We covered the economics of SharkTank in a video, and we discovered how roughly 50% of the deals that were made that aired on SharkTank… never actually happened.
That money is further away than you might think. And it’s all because of two words: Due diligence.
How to get the yes?
In the tech startup world, the equivalent of these guys saying yes is getting a Term Sheet from an investor- which is essentially a one or two-page summary of what the deal is going to be.
But from term sheet to money, there’s a long, long way called the due diligence process.
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 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 should an investment data room include?
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.
Your company Financials
So let’s talk Financials. There are 3 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.
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.
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.
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.
Your Staff information
Now on Staff, you should provide,
An organizational chart on the company structure.
A list of employees, along with their salaries.
Ongoing or relevant contract workers
(many startups choose to hire employees as contractors in their early stages, so that’s the people we are looking for).
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.
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.