Your company has just announced plans for a funding round - great news! But this means legal is tasked with building out a data room for investors. Where should you start, what should you include, and what are the pitfalls you should avoid?
We decided to ask Bobby Rathore, Senior Legal Counsel at real-time payments platform Volt, fresh from its impressive $60m Series B in June 2023.
Hi Bobby 👋 What is a data room, and why is it important?
The data room is a central point of access for prospective investors, so they can delve into the details of the company in which they're investing. This process of due diligence is super important, and can be make-or-break in a funding round.
The best way to get an understanding of what you need is to be receptive to what investors actually want to see
How far in advance of a funding round should lawyers have a data room ready?
This is a balancing act - you don’t want to have a data room ready too far ahead of the funding round itself; startups are constantly evolving, so it’s likely the information in the room would be outdated by the time investors get involved.
You’d end up doing double work updating all the information in the data room, which can be a time sink.
Equally, it’s great to be ahead of the game so that you're not scrambling when the actual due diligence process begins. You don’t want to be under pressure to start compiling information about your entire organization in the space of a weekend.
Getting a data room ready two or three weeks before you go into the investment process, or before you think that the heads of terms need to be signed, is good. Having the bare bones of a data room in place when your commercial team is pitching is great.
What should a data room include?
It should include anything and everything that paints a picture of how the business operates, such as:
- Constitutional documents
- Intellectual property (IP) documents
- List of IP that is material to the business
- Potential key employees
- Top 10-20 commercial contracts by revenue generated
- Top 10-20 suppliers from an expense perspective
- Office leases - or any information on where your business exists
The best way to get an understanding of what you need is to be receptive to what investors actually want to see.
At Volt legal often asked the investors to clarify the kind of information they’d like in the data room, so we knew exactly how to fill it with useful resources.
Having Juro in place was incredibly helpful - we downloaded our standardized contract templates with full confidence that all our terms were up to date
How should lawyers get started?
A few steps that can help lawyers get to grips with building a data room:
- List out the key areas that help the business operate. This is often a helpful way to start and visualize the task ahead, separating into themes like real estate, corporate IP, employees, litigation, HR, and so on
- Outline the important documentation and data that you need to include, pulling the required list into a spreadsheet or similar so it’s easy to understand
- Lean on your external counsel - they often have a data room checklist that legal can use as a roadmap
- Reach out to relevant teams to help you do the heavy-lifting. This isn’t a legal project - it’s a business project, so make sure you get input from the wider business
- Set up a working group to make it easier to access information and collaborate. This working group may consist of a colleague from finance, HR, sales, and so on
Contrary to what the business may think, legal doesn’t always have all the answers, and doesn’t always have access to everything!
It’s important to break down the large project into smaller, more achievable tasks, and reach out to others to help you gather information.
Where does this data room live?
We used Box, which is a cloud content management platform. The priority for us was to use a platform that was both secure and easy to set up.
Within Box we created two separate data rooms: a commercial one for teams during the pitch, and a formal legal room with restricted access.
Having Juro in place as our contract management tool was also incredibly helpful - we downloaded our standardized contract templates and added those to Box, with full confidence that all our terms were up to date.
Did you face any challenges with the project?
Volt is rapidly growing, which is fantastic, but this growth was a unique challenge for me, when creating a data room.
I was adding documents to the Box folder, but updating and reuploading shortly after, because the information was constantly changing.
The challenge did point to the importance of timing, and making sure you don’t start too early on the data room. I managed to minimize double work by only adding in resources that weren’t going to change in the short-term, like constitutional documents.
Everything else I made a note of and added much closer to the due diligence stage, so it was as accurate as possible.
Law firms are going to dip in and out of the data room on a regular basis, so using a platform they’re already familiar with will make the project easier
What advice would you give to lawyers building a data room?
Firstly, make sure you involve the wider business, and that you’re persistent enough to chase internal teams for information. I was lucky in that my working group at Volt was incredibly collaborative, but an unresponsive team can cause problems for legal.
Secondly, if you’re using outside counsel, I would recommend using the data room management platform they use.
This is dependent on the size of your company, but law firms work on funding rounds day in and day out - they’re going to dip in and out of the data room on a regular basis, so using a platform they’re already familiar with will make the project easier.
It’s a big project, and a significant time investment, so anything legal can do to take the burden off themselves and share the workload is an absolute win.
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