The data room is one of the most important aspects of the due diligence process of any fundraising round. This virtual “room” will hold all of the company’s documents for your investors to evaluate as you negotiate. Creating a clean and organized data room is the best way to facilitate a quick and effective diligence process when raising capital. 

There are typically two different versions of a data room that you’ll prepare. The first is what you’ll be showing potential investors to garner interest in participation in your funding round. At this stage, it’s important to first talk with your investors, as well as your lawyers, about what the investors need to see to move forward. It’s unnecessary, and may be harmful to your business, if you allow any interested party full access to your company’s records. This is especially true if you’re planning on raising from many different investors. Once you understand what the potential investors need to see, then you can carefully disclose the proper documents.

Once you enter into term sheet negotiations with a lead investor, it’s time to open up your data room and allow full access. This will include, but not limited to: 

1. Financial information
2. Organizational documents
3. Corporate structure
4. Intellectual property
5. Employment matters
6. Equity issuances
7. Tax matters
8. Real estate
9. Commercial Agreements
10. Litigation issues

Certain platforms, such as Carta, have a function for data rooms that helps you to keep all of your files organized. This will also give you a better understanding of what exactly you need to disclose. For example, knowing when to disclose a template agreement or when you need to disclose a fully-executed version can be very useful.

Once you open up your data room to investors, you’ll need to ensure that you’re taking the proper security precautions. Because this room will contain most of the vital information concerning your business, being aware of who exactly has access to the data room will be a necessary precaution. You’ll want to consider secure file sharing platforms to house all of the information. You’ll be able to limit who can access your files and reduce the risk of leaked or misused information.

In addition, you’ll want to consult with your lawyer about taking the proper legal protections to protect your company. Confidentiality is important, and having the right support throughout the entire diligence process will help with this. 

Diligence can be intimidating, but it’s a crucial step in the fundraising process. If you properly prepare, it can be much more manageable and will help your company in the long run.

Tom Budnik is a startup and venture capital attorney based in Chicago, IL. He represents founders, startups, and venture capital funds in a wide variety of corporate transactions, including raising capital and navigating issues associated with rapidly-growing startups. He can be reached at tbudnik@founderslaw.com.