Data Room Development for Startup

When we see news of fundraising in newspapers or social media, we see it as a glorious win for the startup. We see it as a sophisticated process through which startups with the highest winning probability secure funds from prominent investors. We hear about words like valuation, cap table, shareholders’ agreement, and equity financing. But what we don’t see or hear about much is the grueling part called due diligence. It is an essential part of fundraising on which success of fundraising hangs on to a great extent.

What is Due Diligence?

Fundraising due diligence is the process where investors thoroughly evaluate a startup's business, team, finances, technology, and legal status before making an investment decision.

In my experience of fundraising for startups, I have faced three kinds of due diligence. These are -

• Financial due diligence (FDD)
• Tax due diligence (TDD)
• Legal due diligence (LDD)

In today’s newsletter, I will share my learnings in these three areas. It is worth noting that, due diligence generally starts after the term sheet has been signed by both parties.

What is Data Room

The quality of the data room determines the probability of success in due diligence. A data room for fundraising is a secure online storage where businesses store and share confidential documents with potential investors during the fundraising process. It contains financial records, legal documents, business plans, and other sensitive information relevant to the investment opportunity.

In today’s newsletter, I will show how to create a data room for startups planning to raise funds.

Here is a sample data room that I have created for this newsletter.

As shared above, due diligences mostly revolve around three segments, let’s open three folders under our sample data room.

• Financial Documents for FDD

Financial due diligence is generally the most time-consuming and most comprehensive due diligence among these three. So the financial documents folder should also be the most detailed one. Now, let’s discuss what kind of documents in general you should keep in this folder.?

1. Audited financial statements: This covers all the annual audit reports your business has prepared.
2. MIS along with reconciliation with financial statement: This covers the monthly report you prepare for management and investors. Considering it prioritizes the management accounting process there might be some differences with the audit report so please add the reconciliation with financial statements here.
3. Transaction level detailed revenue register as per CRM for the scope period: These data should be directly fetched from your sales register.
4. Revenue reconciliation as per income statement with the statement received from payment gateway partners and receipts as the bank statement: This segment should cover the documents based on the reconciliation method of your revenue along with matching among income statement, bank statement, and payment gateway.
5. DAU, WAU & MAU: These are your Daily Active User, Weekly Active User, and Monthly Active User data.
6. Month-wise new registered user, cumulative registered user, and paying user: This should cover your month-wise user data.
7. Web and app retention cohort (total and paid): This segment should cover your retention data at both free and paid user levels.?
8. COGS level each segment costing breakdown monthly and invoice for each: This segment should store all natures and vendor-wise breakdowns of cost at the cost of goods sold (COGS) level.
9. FB, google marketing: Month-wise cost detail along with sample invoice. Add all your digital marketing records along with invoices.
10. Provide vendor-wise detail and nature of other marketing costs: This segment should cover all nature and vendor-wise information of other marketing costs the business incurs.
11. CAC computation and details of organic & paid acquisition separately: This segment should cover the CAC computation method the business follows as well as the month and product category-wise calculation breakdown.?
12. Detail of payroll on a monthly level for the scoping period: All details of your M2M salary payments should be here.
13. Rental property list, payments made, and agreements information: This segment should cover all rental agreements and payment information.
14. Fixed asset register along with depreciation computation: This should cover a detailed listing of your all fixed assets as well as the depreciation method and calculation the business follows.
15. A detailed breakdown of intangibles along with details of capitalization and amortization during the period: This segment should cover your intangible assets. Capitalization method and amortization calculation related information.
16. Party-wise split of payable balances as at each balance sheet date: This should provide the answer to all the outstanding payables of the business.
17. Copies of all bank statements (PDF and Excel format) for the scope period: This should have all the bank statements of the business.
18. Shareholding pattern as of the latest balance sheet date: The business cap table should be attached here.
19. Details of related party transactions during the scope period: All related party transactions with amount and purpose should be covered here.
20. Schedule of future cash commitments as at the latest balance sheet date: Share a detail of the business cash commitments here.
21. A/R aging schedule: An accounts receivable aging schedule is a report that categorizes the outstanding balances of a company's accounts receivable according to the length of time they have been outstanding.
22. A/P aging schedule: An accounts payable aging schedule is a report that categorizes a company's outstanding bills according to the length of time they have been unpaid.Please click here to see the documents you should keep in your financial documents folder.

• Tax Documents for TDD

Tax documents cover all kinds of direct and indirect tax submissions to regulatory bodies as well as required reporting copies. Generally, your tax documents folder should have at least these documents in place -

1. Tax registration certificate: This should have the ETIN certificate.
2. All previous audited statements: This covers all the annual audit reports your business has prepared.
3. Income Tax Returns for every year of operation: This segment should have proof of income tax returns since the beginning of operation.
4. Details of any tax investigations conducted by any authority: This should cover the ongoing or previous investigation on business run by the regulatory body.
5. Any tax exemption or facility granted for Target entity: Add the tax exception or any facility granted certificate if any.
6. An Excel sheet showing payments, withholding tax and VAT, and challan number: This should cover all details of payments made as tax and VAT submission along with the respective challan numbers.
7. Detail breakdown of expenditures for the DD period: This segment should cover all OpEx and CapEx at transaction level data.
8. All tax-related filings the company is supposed to submit each FY: This segment should cover all tax-related filings the business has to do every FY.
9. VAT registration certificate: Add the BIN certificate.
10. All monthly VAT return files for the scope period: Add all VAT return files for the scope period.

This list covers minimum expectations. The more comprehensive the document folder, the better for the business. Click here to see the folder.

Legal Documents for LDD

The legal document folder covers all legal documents, contracts, intellectual property rights, regulatory compliance, and any potential legal liabilities associated with the startup. Here’s a short list of expected documents in an LDD.

1. Corporate document [All RJSC approvals, board resolutions, share registers]: All RJSC-related submissions, board resolutions, and share records should be here.
2. Certification of incorporation, MoA, AoA: All required company incorporation documents should be here.
3. Material agreements: All valid and executed contracts by the company. All contracts that the company is part of should be here.
4. License and permits: Trade license, ETIN certificate, BIN certificate. All licenses the business requires should be stored here.
5. Borrowings: Every kind of loan agreement with the latest update should be stored in this segment.
6. Employment: All employee agreements, HR manual, and list of consultants, and employees should be here.
7. Intellectual property: Details regarding all patents, trademarks, copyrights, and any other form of intellectual property (“IP Rights”) owned or used by the company and supporting documents about the same (such as registration certificates, applications, etc.).
8. Litigation: Info on any litigation, statutory, regulatory, judicial, or other inquiries or investigations involving Target or the officers or agents of Target.Please click here to see the legal documents folder.

I would like to remind you that this newsletter doesn’t cover everything a data room should have. A data room can be much more comprehensive based on the stage and size of the business. But this newsletter can be a good starting point. Please feel free to make a copy of the sample data room I have shared and start building yours!