Primer on Data Rooms
Data Rooms
This is a shared drive / folder where you’ve compiled due diligence material relating to your Company so that prospective investors or acquirers can easily access and review.
This could be a Google Drive folder that’s shared or you might use a more sophisticated Virtual Data Room provider. The more sophisticated platforms allow you to set more custom permission levels, increase data security, restrict downloads and further sharing, and watermark documents.
If the material in your data room is of significant sensitivity, you may want to consider more sophisticated VDR providers so that you can better protect your information and material.
Stages
We find it’s helpful to have 3 different Data Room versions:
(1) General Data Room (Stage 1) - This is where you have very high level information that can be widely and publicly disclosed, without concern. This might include your pitch deck, a simple product demo, and perhaps even a simple cap table (excluding individual investor / shareholder names).
(2) Vetted Data Room (Stage 2) - This is where you go a little deeper for parties that are looking for more information, but which you have vetted more carefully. They’ve shown some real interest, conversations have progressed, you know who they are, and they need to see some more to give them a sense of what they’d be getting into. We would caution sharing anything too sensitive here, but we also recognize that you need to share enough additional information to rope in their investment.
(3) Deep Data Room (Stage 3) - This is generally only made available to parties that have signed a term sheet / letter of intent, expressing their commitment to invest, pending a deep dive on due diligence. This is where things get a lot more detailed in content.
Organization
Here’s a folder structure we’ve seen often used for the "Deep Data Room” (Stage 3):
(1) Overview - It is helpful to have a Table of Contents or Index that’s easy to navigate and which guides the reader through your Data Room. As your business grows, your Data Room will become very extensive. The more you can help the reader navigate through it, the less questions you’ll get, and the faster your due diligence experience will be. This is also an opportunity to demonstrate that you are well organized and on top of the details of your business.
(2) Financials and Cap Table - This includes Financial Statements, Cap Table, Fully-Diluted Cap Table, and any details relating to your raise / transaction. If you have outstanding debt, you would include those related documents as well. You might also put your business plan here, if you have one!
(3) Market Data & Research - This is where you demonstrate your understanding of the market and competitive landscape. Supporting documentation relating to market size, consumer behaviour, and studies, may all be very helpful for the reader to assess your value and strength.
(4) Legal - This is where you’d put your corporate records (shareholder agreement, stock option plan, vesting agreements, share purchase agreements, board / shareholder minutes), or link in your virtual record.
(5) Intellectual Property - List all the IP owned by the Company, and provide supporting documentation for same. This could include trademarks, patents, copyrights, licenses and domains.
(6) Team - This is where you outline the team, and include things like employment agreements, contractor agreements, advisor agreements, and IP agreements. It’s helpful to have a document that summarizes everyone, with their title, compensation, seniority, and where their documentation is. You might also include your employment policies, NDAs, non-competes, and other related documents.
(7) Product - This is where you provide more information on the Product itself, such as full product demos, system architecture, roadmap, and pricing strategy.
(8) Material Contracts - This is where you put all the contracts of the Company that are of significant financial or commercial value, such as license agreements, manufacturing agreements, and customer agreements. These are especially important if there are exclusivity terms anywhere, restrictions on assignment, non-market terms, or significant liability exposure.
(9) Disputes and Litigation - If there are any outstanding disputes or litigation relating to the Company, they should be disclosed and supporting documentation may need to be provided. With that said, don’t disclose anything without first discussing the content with your lawyer.
Caution
With all these areas, you can go much deeper than described above. With that said, we caution over-disclosing in this context. It is important to be discerning when populating your Data Room. You can risk losing important intellectual property protections if you’re not attentive to this question. For example, if you disclose an invention idea, that idea could lose its patentability as a result of your disclosing the idea! If you disclose your secret sauce, and it gets shared publicly after that disclosure, no legal recourse available will be able to turn it back into a secret.
There are a lot of variables at play with Data Rooms, so it will be important to get advice that is specific to the stage you’re at, the transaction proposed, and the general context you’re working in.
Ink LLP provides legal counsel to high-growth companies and those that build them.
Contact one of our lawyers to discuss your business and how our team might be able to help you tackle the challenges of your business and the opportunities for growth.
This information is provided for informational purposes only and is not legal advice.