What is a data room?
Once upon a time, when a company was being sold, the acquiring company would need access to all the company’s documents as part of the due diligence process. The documents would be stored in a physically secure continually monitored room, normally in the vendor’s offices (or those of their lawyers). Advisers and lawyers from the acquiring company would visit to see the documents they'd need.
How does this relate to start-ups? If a start-up raises money from a VC, the VC will need to do some due diligence. The due diligence will require access to key company documents. These documents are stored in a data room.
These days, a data room is a secured online storage location. Professional purpose-built M&A data rooms are expensive but will contain an array of functions such as the ability to limit documents to certain advisors and the ability to track who has accessed what and when downloads have taken place. However, in a cost-conscious start-up world a data room could be as simple as Dropbox, google drive or similar. This data room will contain important documents relating to the company
When should I start getting my data room together?
Due diligence can be distracting and a lot of work. The earlier you start a data room, the easier it is to maintain one. The better maintained your data room is, the faster and less painful the due diligence is.
Think of it this way. If due diligence lasts only 1 month versus 3 months, the difference between the two is 2 months less cash runway needed and more time to focus on growing the business! If due diligence takes longer because you're scrapping around to put your documents in order, your disorganisation is costing you valuable runway. Even more of a concern for investors will be lost critical documents such as key customer contracts. To avoid losing important documents you need to get organised.
A basic data room checklist.
Here are the obvious things to file.
- All employee contracts past and present – (or at least keep them in an easily accessible cloud-based HR system)
- All intern contracts past and present
- All consultant contracts past and present
- List of current employees, job titles and salaries
- Office lease
- Supplier contracts
- Terms and Conditions for material software used in the business
- Insurance policies and certificates
- Any patents applied for or granted
- Partnership agreements
- Customer contracts
- Asset register
- Management accounts
- Audited accounts
- Board minutes
- Board packs
- Certificate of incorporation
- Articles of association
- Shareholders agreement
- Share option agreement
- Share option grants
- Software licence details
- List of any open-source software used
- Up-to-date cap table
- Domain name ownership
- Any legal disputes, past and present - all relevant documentation
You may get asked for more than this but most investors will need to see the above. If you can keep the above data up to date, that's a great start.
Own your data room.
Someone in the team must own the administration of the data room. If the founders can’t do it themselves, they need to entrust it to one person to do it. However, you should check the status on a regular basis.
Keep your data room updated regularly.
Everyone in the team needs to understand that all contracts need to go to this one person as soon as they are signed. It's so easy to do deals that don't get filed centrally. Two years later finding the contract can be like finding a needle in a haystack.
It's useful to have a standing agenda item in a weekly management meeting: what contracts have you; entered into, terminated, currently negotiating.
Keep your data room secure.
The data roomitself can be a file-sharing service. Make sure you back it up and that thesecurity is tight with strict access controls.
Use a folder structure that is simple to navigate. At the root level, keep an index file showing the contents of the data room. Where relevant, keep paper copies of contracts filed and in a locked cabinet. Always keep digital copies of every paper contract as well.
If you are not convinced, think of it this way. When you come to raise your money or sell your company, you are selling what's in the data room. Your data room in many ways is your company.