I was… NOT in front of these guys last week. But we did cover the economics of
SharkTank in that video, and we discovered how roughly 50%
of the deals that were made that aired in Shark Tank… never actually happened.
They didn't get any money
That money is further away than you might think.
And it’s all because of two words: Due diligence.
In the tech startup world, the equivalent of the sharks saying yes is getting a Term Sheet
from an investor or a VC, which is essentially a one or a two-page summary of what the deal is going to be.
But from term sheet to money, there’s a long, long way called the due diligence process.
Investors check that everything you pitched is real, check that you have a legal structure
in order, and your contracts, stock vesting, trademarks, and everything…
What they’ll be doing is navigating your data room, and if your data room is no good.. well,
that’s when deals fall apart.
And today, I want to walk you through everything that investors expect to see
in a Data Room, for the stuff you are maybe missing, I have a couple of resources that I'm going to point to
so you can find it and download it, and I include this checklist that gave it to use
downloaded in the description and take each one of the things that yo need to check
I should say that this is NOT a sponsored
video, so these recommendations are as genuine as they get- the tools that I truly endorse.
So let's get started!
So let’s remember the
due diligence process for which you need this Data Room- happens after you’ve convinced an investor.
Preparing everything takes a while; you need to prepare and collect a bunch of
documents from a bunch of places- so you might want to get started sooner, rather than later
but the context here is important: you’ve already convinced an investor.
So, it’s expected that you include your pitch deck, which works much like a cover for the entire
thing: but by the time you share this data room, investors will most certainly have seen this deck.
It’s useful to have one there, though- either for looping other decision makers into the process
or to even use as intros for other investors. Same with the One Pager, which is a printable,
single-page version of the pitch deck. Both of them are company summaries in the end.
We’ve published a bunch of videos on how to write a pitch deck- even a 9-day course. We
also have a bunch of pitch deck templates and one-pagers templates- and our team is
available to help write and design them- so you’re more than covered on that front.
So let’s talk Financials. There are 3 core items here.
First, your Balance Sheet and your P&L. This is what a Balance Sheet looks like, and this
is what a P&L looks like. They are both generated by your accounting software- which, by all means,
you should have one if you’re at this stage (and probably a bookkeeper to help you track it).
Recommended platforms here are Quickbooks and Xero, and we have discounts for both
of them on the startup deals module in Slidebean. I’ll link that below.
The other part is the financial model, also called a Pro-forma statement.
That does require a little more work. An investor wants to see three things in a financial model:
Where you will be spending money: your budget for hires, team members, and marketing costs.
Your key assumptions: when do you foresee milestones like launching the platform, or when
do you expect you’ll need to raise money again. Lastly, these key assumptions will determine your
revenue projections- how much you expect to grow, and what drives that growth.
A big mistake founders make is just place growth numbers
rather than estimating what drives them. I wrote a Techcrunch article about it,
and I’m working on a new video to teach you how to do driver-based modeling.
If you don’t know where to start, I got you. My team and I created a few templates for the
most common business models: SaaS, and eCommerce, Marketplaces, Apps- where all
the variables are ready, all you need to do is bring your numbers- all available on Slidebean.
We also published free tutorials for each of them, so you can check that in our channel.
Lastly, if you need our help, for example, if your business model doesn’t quite fit either of them,
we now have a team of analysts that can jump in too.
Our template is good for 7 years. Investors don’t necessarily want you to detail your
hiring plan that far into the future, so your focus should be on two things-
Expenses and revenue for the period that the investor money will fund.
A reality check- a vision that’s
that's being realistic that our business is not making a $1B in revenue in 5 years,
or just $10M in that amount if time, it’s not exciting enough.
Let's move to LEGAL stuff
Now, by the time you get
to due diligence, you should have incorporated already. Actually, ‘being in business’ has costs,
starting from accounting and tax filing - so do it when you are ready.
Also, remember that to officialize any stock deals with your co-founders,
you’ll need to have a corporation.
Investors overwhelmingly prefer Delaware C-Corporation, and definitely not LLCs. I
won’t bore you with the reasons but let me know if you’d like me to cover that in another video.
If you have NOT incorporated, then my best recommendation to take care of it is a company
called Firebase.io - it’s pretty much a turn-key service that takes care of everything, including
opening a company bank account. We also have a 10% discount in the deal section of Slidebean.
Assuming you have incorporated it, here’s some of the stuff you need to include in the Data Room.
Articles of incorporation. Voting agreements
Founder Stock purchase agreements (which is the document that
includes vesting agreements). And of course, your Cap Table.
Your Cap Table should probably look something like this- this is from our
Cap Table template. Remember that a cap table is just a summary of
the legal agreements you’ve made: it’s not THE official document.
The official stuff is in the paperwork
Those agreements and share distribution are lost on pages and pages of legal paperwork-
the cap table just summarizes it, but the ultimate word is the signed documents.
You’ll also want to include your Board of Directors materials.
In a Delaware C-Corp, the board essentially makes decisions representing the shareholders.
In theory, the shareholders make important business decisions on votes representing
the number of shares you own. But asking all the shareholders about something is
impractical, so the Board represents shareholders for those decisions.
That, of course, requires a rulebook: what decisions can the CEO make without
the board, what needs permission, what needs unanimity. How do board members get removed?
That rulebook is called a Bylaws, and you absolutely want to upload it.
Also, any previous Board agreements (called Board consents) should also come in.
In larger companies, the Company Secretary should be keeping Board Minutes. We don’t do this,
so- well, maybe we should.
Now, if you have
raised money in the past, you also want to include that here:
Investor rights agreements First refusal & co-sale agreements
Any other document/agreement with those investors.
Let's move to IP (INTELECTUAL PROPERTY)
On the IP front, you should have a folder with your existing, relevant IP materials.
At the very least, you should have Trademarked your brand name (to do it,
of course, the Trademark Office needs to confirm that you are not infringing
existing trademarks). So having your trademark confirms this check was passed.
If you have any provisional or granted patents, they should also be here.
Just a quick note on patents: provisional patents are not very valuable, I feel people often brag
about having ‘filed for a patent, but in reality, the real mess is getting your full patent granted.
That usually costs 10s of thousands of dollars in legal fees and can take years.
If you have a Brand Book or a Design Guide, you can include them there. I’ve included ours in
the Data room template so that you can have it as a reference, though it’s usually not necessary.
Now on Staff, you should provide,
An organizational chart on the company structure. A list of employees, along with their salaries.
Ongoing or relevant contract workers (many startups choose to hire employees
as contractors in their early stages, so that’s the people we are looking for).
people that are essentially permanent and on-going
And last but not least, your employee agreements for key people.
This last one is really important. Investors want to check that you’ve done your homework,
that your employee’s IP is being assigned to the company, and that
you have confidentiality agreements in place.
This is even more important for the founders. Their contracts often include
a Restricted Covenants clause that prohibits them from working for competing companies.
We have templates available for many of these documents, you can find them on our Document list.
METRICS On the metrics front,
you should provide investors with data.
Now this varies from company to company, of course.
It may range from usage metrics from your app, to your sales pipeline and flow.
Let me cover some common scenarios, - For a SaaS company, the best
alternative is to offer them access to your SaaS tracking platform. In ChartMogul, for example,
you can add a limited user seat for them, and save the trouble of having to download and re-forrmat
everything. They are connected directly to Stripe, so data is as real as it gets.
The key numbers to look at there are MRR, ARR, churn rates, and lifetime values.
- For a mobile app, you could go with a dashboard built on a tool like Mixpanel (which we actually
use ourselves too). The key numbers to look at there are monthly active users,
average session times and customer retention.
- For any B2B product, they will want to look at sales.
We use Hubspot for our consulting branch sales,
so you could build a custom dashboard for that (we have 90% off on Hubspot for Startups, BTW).
So as a general rule, access to your dashboard is great. If that’s not possible, you could go
with a presentation that highlights the relevant aspects, provides context on data that is hard
to understand, and provide some sort of proof (data points, spreadsheets) on the data itself.
This gets more sensitive the bigger the company is,
Look at that Twitter deal that we've been meaning to do a video about it
but either way, you should never include customer’s personal information.
So far, I’ve mentioned everything our own data room included, but for my sanity,
I checked a few more articles on what to include.
Some of the stuff mentioned that I didn’t consider necessary-
were a Market Research section (with market studies and competitive analysis).
.. And a Technology stack section, with a diagram of the system architecture,
API documentation, details on large integration- and even your roadmap and backlog.
I think that just attaching all of those in a folder might not provide more value,
but I do understand why some investors will want to dig deep into those,
especially if the product needs to scale to a massive audience and support that much traffic.
Now as I said, I prepared two things that you will find useful:
A spreadsheet checklist of everything that you need to prepare,
with instructions on how to find it. A Data Room folder structure, that you
can use to upload docs. Most companies I know use Google Drive or Dropbox.
That's all for today!