how to share it with the us team for due diligence purposes.