The capital raising process has many phases, including creating pitch materials and negotiating deal terms with investors. To help increase the likelihood of positive outcomes for entrepreneurs and companies raising capital, this article discusses the benefits of creating a virtual data room, provides an overview of the documents it usually contains, and shares suggestions regarding data room management practices.

Reasons to Create an Investor Data Room

Many entrepreneurs and companies raise capital through a structured fundraising process. This process often has several parts, including:

• preparing materials for investors that describe the investment opportunity
• researching and contacting investors
• providing investors with information and answering investor questions
• negotiating deal terms and executing investment documentation; and
• closing the deal.

In most fundraising processes, as investors are contacted, they request information about the company to review the investment opportunity in detail.

There are two ways that information is generally provided to investors. One way is to send information to investors on a case-by-case basis. The other is through creating a document room where information that is provided to investors is contained in a single place.

Historically, data rooms were in physical locations. Today, it is more common for documents to be included in virtual data rooms where they can be digitally accessed and managed. This can greatly facilitate investor outreach possibilities and investor due diligence.

Creating a data room can facilitate investor due diligence, improve company control over the capital raising process, and increase the probability of fundraising success.

Creating a data room has several advantages in the fundraising process.

Information distribution efficiency. When a company is contacting multiple investors, providing different documents at different times to different investors can be very time consuming. With a data room, all documents can be placed in one virtual spot and time spent processing investor information requests can be spent on other capital raising process or company operational matters.

Narrative control of company message. When investors receive documents on a piecemeal basis, the core investment proposition that companies are projecting to investors can get significantly watered down. This is because significant narrative gaps can exist between one document and another. By creating a document room, a company seeking capital can have greater control over the investment value proposition narrative to maximize the probability that investors will understand the core company message.

Due diligence process metric tracking. With a data room, companies can monitor what investors visit the document room, the documents they review, and how long they review those documents. This can be useful for companies in analyzing investor engagement, where it is focused, and how it can be improved.

Due diligence time frame management. A data room can also be used to set capital raising time frames. Investor requests and documentation reviews can continue over long periods, which can use large amounts of company resources without providing any guarantee that an investment deal will close. When a company sets up a data room, it can control how long investors have to review documentation. This can encourage investors to work within a pre-agreed time frame that matches the company’s fundraising timetable.

A data room can give companies greater control over the investor due diligence process.

Key Materials to Include in the Data Room

The documents included in a data room depend on the nature of the transaction and the nature of the company, including how large it is and how long it has been in business. However, there are several types of documents that are often included in the data room to give investors as complete a picture as possible of the investment opportunity and highlight the core company investment value proposition.

Data room content can be used to focus investors on the company’s unique value proposition.

The first category of documents is related to data room contents and procedures.

Data room overview document. It is useful to include an overview document in the data room which provides a summary of the materials that are found there. This will make it easy for investors to quickly find key information they are looking for.

Data room policies and procures document. It is useful to include a document that describes the policies and procedures that people visiting the data room are expected for follow. These policies and procedures can include provisions regarding confidentiality, to whom questions regarding materials in the data room should be directed, and company contact information.

The second category of documents is related to the company’s legal existence, structure, and team.

Corporate governance documents. The data room typically contains the key corporate legal documents of the company, including formation documents and Board of Director resolutions.

Company structure. This document should set forth all company subsidiaries or affiliate entities, where they are located, and percentage of ownership interest in those entities.

Organizational chart and key team member profiles. The data room should include an organizational chart or similar document of the company that sets forth the people who work for the firm, their roles, how long they have been with the firm, and where they are located. It is also useful to provide the CVs of key team members or a summary of their professional backgrounds.

Company capital structure/cap table. This document should illustrate the shareholders of the company, their percentage ownership, and the types of shares they own. It should also indicate if any persons or entities have the right to purchase company shares or convert an economic interest into shares of the company (such as via a SAFE). Any shares set aside or intended to be set aside in connection with an ESOP should be indicated. Further, the data room should indicate any debt that the company has and what the debt terms are.

Employee Stock Option Plan. If the company has an ESOP or similar employee benefit program, it should be included in the data room.

The third category of documents is related to the company’s current or planned product and services.

Existing products. If the company has existing products and services, they should be described in detail. Key product and service use and sales metrics should be indicated, including:

• number of customers
• customer geographic location
• product and service pricing
• total sales
• sales/customer.

Product development. If the company is developing products, where the products are in the development map should be indicated along with expected timetable for beta and commercial release. The intended commercialization strategy should also be described.

The fourth category of documents is related to the investment opportunity.

Investor deck. The investor deck is a key capital raising and data room document. It typically contains several parts, including:

• an overview of the company, the company’s history, and its current status
• a statement of the market opportunity that the company has identified
• the company’s proposed strategy to take advantage of that opportunity
• the expected outcome if the company can take advantage of the market opportunity in terms of sales, profits, and/or market share
• funding the company needs to take advantage of the opportunity and proposed use of investment funds
• the company’s preferred investment structure (equity, debt or other arrangement such as a SAFE) and deal terms; and
• investment risks and mitigants.

Financial Information. Data rooms should include the company’s financial information. This includes the company’s financial statements, ideally for at least three years if the company has been operating that long. Financial information should also include a financial model that sets forth the company’s expected future business and financial performance for a reasonable period.

Investor Q&A. A well-drafted Q&A can play a very powerful role in the capital raising process. In addition to providing general information about the company, this document can be used to address likely questions of investors, emphasize company competitive advantages, and address any data room information or lack of data room information that may raise investor questions or cause investor concern.

The Q&A can be used to provide more support for company competitive advantages and address any issues in the data room materials.

Areas of the Q&A where additional discussion is often helpful include:

• the company’s market vision
• company strategy
• competitive analysis; and
• assumptions underlying company financial projections.

Other documents that can be included in the data room are key contracts, intellectual property documents, employment agreements, insurance agreements, litigation documents, and any market research backing up the company’s market vision or strategy.

It is important to note that these are general guidelines that have to be adjusted on the nature of the company and what its capital raising strategy is. There is no absolute formula and data room strategy and contents must be decided on a case-by-case basis.

Conclusion

Capital raising is a process, and the more efficiently the process is run, the greater the chance of positive capital raising outcomes. Creating a virtual data room can help companies create a unified investment proposition narrative and more effectively manage the document review process.

The photo for this article was taken by Annie Spratt on Unsplash.