What is a Data Room for Investors - What to Include?

September 18, 2022

Adam Hoeksema

If you are an entrepreneur looking to raise capital from angel investors or venture capitalists and a potential investor just asked you for access to your data room and you nodded your head and pretended like you knew what that meant and then immediately after the meeting you Googled “what is a data room” don’t worry you aren’t alone!  

Being an entrepreneur often means that you have to learn on the fly.  

So in this article my hope is to help take you from hearing about a data room for the first time in an investor meeting, to quickly pulling together a data room for your potential investors.  Here is what I hope to cover:

  1. What is a Data Room for Investors?
  2. Why is a Data Room Important?
  3. What is Due Diligence? 
  4. Do I Really Need a Data Room for my Startup?
  5. How to Set up a Data Room
  6. What Should be Included in a Data Room for Due Diligence?
  7. How to Clean Up your Data Room for Due Diligence - and Quickly!
  8. What Software to Use for an Investor Data Room?

With that as a framework, let’s dive in! 

What is a Data Room for Investors?

A startup data room is simply a location where a startup can store their important due diligence documents and control who can access the documents.  If it sounds like a Google Drive folder or Dropbox folder you aren’t far off, in fact, a shared folder like a Google Drive or Dropbox folder could work for you as a quick and simple data room.  There are probably some good reasons to use a more purpose built software to manage your data room and we will discuss that later, but in a pinch a data room for investors can be as simple as a shared Google Drive folder. 

Why is a Data Room Important?

A data room is a way to share important documents with potential investors during due diligence.  You want to be able to quickly and easily share your key documents with investors without having to email a bunch of confidential documents to each individual investor.  I guess the other reason a data room is important is simply because many investors have come to expect that you have an organized data room to make their job of due diligence easier.   

What is Due Diligence?

Let’s make sure we are on the same page about what due diligence is.  Investor due diligence is the process of reviewing important source documents and data to confirm that the story the entrepreneur is telling in the pitch deck lines up with reality.  Different investors complete different levels of due diligence depending on the specific company and the situation.  Depending on the situation, sometimes the investor is in the driver seat and can demand higher levels of due diligence, but for really hot deals and high growth startups, the entrepreneur may be in the driver’s seat and can force the investor to make an investment decision before they have the opportunity to complete all of the due diligence that they might like to complete.  

So what exactly will investors look for during due diligence?  Let’s dive into that next.   

What Should be Included in a Data Room for Due Diligence?

As I just mentioned, the amount and level of due diligence that an investor might require can vary from investor to investor and depending on whether the investor or entrepreneur has the upper hand in the deal.  Here is a list of documents and data that may be requested during investor due diligence:

Investor Due Diligence Data Room Document Checklist

The following list aims to be a comprehensive list of documents and data that you might need to provide to potential investors during the due diligence process. 

Startup Legal Documents - Due Diligence

You will want to provide your incorporation documents and company bylaws along with any contracts or agreements that are material to your business.  So if you just got a very large contract that represents 50% of your annual revenue, an investor will likely ask to review that contract. Documents may include:

  • Articles of Incorporation
  • Bylaws
  • Material Contracts or Agreements
  • Any current or pending lawsuit documentation

Employee Documents - Due Diligence

Investor legal team may want to review any employee agreements, non compete agreements, and employee stock option agreements.  They may also want to confirm that you don’t have any hidden HR nightmares or legal issues brewing. 

  • Employment Agreements
  • Employee Non Compete Agreements
  • Employee Stock Option Agreements

Financial Documents - Due Diligence

Investors may ask to review bank statements to confirm that the financial statements you are providing are accurate.  This can help investors avoid founders that simply provide fraudulent financial statements. You will also want to provide all historical income statements that you have available plus your current balance sheet.  Next you will need to provide your current cap table so that investors can understand the current ownership of the business. Finally, you will want to include your financial projections as well. 

  • Bank Statements
  • Historical Income Statement
  • Current Balance Sheet - (Download our free balance sheet template)
  • Cap Table
  • Pro Forma Financial Projections - (Check out our library of 70+ projection templates)
  • Previous Investment Agreements, Convertible Notes, etc

Intellectual Property Documents - Due Diligence

Don’t be surprised if investors want to review your intellectual property like trademarks, copyrights and patents.  Investors may also ask to review software source code.  This is a little bit tricky.  On the one hand it makes sense that investors want to get an idea of the codebase that they are investing in, but it also makes sense that you don’t want to just handover your code base to just anyone.  This may be a negotiation. 

  • Software source code
  • Trademarks
  • Patents
  • Copyrights

Other Due Diligence Documents

You could include a business plan and pitch deck as well. 

  • Business Plan
  • Pitch Deck

Data Access During Due Diligence

Investors will want to review your Google Analytics to confirm the traffic and conversion rates etc on your website and confirm any growth trends.  Likewise access to your Stripe account or payment processing provider will allow the investor to confirm things like customer churn rates. 

  • Access to Google Analytics
  • Access to Stripe Account

What documents are we missing from our list? 

Do I Really Need a Data Room for my Startup?

After reviewing that list you are probably wondering, do I really need to provide all of this data?  There is some debate about whether a data room is necessary.  Mark Suster wrote a blog post titled Why you Should Never Have a Data Room and gave some compelling reasons not to have a data room.  The short of his point is that a data room is where a deal goes to die.  Once investors are looking at all of these documents, of course they are going to find issues and those issues are going to slow down the deal and probably kill it.  The best startups are often growing so fast and there is so much investor interest that investors are forced to make an investment decision before they can review every single document in your data room.  Mark’s point was that providing all of this data access is a waste of time for the entrepreneur and basically you should just focus on growing the business such that investors can’t ignore the investment opportunity and just dive in to invest with limited due diligence.  

I think there is probably a lot of truth to what Mark is saying, BUT not every founder can be lucky enough to be growing so fast with such great market opportunity that they can be so picky with investors.  I think that it could be that your startup won’t be in the top 5% of investor backed startups, and so you might need to do a bit more work to lure in those investors which might mean providing these docs in a data room, but I think you can still be successful and still raise capital to help grow your business with investors that might want to do more due diligence than what Mark suggests.  

So my answer is - yes.  Yes you should at least be open to providing investors with a data room full of due diligence documents. 

How to Set up a Data Room

As I mentioned previously, in a pinch, you could probably just use a Google Drive shared folder as your data room, but there are some purpose built tools available with some nice features that you might want to consider.  For example, Dealroom provides a secure data room product that will allow you to have a bit more control over your documents.  Investors will just review the documents from the platform, you will get to see who viewed your documents and you will have the confidence that investors aren’t just passing around your sensitive data because the docs will only be available to view in the data room product. 

How to Clean Up your Data Room for Due Diligence - and Quickly!

The most likely scenario if you are a fast growing company that might be able to secure investor funding is that you have been so busy with growth, that you don’t have all of your data room docs cleaned up and organized.  I came across an interesting company that can help you quickly produce any documents that you should probably have in place but don’t yet.  Savvi can provide you with:

  • Due Diligence Clean Up and Maintenance 
  • Data Room Creation and Up Keep
  • Investor Onboarding

I have not personally used Savvi, but had some conversations with their team and thought it seemed like they could be really helpful in getting your data room up and running.  

Financial Projections for Due Diligence

Finally, at ProjectionHub we help startups create financial projections for potential investors which can be a key piece of the due diligence process.  We have a library of over 70 financial projection templates that will help you produce investor ready financial projections in short order and if you need some help, check out our custom financial modeling services as well. 

And if you're looking to get more proficient at creating projections yourself, check out this free course to learn the ropes:

Best of luck in your fundraising efforts!

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

Other Stories to Check out

8 Ways to Enhance Your Chances of Getting approved for an SBA Loan

Learn practical steps to increase your SBA loan approval odds. This guide offers 8 straightforward strategies from an experienced SBA loan officer.

Your Guide to the SBA Loan Application Process

Start your SBA loan application with confidence using ProjectionHub's comprehensive, free SBA Loan Application Checklist. Discover essential tips and resources from experienced professionals to streamline your loan process and enhance your approval chances.

How To Start a Self-Storage Unit Business and How Much Will it Make?

Self Storage facilities seem to be popping up all over the place recently and there's no slow down in sight. Follow this step by step to understand the basics of how to get your self storage business started, how much it will cost, and how much you stand to make!

Have some questions?
Let us know and we'll be in touch.

FOLLOW
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
?