Way back, before all this digital stuff, companies kept their most valuable documents in a safe room. This way, possible buyers could readily see such information as part of due diligence. Storing this information meant using a room with the highest possible security levels. Back then, this was a document or data room.
The name still stands today, but it's no longer a physical space that you can call a room. Nowadays, an investor data room is digital. Is it essential for your startup? The answer can be controversial.
Investors check that everything you pitched is real, check that you have a legal structure in order, and your contracts, stock vesting, trademarks, and everything…
What they’ll be doing is navigating your data room, and if your data room is no good.. well, that’s when deals fall apart.
And today, I want to walk you through everything that investors expect to see in a Data Room, and, most useful for you, how to solve them. I also made a checklist that I’ll link here for you to free download.
I should say that this is NOT sponsored content, so these recommendations are as genuine as they get- the tools that I truly endorse.
What is a data room for investors?
An investor data room is a storage space, digital or physical, where companies store information relevant to due diligence. It can also hold other valuable data. For example, when an enterprise wants to buy a company, this information helps investors ensure everything is in order.
The information in this data room answers most of the questions investors might have. So, from this perspective, it makes sense to have one. In addition, a good data room can showcase the startup's knowledge for a favorable image with investors. Plus, digital data rooms can also make communication easier. This is thanks to sharing permissions between the startup and possible investors.
We mentioned in the introduction that an investor data room can be controversial. That's because some investors can question the validity and importance, but it shouldn't be this way. Still, we understand that you might be asking yourself if you should have an investor data room. So, in the following section, we'll cover this topic and much more.
Should I have an investor data room?
This question is widespread among startup founders, and it's valid to have this doubt. There is a lot of added value behind an investor data room, and, at the same time, it does come with a cost. This has caused a lot of debate among VCs and founders, and we'll explain why.
Some VCs and founders consider that a data room can slow down the process. In fact, according to some, the data room becomes a perfect excuse for investors to delay giving a yes or a no. In addition, since there's so much information, reviewing it might slow down decision-making.
Another possible downside to an investor data room is that it takes time. There are no two ways about it. Gathering all this information can be a slow process and not ideal for spending all the founder's effort.
It's important to note that the idea of a data room shouldn't be that the investor takes longer to decide. Instead, it should be efficient and to the point. So, further down the article, we'll cover what the Data Room should look like so that it's as efficient as possible.
Naysayers aside, there are advantages to an investor data room. First, a data room can answer many potential investors' questions. (Actually, it can answer all, but we don't want to oversell it).
Remember that an investor data room isn't only about fundraising. It's about your business from start to finish. Moreover, the data room tells an entire story, from technical reviews to competitor analysis. So in that sense, it's better to have it instead of not having one.
Granted, not all investors will look at your data room, and that's fine. Let's hope that your startup has a line of investors waiting to put down their money, but this doesn't always happen. So, you want to be as prepared as possible by having a complete investor data room. Now that we've covered why you should have a data room let's discuss another important aspect.
When should I put a data room together?
The short answer is: now.
The slightly longer answer is that it's never too early to create an investor data room.
Regardless of your company's stage, it's always an excellent exercise to have an investor data room. At the same time, it's important to note that data rooms can evolve over time. So, if your startup is in the earliest stages, you might feel overwhelmed if some of the valuable information is missing.
Don't fret over the data room if this is the case, but keep it in mind. A startup evolves fast, and the sooner you have the information, the better. This leads us to our next point, one of the most important ones you will read in this article. What do you include in an investor data room?
What Do I Include in a Data Room for investors?
Let's make one thing clear. Defining what information you have to put in your investor data room can be challenging. If you put too much information in it, some investors might put off reading it. Still, on the other hand, if you put too little information, it might send off signs of lack of preparation.
The following list suggests what you should have, so it can come off as long. However, if you find something you don't have or don't know its importance, this is the best moment to learn about it.
Startup due diligence checklist
Main Documents and Summary
So let’s remember the due diligence process for which you need this Data Room- happens after you’ve convinced an investor.
Preparing everything takes a while; you need to prepare and collect a bunch of documents from a bunch of places- so you might want to get started sooner, but the context here is important: you’ve already convinced an investor.
So, it’s expected that you include your pitch deck, which works much like a cover for the entire thing: but by the time you share this data room, investors will most certainly have seen this deck.
It’s useful to have one there, though- either for looping other decision makers into the process or to even use as intros for other investors. Same with the One Pager, which is a printable, single-page version of the pitch deck. Both of them are company summaries in the end.
We’ve published a bunch of videos on how to write a pitch deck- even a 9-day course. We also have a bunch of pitch deck templates and one-pagers templates- and our team is available to help write and design them- so you’re more than covered on that front.
So, here's what you should include in your investor data room:
So let’s talk Financials. There are some core items here.
First, your Balance Sheet and your P&L. This is what a Balance Sheet looks like, and this is what a P&L looks like. They are both generated by your accounting software- which, by all means, you should have one if you’re at this stage (and probably a bookkeeper to help you track it).
Recommended platforms here are Quickbooks and Xero, and we have discounts for both of them on the startup deals module in Slidebean.
The other part is the financial model, also called a Pro-forma statement.
That does require a little more work. An investor wants to see three things in a financial model:
Where you will be spending money: your budget for hires, team members, and marketing costs.
Your key assumptions: when do you foresee milestones like launching the platform, or when do you expect you’ll need to raise money again.
Lastly, these key assumptions will determine your revenue projections- how much you expect to grow, and what drives that growth. A big mistake founders make is just place growth numbers rather than estimating what drives them.
I wrote a Techcrunch article about it, and I’m working on a new video to teach you how to do driver-based modeling.
If you don’t know where to start, I got you. My team and I created a few financial templates for the most common business models: SaaS, eCommerce, Marketplaces, Apps- where all the variables are ready, all you need to do is bring your numbers- all available on Slidebean.
We also published free tutorials for each of them, so you can check that in our channel.
Lastly, if you need our help, for example, if your business model doesn’t quite fit either of them, we now have a team of analysts that can jump in too.
Our template is good for 7 years. Investors don’t necessarily want you to detail your hiring plan that far into the future, so your focus should be on two things-
Expenses and revenue for the period that the investor money will fund.
A reality check- a vision that’s exciting but realistic: if you show reaching $1B in revenue in 5 years, that may be too much. But if you show $10M in that amount if time, it’s not exciting enough.
On the IP front, you should have a folder with your existing, relevant IP materials.
At the very least, you should have Trademarked your brand name (to do it, of course, the Trademark Office needs to confirm that you are not infringing existing trademarks). So having your trademark confirms this check was passed.
If you have any provisional or granted patents, they should also be here.
Just a quick note on patents: provisional patents are not very valuable, I feel people often brag about having ‘filed for a patent, but in reality, the real mess is getting your full patent granted. That usually costs 10s of thousands of dollars in legal fees and can take years.
If you have a Brand Book or a Design Guide, you can include them there. I’ve included ours in the Data room template so that you can have it as a reference, though it’s usually not necessary.
The intellectual property documents to include in your investor data room are:
Patents (granted and filed)
Software license details (you should also list any open-source software that you use)
Domain name ownership
Incorporation & Legal Documents
Now, by the time you get to due diligence, you should have incorporated already. Actually, ‘being in business’ has costs, starting from accounting and tax filing - so do it when you are ready.
Also, remember that to officialize any stock deals with your co-founders, you’ll need to have a corporation.
Investors overwhelmingly prefer Delaware C-Corporation, and definitely not LLCs. I won’t bore you with the reasons but let me know if you’d like me to cover that in another video.
If you have NOT incorporated, then my best recommendation to take care of it is a company called Firebase.io - it’s pretty much a turn-key service that takes care of everything, including opening a company bank account. We also have a 10% discount in the deal section of Slidebean.
Assuming you have incorporated it, here’s some of the stuff you need to include in the Data Room.
Articles of incorporation.
Founder Stock purchase agreements (which is the document that includes vesting agreements).
And of course, your Cap Table.
Your Cap Table should probably look something like this:
This is from our Cap Table template. Remember that a cap table is just a summary of the legal agreements you’ve made: it’s not THE official document.
Those agreements and share distribution are lost on pages and pages of legal paperwork- the cap table just summarizes it, but the ultimate word is the signed documents.
You’ll also want to include your Board of Directors materials. In a Delaware C-Corp, the board essentially makes decisions representing the shareholders.
In theory, the shareholders make important business decisions on votes representing the number of shares you own. But asking all the shareholders about something is impractical, so the Board represents shareholders for those decisions.
That, of course, requires a rulebook: what decisions can the CEO make without the board, what needs permission, what needs unanimity. How do board members get removed?
That rulebook is called a Bylaws, and you absolutely want to upload it. Also, any previous Board agreements (called Board consents) should also come in.
In larger companies, the Company Secretary should be keeping Board Minutes. We don’t do this, so- well, maybe we should.
The investor data room should also include employee information such as:
All employee contracts. These include past and present, with titles, salaries, and records.
List of current employees, salaries, and titles
All intern contracts, past and present
All consultant contracts, past and present
If your team is growing (or it's only you at the time), then you can include your vision. How many employees do you see hiring, and how soon?
And last but not least, your employee agreements for key people.
This last one is really important. Investors want to check that you’ve done your homework, that your employee’s IP is being assigned to the company, and that you have confidentiality agreements in place.
This is even more important for the founders. Their contracts often include a Restricted Covenants clause that prohibits them from working for competing companies.
We have templates available for many of these documents. You can find them on our Document list.
On the metrics front, you should provide investors with data.
Now this varies from company to company, of course. It may range from usage metrics from your app to your sales pipeline and flow.
Let me cover some common scenarios,
- For a SaaS company, the best alternative is to offer them access to your SaaS tracking platform. In ChartMogul, for example, you can add a limited user seat for them and save the trouble of having to download and re-format everything. They are connected directly to Stripe, so data is as real as it gets.
The key numbers to look at there are MRR, ARR, churn rates, and lifetime values.
- For a mobile app, you could go with a dashboard built on a tool like Mixpanel (which we actually use ourselves too). The key numbers to look at there are monthly active users, average session times and customer retention.
- For any B2B product, they will want to look at sales.
We use Hubspot for our consulting branch sales, so you could build a custom dashboard for that (we have 90% off on Hubspot for Startups, BTW).
So as a general rule, access to your dashboard is great. If that’s not possible, you could go with a presentation that highlights the relevant aspects, provides context on data that is hard to understand, and provides proof (data points, spreadsheets) on the data itself.
This gets more sensitive the bigger the company is, of course- but either way, you should never include customers’ personal information.
Now, if you have raised money in the past, you also want to include that here:
Investor rights agreements
First refusal & co-sale agreements
Any other document/agreement with those investors.
So far, I’ve mentioned everything our own data room included, but for my sanity, I checked a few more articles on what to include.
Some of the stuff mentioned that I didn’t consider necessary were:
A Market Research section (with market studies and competitive analysis).
A Technology stack section, with a diagram of the system architecture, API documentation, details on large integration- and even your roadmap and backlog.
I think that just attaching all of those in a folder might not provide more value, but I do understand why some investors will want to dig deep into those, especially if the product needs to scale to a massive audience and support that much traffic.
Now as I said, I prepared two things that you will find useful:
A spreadsheet checklist of everything that you need to prepare, with instructions on how to find it.
A Data Room folder structure that you can use to upload docs. Most companies I know use Google Drive or Dropbox.
Last but not least is technology. This is a critical component that many founders overlook. On technology, your investor data room should include:
System architecture diagram
Product backlog export
Existing products (for safety, you can present these with screenshots)
As you can see, the list can be lengthy but don't feel intimidated by it. You can create an investor data room step by step. Plus, even if you can see that the list is quite long, there are some things that you shouldn't include.
What shouldn't include in your investor data room?
This section stands as a warning, as there is a balance that you must achieve with the investor data room. So, there isn't a defined list of documents that you shouldn't include. Instead, consider the data inside as valuable (or not) for your investor. If certain documents aren't necessary for decision-making at that moment, then you can omit them.
Then, there's the aspect of safety. Don't include people that you wouldn't want seeing your data. While this sounds logical, it's a step that some founders overlook. The best practice is to perform routine checkups on who has access to the data room. This way, you can include or exclude those no longer pertinent.
Finally, another good practice is to withhold information according to stages. For example, let's say you've found that an investor is interested in your company but hasn't committed. You might consider excluding certain documents until the next stage. That's why some founders create different investor data rooms for other moments in time. This isn't mandatory and could be time-consuming, but it offers the advantage of providing information in stages.
What are some benefits to having a data room for investors?
We've seen what you need to include in your investor data room. Now, let's discuss some of the clear benefits that it can provide for you. These aren't all the benefits, of course, and what we've done is list those most important.
It's okay to admit it: due diligence isn't fun.
It's a time-consuming process that's vital for investors. In summary, due diligence is when investors thoroughly investigate your company, usually at an early stage. With this investigation, they can value whether your company is suitable for investing or not.
As you can imagine, it's a long process that can consume a founder's time. So, an investor data room helps speed up this process. First of all, all the information is in one place. Then, an organized data room can help investors find what they need faster. Third, if your data room is secure, you are confident that you won't lose valuable information.
The investor data room allows for more organization and easier access. Plus, it can make for faster fundraising processes. Now, we know that some people out there believe that it's the opposite. They feel that an investor data room could actually slow down the process.
Is that so? It depends on how organized your investor data room is. The clearer the information, the more it will help speed up the fundraising process. Plus, it can help you with one essential aspect.
To have an organized investor data room, you need to manage your data. It's logical, right? As you go along in this process, you will also learn a lot about your own company. Plus, going through all these documents further readies you for more fundraising processes.
Having that information fresh in your mind is vital. In fact, this might be one of the most underrated yet essential parts of an investor data room.
We've discussed much of the benefits of an investor data room. So, now, there's a big question to answer. What do I use to create an investor data room? We'll explain all the details in the following section.
How to choose data room software?
We're overlooking a critical aspect of an investor data room. What if you want to have a physical data room? In that case, the room should have the necessary security and strict access procedures.
The reality is that you should opt for a digital investor data room. There are many software options out there, and for most budgets as well. You can find mainstream options such as Google Workspace and Dropbox. There is also more specialized software, such as CapLinked and Contract Zen. Before choosing one, you should check reviews. Also, be sure to inquire about safety features and backups.
Another vital aspect that you should research is the support team. Don't be afraid to ask, as the team should explain how it handles issues such as access and permissions.
Privacy and security are vital in an investor data room. After all, you're holding the information crucial to your company and your competition. The more you understand your software, the better, because something unpleasant can happen.
What happens if someone leaks information from my Investor Data Room?
Your company should have established processes in case of a security breach. For example, the software should trace those who have had access to sensitive documents. Still, leaks can happen. If your company goes through the unfortunate event of having a data leak, there's not much that you can do to recover it. Instead, your actions include filing a complaint to authorities and pursuing legal actions.
It's common for founders to ask whether they should have an investor data room or not. As we migrate to digital, these have become much more accessible, both in cost and ease of use. So, in this article, we cover the essential aspects that you need to know of investor data rooms.
We've also provided a detailed list of what you should include in your investor data room. Founders can feel overwhelmed when starting one, but they can prove vital. Also, creating an investor data room can be a great learning experience for you as a founder. So, we hope that you have enough information to make the right decision about your investor data room.
CEO at Slidebean/FounderHub. TEDx Speaker. 500 Startups Alum. 40-under-40.