Fundraising Data Room for Founders: the must-haves

The Blackroom Team
The Blackroom Team

If you are a founder soliciting funding, having an orderly data room is not optional. Instead, see your data room as an opportunity to impress potential investors with your forethought and sense of organization.

The list of documentation investors want from founders during the due diligence phase of fundraising has evolved over the past decade. It can be tough for founders to unearth every potentially helpful document, and you may worry that a lengthy due diligence procedure might impede potential mergers.

Here are the documents that are frequently requested and that we advise all founders to include in their data rooms:

1. Financial reporting and budget

Financial statements are among the first items that potential investors search for in a data room. Founders should include historical profit-and-loss statements dating back to the company's founding, as well as a year-to-date statement if it is the middle of the year. The company's most current balance sheet must also be included.

Financial estimates are also crucial. Some VCs believe pre-seed and seed companies do not need financial models, but entrepreneurs who have a thorough understanding of their business will naturally want to invest the effort in creating one. Projections also aid in understanding how a founder thinks.

Businesses in the pre-seed stage should provide annual estimates for two years, whereas companies in the seed stage should provide projections for three years or longer. These models incorporate revenue by segment, cost of sales, costs, and EBITDA (a proxy for cash burn). If you have multiple business lines, you should segment them and also display the cost of sales per section. Costs should cover marketing and sales, general and administrative costs, and research and development.

In the end, financial projections mostly assist in determining whether you have considered the fundamental aspects of your organization. For instance, how many salespeople are necessary annually to bring in the anticipated amount of customers? Is enough money being spent on research and development? Are the gross margins reasonable? Entrepreneurs should demonstrate that they have thoughtfully considered these and other elements unique to their firm.

2. Customers and advisors references

Referrals are another tool we utilize to learn about the founders we deal with and how customers see the challenge being handled.

Entrepreneurs should strive to include a variety of people on their lists:

Principal members of the management group

1-2 customers

1-2 current investors (if any)

Advisors

Some people who know you well and can bolster the cause to believe in the business

Existing customers, advisors, investors, and key team members typically serve as the finest references. It is essential that when the entrepreneur compiles a list of references, they choose individuals who understand their industry, who they can trust, and who will speak positively about the organization. Founders should have a crystal-clear concept of who will be on their lists and a good understanding of what those people will say.

One method of constructing a reference list is to include the contact information (email addresses and phone numbers) of relevant individuals. Nonetheless, I recommend that founders only post the names, affiliations, and LinkedIn profiles of references and provide contact information upon request. At any given time, a founder may have ten or twenty people perusing their data room; if they all contact the same references, people will become irritated!

You might not want every investor to contact your most prominent or most valuable clients. Instead, it is advisable to have your lead investor speak with these customer references, take notes, and then share these in the data room. This manner, other investors can read the notes and won't have to disturb certain customers.

3. Current and prospective cap tables

Founders must provide both current and pro forma cap tables to demonstrate to potential investors how stock is now allocated in the business and how allocations will change following the current round of fundraising. Your existing cap table should reflect the current ownership structure of the organization. You must include what is anticipated to occur following the current funding round in your pro forma cap table. You can do so by expressing the estimated ownership proportion of the company by this round's investors.

There is no requirement to disclose the names of investors or stock holders other than founders in your cap table. Here's an illustration:

Founder A: 45%

Founder B: 30%

Existing investors: 15%

2% of the available options have been allocated.

Pool of unallocated options: 8%

Whereas some founders may opt for a basic overview of current ownership, it is suggested to see a complete version that specifies who owns what part of the company. Comprehensive capitalization tables are crucial since they reveal how the company's stakeholders may have changed over time. Is there, for instance, a shareholder who is no longer employed by the company? Detailed capitalization tables place this information front and center and avoid guessing or confusion.

Other data to consider

While the aforementioned documents are "must haves" for your data room, you may also wish to be thorough and offer additional pertinent information. Your articles of incorporation will need to be reviewed at some time, therefore it is often advisable to include them from the beginning. You may also wish to note if and how much investors have already committed to the round. Another possibility is a clear plan for the use of the cash from this round. Other strategic documents, such as a product roadmap or a go-to-market strategy, may also be useful. If you currently have any of these documents, you may include them; however, you should not create them specifically for the data room.

Founders may also opt to include the following papers in their data room:

Any links to the company's press coverage

Utilization data from beta testing, pilots, or early consumers

Client list

Example customer contract

Patents or trademarks

When it comes to these additional documents, it is essential to only include pertinent information. Last but not least, proactively disclose any pending lawsuits or other matters that can raise a red signal during your diligence process.

A good fundraising data room can help you stand out.

It should just take a few hours to set up a data room at the start of a fundraising campaign. Yet, this does not indicate that you should disregard the process. Rather, founders should try to construct the greatest possible data room, which will help you separate out from the competition and impress investors.

Go for less than 10 folders in your data room; you don't want to overwhelm investors or divert their attention away from the most important data they need to make funding decisions.

Create a folder for each of these components with simple naming so that investors can quickly determine which papers are included and where they are placed.

Use a data room service, such as Blackroom, that enables you to maintain accurate information and monitor what investors are studying.

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