“Organization is the foundation of success.”
– Andrew Carnegie
As a founder, one of the key tasks in raising capital is to effectively communicate the value of your company to investors. In my post “YC’s guide to series A” I shared Ycombinator’s advice on how writing your own investment memo can help articulate your value proposition for investors and have the answers to the questions you’re likely to get probed on by VCs. It’s also worth checking YC’s series A due diligence checklist.
Today, I want to share another resource that is a bit underrated – the data room. In my experience as a seed venture investor, founders that had a full and tidy data room not only came across as more professional, but actually accelerated the process of DD and legal.
As founders that raised investment know, there’s a lot that happens after the investors’ initial decision to invest. A well-organised data room can play a crucial role in making the process more efficient, and get the money quicker into the startup’s bank account. A data room is a secure repository of information that is shared with potential investors during due diligence. This information can include financial statements, contracts, patents, and other sensitive information.
So what goes in the Data Room
The data room can be a Google Drive / Dropbox/ Docsend series of folders. You can also choose to pay for a dedicated SaaS product, but I find that a password protected link does the job. Within it, you should have the following categories (the need for certain documents may very based on the startup’s stage)
- Summary – company short description, one pager, full deck
- Team information – executive team bios / LinkedIn profiles, advisors, some might choose to include references, but in any case a DD process is likely to go beyond the references provided
- Financial documents – budget/ use of proceeds, revenue model/ projections (if relevant), cap table, ESOP allocation table
- Legal documents – term sheet (i.e. SAFE note), shareholder agreements, company formation and governance documents (e.g. articles of incorporation, bylaws, shareholder agreements), employment contracts, patents and trademarks, contracts with providers, SEC filings, licenses
- Business documents – client contracts, pipeline (can be redacted: i.e you can remove PII and specific names if needed),
- Market documents – Market research overviews/ relevant reports, detailed competitive landscape
- Product and tech documentation – in some cases companies will choose to include material that is relevant/ specific to their tech, including architecture overviews, tech roadmap, product screenshots, access to demo/video
Best practices for your Startup Data Room
Here are some tips for setting up an effective data room:
- Keep it organised: The data room should be organised in a logical and intuitive manner, with clear and concise labelling of files.
- Make it secure: Make sure to use a secure platform to store the data and ensure that only authorized personnel have access to it.
- Keep it updated: Keep the data room updated with the latest information, as investors will want to see the most recent information available.
- Make it accessible: Make sure the data room is accessible to investors at all times, and that they have the necessary tools to easily review and download the information they need.
Getting to ‘yes’ from an investor is the first step. Making the process smooth and professional will not only save you money in legal fees, but also accelerate the whole process. Once you go through the process of setting up a data room, it will serve you well as a template for future rounds as well.