When founders hear the term “due diligence,” many may pause and feel uncertain about what investors will do, especially if it’s their first time seeking funding. I suggest preparing and maintaining a data room with all their diligence documents ready. Instead of responding to specific requests and making the investor do the work, you can direct them to your data room and proceed with the investment. You can also provide them with specific documents that are already prepared. People prefer to work with those who are easy to work with.
In later stages, mainly when conducting a priced round, it’s advisable to involve legal counsel in managing your data room. However, having a ready-to-use data room will make the preparation process smoother and significantly reduce the last-minute rush to locate documentation.
Some people believe this preparation level is too much for the early rounds, and they are correct. You can close early rounds without being so detailed. I suggest always having a data room prepared. Demonstrating a certain level of sophistication at the beginning of the financing process shows investors that you can handle the later rounds when things get serious.
There are hundreds of VDR (Virtual Data Room) providers with various pricing models.
I have set up Data Rooms on different VDR (Virtual Data Room) providers, but they all have the same foundation. I use a Notion Page to organize everything. For each section, I create a folder and link the documents to a cloud drive. This approach has several advantages:
- I have one reliable and current source (it’s a working repository).
- I always know where everything is.
- I have a backup of everything.
- During DD, I only need to selectively copy and upload to a VDR.
When it comes to NDAs, my belief is that unless you have a truly groundbreaking deep tech innovation with unprotected IP, most startups raising pre-seed to seed funding should not be concerned about NDAs for due diligence. At the seed stage, it’s important to be easy to work with, just as much as you want your investor to be easy to work with. However, I do think that at the Series A stage, companies should consider NDAs before sharing their data room because they typically have confidential contracts at that point and want to ensure safe sharing.
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