Did you ever do something for the first time, and felt like – Wow, I want to do this again, but next time I will have trained so much harder, and I will perform so much better!
This is exactly how I felt last summer, after I had put together a dataroom for the company I worked for. I guess we did pretty ok after all, since the potential purchaser ended up buying the company, but I still felt we could have been even better prepared.
A dataroom is where you collect all kind of information, that a potential investor or buyer might ask for before they decide on whether to invest in you company or not. If they discover any serious red flags during their investigation (their “due diligence”) they might worst case back out of the deal. If they do any lighter findings they might work with you to correct them instead. Needless to say, the cleaner your dataroom, the better it is.
When I worked as an attorney I helped many clients organize and put together their datarooms, but setting up your own dataroom is quite a different story. Not only does it require a lot (and lot!) of work to make sure you get everything in place, only using the latest versions of every document, and that everything is complete, but it’s also kind of stressful to get your own work examined by a team of lawyers and financial advisors that are getting excessively paid to find errors and red flags. In the future, I will make sure every company I work for has a dataroom ready (or at least 75% ready) at all times, regardless of whether they have an investment round or transaction approaching or not.
Why should you set up a dataroom unless you have to?
But why would you set up a data room unless you had to – surely, you must have better (and more urgent) things to do? I think there are several reasons for that:
- Time. You will be ready to present a dataroom as soon as the investors or potential buyers ask you for it. This will save you valuable time when you need it the most.
- Mis en place. In the eyes of the potential investor, you will seem very well-organized if you can present a clean and tidy dataroom in no time. Even better – you probably are!
- GAP analysis. Staging your future dataroom, will help you realize if things are missing, or need to be fixed – before it’s too late to do something about it. It can be making sure you don’t have any non-competition or exclusivity undertakings that are preventing a future expansion, or that you have the proper assignment agreements in place with the founders and employees to ensure that the intellectual property rights used in the business actually belong to the company.
- Get ready to scale. Making sure you have everything in order, and easily accessible for anyone who needs, will help you scale. Scaling means growing, and you will need to have a system for finding the information you need.
How do you build a dataroom?
So, how do you build a dataroom? It isn’t that hard, really, especially not if you start early enough when there is a limited amount of agreements, documents, information to keep track of.
The first question is of course where to keep your dataroom. I’m old enough to have experienced traditional, physical, datarooms, where you put copies in binders of every document you wanted to show the investor or purchaser, and then put them in closed rooms at law firms, which only a few people could access. Today, most companies use virtual datarooms instead, which seem more secure and which are a lot more practical to work with since they can be accessed at any time and from anywhere, often including a tracking function as well. You can use a professional dataroom provider, such as Merrill, or do it simpler and cheaper (but with less features) with DropBox or Google Drive. We used favro.com, our own project management tool, in combination with Google Drive.
Second, you need to decide what information to include in your dataroom. There are many Dataroom Checklists to be found on the internet, that you can use and adapt to what’s relevant in your case. For a start, you should include all documents relating to Incorporation and corporate documents, all material agreements, documents relating to your intellectual property, accounts and tax filing for the past few years, HR documents, product planning and strategic plans. Since this is just a dry round, you might want to mark out documents which change a lot over time, so that you can easily switch them up with new ones when it’s time to go live. You might also want to mark out which documents contain highly sensitive information, so that you know this is something you don’t want to show an investor until you know they are serious.
To sum up
Setting up your dataroom before you even start looking for investors might seem like doing things in the wrong order. But when you think about it, it actually makes sense – in practice, it’s nothing else than working very concretely towards a specific goal, making sure you’re prepared for the next investment round, the exit or whatever lies in your future. Putting the extra time into setting up a structure for your corporate and legal documents right from the start will save you time later on, and will hopefully help you build a company that someone will be willing to take a chance on.
