What to include in your startup acquisition data room?
Years ago, when a business was sold, the buyer would request financial and historical company documentation as part of the due diligence process.
These records would be kept in a secure facility that would be monitored at all times.
Individuals critical to the decision-making process would come to the room to review the physical documents.
These facilities are now known as investor data rooms and have shifted to the digital sphere.
A data room is one of the trademarks of a well-organized startup. They have a structured manner of communicating your startup’s history and potential.
A virtual acquisition data room can be an essential part of your startup’s fundraising efforts.
That’s because it gives potential investors all the information they need to make an informed decision, based upon their due diligence.
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
- 1. What is due diligence?
- 2. Why does a startup need a data room?
- 3. Assists in due diligence
- 4. The fundraising process is sped up
- 5. It simplifies an investor or acquirer’s job
- 6. It keeps you focused and organized
- 7. When should I start putting together a data room?
- 8. How to set up a data room
- 9. Setting up two data rooms
- 10. What to include in your startup acquisition data room
- 11. Company documents
- 12. Financials
- 13. Intellectual property
- 14. Employees
- 15. Technology
- 16. What information should not be included in your startup’s data room?
- 17. How are virtual data rooms used?
- 18. M&A transactions
- 19.Initial Public Offering (IPO)
- 20. Court proceedings
- 21. Conclusion
What is due diligence?
Due diligence is how investors and acquirers thoroughly investigate a startup to determine whether it is a solid investment opportunity. And what it is worth to them.
Due diligence will take a lot longer if this information isn’t readily available. Lack of clarity can completely derail a potential deal.
Investing in startups is risky, and investors don’t want any unforeseen events after deciding to commit capital or buy one.
That is why they conduct preliminary research.
Having a data-driven picture of your assets and liabilities can aid in risk mitigation, increase perceived value and streamline transactions.
Why does a startup need a data room?
There are several reasons why a startup needs a data room, including the following.
Assists in due diligence
A virtual data room houses all of the information that highlights the strengths and achievements of your startup.
If done well, it paints a clear and appealing picture of your startup, assisting investors in their due diligence, valuation, and offers.
The due diligence process has a lot of moving components. As a result, the faster and less tedious the process is, the better the outcome will be.
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The fundraising process is sped up
A data room can aid in the fundraising and acquisition process.
Investors and buyers will want to examine all previous documentation and forecasts.
This information will support them in making an educated investment decision when you’re looking to raise venture capital for your startup or sell a business.
It simplifies an investor or acquirer’s job
Investors and acquirers already have a lot to do. There are a lot of competitors for raising money and selling a company.
A strong acquisition data room can make their job easier, more efficient, and make your company a more attractive option.
Consider putting up a data room before you start soliciting money if you’re considering a funding round, or before putting it up for sale.
This is because establishing a data room that’s ready to go before ever having a single fundraising conversation is critical.
It can save you and your investors and buyers a lot of time and aggravation.
It shows professionalism and suggests you have the rest of your business organized too.
With all of the information they require arranged in a single place, you’ll make crucial information easily accessible.
In this way, you can make life a lot easier for both sides. It can slice many months off of the process.
It keeps you focused and organized
The process of putting together a data room pushes you to see things from an investor or acquirer’s perspective.
This will assist you in documenting aspects of your business that were previously all in your brain.
This information includes customer acquisition strategies and product development.
As well as focusing on the most important metrics and factors that are important to business buyers.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
When should I start putting together a data room?
It’s never too early to get a data room up and running.
Once you start building a company, you should start a data room. You’ll likely need it every few months to raise money, before getting to an exit.
You’ll also want it to show off your startup to early hires and advisors before even considering raising capital.
Develop a workflow or process for regularly updating or maintaining the data room. This will help streamline and organize everything else you do.
A well-organized data room can go a long way towards impressing potential investors even at the seed money level.
A data room’s contents can address the bulk of a potential investor’s due diligence questions.
It will stay with you and keep working for you through your exit.
How to set up a data room
A data room is an extension of your current filing and data management system.
As a result, if you’re already well organized, putting one together should be relatively straightforward.
Google Drive is one of the easiest to use file storage and sharing platforms for establishing a data room.
Other data room providers include:
- Deal Room
Before choosing a virtual data room provider, you need to consider the following factors:
- Privacy and security
- Document management features
- Permission settings
- Clean and easy to navigation
- User friendly
Even though data rooms don’t get used in every situation, they are regularly used to help with financing and acquisitions.
Founders should use their data room to customize their startup’s narrative for investors.
Founders should exercise caution while selecting a solution and be mindful about putting sensitive information in the acquisition data room.
Allow read-only access to prevent third parties from downloading or editing your confidential material.
You might want to give each individual their own data room access so that you can present them with tailored information.
This strategy will help to personalize the process. As well as allowing access to be instantly revoked as well.
Setting up two data rooms
Setting up two separate data rooms can be a good idea. You can then categorize document accessibility based on necessity.
You can give investors who have expressed an interest in your startup but haven’t made a concrete commitment yet access to the first room.
Then provide enhanced access as they move through the process.
Typical things in this room include strategy documents, pitch decks, and product plans.
The second data room will contain more confidential material such as legal agreements and HR paperwork for more serious investors.
Provide an index to show users what files each data room contains, making it easier to find a given document.
This might save you a lot of time and help you become more organized.
Creating a virtual data room is only one of the methods of connecting with potential acquirers. If you would like more tips about how to share information with investors, check out this video I have created. You’re sure to find it helpful.
What to include in your startup acquisition data room
There are a lot of files and facts to include in your data rooms. Acquirers can’t make informed decisions if you don’t include enough information.
If you include too much information, you risk confusing them with information and wasting their time as they try to sort it all out.
The following documents should be considered for inclusion in the acquisition data room.
Remember that the primary objective is to present a startup’s potential for future profit. As well as demonstrating historical performance and presenting the assets.
- Voting agreements
- Amended and restated articles of incorporation
- Partnership agreements
- Investor rights agreements
- Customer contracts
- First refusal and co-sale agreements
- Board of director’s materials
- Board consents and actions
- Board meeting minutes
- Competitive analysis
- Shareholders’ agreement
- Sales process
- Market research
- Pitch decks
- Marketing materials
- Branding guidelines
- One page business plan
- Investor updates
- Past and present legal disputes
- Office leases
- Profit and loss statements
- Financial projections
- Pro-forma statements
- Capitalization table
- Asset register
- Audited accounts
- Information on previous raises
- Filed and granted patents
- Software license details
- IP strategy
- Domain name ownership
- List of open-source software used
- All employee contracts, including titles and salaries
- All current and past intern contracts
- A complete list of current employees, including their salaries and job titles
- All current and past consultant contracts
- API documentation
- System architecture diagram
- Existing product screenshots
- Product backlog and map
- Large integration details
Include previous investor updates in your acquisition data room demonstrating your progress, growth, and approach to problem-solving.
The list above covers many items that can be relevant to your transaction.
However, keep in mind that not every one of your company’s documents needs to be included in your acquisition data room yet.
The reason for this is:
- Additional documents necessitate more time for analysis and review, thus delaying the due diligence process and eventual capital transfer to the company.
- Irrelevant materials might annoy, confound, or make an investor wonder, “What is the point of this?”
- The greater the number of documents provided, the greater the risk of misuse or vulnerability.
Note that if the investor or buyer has indicated early interest and wishes to move forward, more documents can be uploaded.
They can be stored separately for the next stage of the process.
What information should not be included in your startup’s data room?
While you must share some information with investors and acquirers, some data should be carefully throttled.
Always do your homework on the people you’re giving access to your data room.
Let’s imagine you discover they’ve donated competitors large sums of money or are actively involved in the dealings of rival companies.
You might not want them to see crucial company information in such an instance.
Your data room does not need to contain every document.
As you receive LOIs or term sheets and pass milestones in the process you can reveal more as you go.
The greater the number of files in your data room, the greater the risk of misused or compromised information.
Not everybody needs to see everything, so set up multiple views and access rights for the people looking at your content.
This will help you keep your documents secure.
How are virtual data rooms used?
There are several ways to use and benefit from a data room.
Virtual data rooms are commonly used in mergers & acquisitions.
As part of the due diligence process, buyers require extensive access to a vast amount of sensitive information.
Many of these documents are private and must be kept secure where bidders may access them.
Buyers can review and exchange files without traveling to the seller’s office using virtual data rooms.
It also reduces the cost of the review process because the buyer does not have to deal with multiple papers.
Or pay for the travel of many experts to examine them.
Initial Public Offering (IPO)
When a company issues an IPO, it generates a lot of paperwork.
Attorneys, investment bankers, and other participants must sign and validate documents.
Storing these papers in a virtual data room assures their confidentiality and integrity and prevents access by non-transactional third parties.
The firm can also prohibit competitors from accessing these documents by preventing them from being copied, printed, or edited.
Large amounts of documents regularly get dealt with in court proceedings.
Several of these documents are highly confidential and might easily be misplaced or stolen.
Attorneys, regulators, and other relevant parties can access documents from a distance without fear of them being stolen when they use virtual data rooms.
Virtual acquisition data rooms enter the picture when a case involves foreign teams working on the same investigation.
Without traveling to access documents, the teams can now access all essential documents from a central location.
If the documents’ integrity is in jeopardy, the issuing party may put them to “view only” to restrict access.
The value of a strong virtual data room is significantly more than the sum of its parts.
However, getting the most out of this technology demands immediately putting some structure in place.
This entails developing an initial design for the data room and granting access to the appropriate individuals.
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