Fundraising Diligence Checklist: What to Have in Your Data Room

When founders hear “due diligence,” a lot of them pause, unsure what investors are actually going to do, especially the first time out. One thing I recommend every founder do is prepare a data room before starting the process, so all of your diligence documents are ready to go. Instead of responding to one-off asks and making the investor work for it, you can link them to your data room and keep moving, or pull specific docs that are already prepared. People like working with people who are easy to work with.

At later stages, specifically once you’re doing a priced round, you’ll want legal counsel managing your data room, so this advice mostly applies to pre-seed through Series A. Anything after that takes a different form, and you also need a proper CFO with investment banking experience if you don’t have that background yourself.

There’s a camp that thinks this level of preparation at seed, when you’re raising on SAFEs or convertible notes, is excessive. They’re not wrong. You can close your round without this level of granularity. I subscribe to the view that showing this level of sophistication at the start of the financing journey signals to investors that you can execute the later rounds, where the proverbial shit gets real. Seed through A gets raised on vision, early traction, and team. At Series B and beyond, the rubber hits the road and it’s about metrics more than anything else.

The standard diligence checklist is below. Keep in mind that early-stage companies definitely won’t have everything on this list. If you’ve never issued stock to a non-founder or set up an employee equity incentive plan, you probably haven’t completed a 409a valuation and won’t have those documents. That’s fine.

Each heading below should be a folder in your data room, and the bullet points are the contents of that folder.

Corporate records and charter documents

• All minutes of directors’ and stockholders’ meetings, and all written consents of directors and stockholders.
• Certificate of Incorporation, Certificates of Designation, Rights, and Bylaws.
• A list of each state where the company does business, specifying whether it is qualified to do business in that state.

Business plan and financials

• Current business plan and any financial projections.
  • At an early stage this is a deck. You don’t need a formal written business plan.
  • In earlier stages, treat your financial projections as a use of proceeds and a budget, especially with no or limited revenue.
• Most recent financial statements.
  • The more the merrier here.

Security issuances and agreements concerning securities

• A list of the company’s stockholders, including issuance dates and original issuance price. This is your cap table.
• A chronological list of option grants including grant date and exercise price.
• Copies of agreements relating to outstanding options, warrants, and rights (including conversion or preemptive rights), agreements for the purchase or acquisition of any of the company’s securities, and agreements relating to past stock issuances.
• The company’s stock plan and all related form documents, plus any documents evidencing registration rights, agreements among stockholders, or agreements between the company and its stockholders.
• A summary of the vesting schedules of any stock or options subject to vesting, including any vesting acceleration.
• Agreements relating to voting of securities and restrictive share transfers.
• Evidence of qualification or exemption under applicable federal and state blue sky laws for issuance or transfer of the company’s securities.
• Copies of Internal Revenue Code Section 409A valuation reports.

Intellectual property

• A list of the company’s trademarks, patents, copyrights, and domain names, or any applications for them, including documentation of filing or registration with the appropriate government entities.
• Any documentation relating to the transfer of technology to the company or to any employee.
• Copies of the proprietary information and invention agreements signed by any service provider, including employees and consultants.
• A list of any employees or consultants who have not signed proprietary information and invention agreements, including any periods when they performed services for the company while not bound by such agreements.
• Any correspondence or documents relating to allegations that the company infringed the proprietary rights of others, or allegations by the company that its own rights were infringed.
• Copies of all material agreements licensing company technology to third parties, including cross licenses.
• Copies of all material agreements licensing technology from third parties.
• A list of all third-party software, including open source, and any derivatives used with or integrated into software the company distributes or hosts. List applicable licenses and licensors for each, and describe the communication and linking between that third-party software and the company’s proprietary software.

Material agreements

• Any agreements, understandings, instruments, contracts, or proposed transactions the company is party to or bound by that involve obligations of, or payments to, the company in excess of $25,000.
• Any personal property leases.
• Any agreements concerning the purchase, lease, or sublease of real property.
• Any documents evidencing indebtedness for money borrowed or other liabilities incurred by the company.
• Any documents evidencing mortgages, liens, loans, and encumbrances on company property or assets.
• Any documents evidencing loans or advances made by the company, including loans made to employees for any reason.
• Any agreements, understandings, or proposed transactions between the company and any of its officers, directors, or affiliates, including non-competition agreements, employment agreements, and non-form offer letters.
• Any licenses or agreements concerning the company’s or others’ patent, copyright, trade secret, or other proprietary rights, proprietary information, or technology, including employee confidentiality agreements.
• Any insurance policies held by the company or naming it as beneficiary, and a summary of those policies if available.
• Any judgment, order, writ, or decree binding the company or to which it is a party.
• Any standard forms of agreement used by the company.
• Any joint venture or partnership agreements.
• Any management, service, or marketing agreements.
• Any confidentiality or nondisclosure agreements.
• Any agreements requiring consents or approvals in connection with the financing.
• Any documents containing severance payments or acceleration of stock or option vesting.
• Any consulting contracts.
• Any other agreements material to the business, or outside the ordinary course of business.
• A list of officers and directors. If any officers are not devoting 100 percent of their business time to the company, note that here.
• A list of all acquisitions, dispositions, mergers, consolidations, and reorganizations, with all related documents, plus a description of any plans for events of this nature.
• Any product or service warranties or indemnities.

Disputes and potential litigation

• Any correspondence or documents relating to a pending or threatened action, suit, proceeding, or investigation, including those involving employees in connection with their prior or present employment or use of technology.
• Any correspondence or documents relating to allegations that the company infringed the proprietary rights of others.
• Any correspondence or documents relating to labor agreements or actions, union representation, strikes, or other labor disputes.
• A schedule of settled or concluded litigation, claims, suits, and proceedings, along with related consent decrees, judgments, orders, settlement agreements, and injunctions.
• A list of all claims made under any D&O policy or other insurance policy covering the company.
• Notices of breach or default under any material agreement.

Employees and employee benefits

• A list of employees and consultants, including title, base salary, target bonus if applicable, commission plan if applicable, classification (for employees, whether exempt or non-exempt), and state of residence.
• The company’s standard form of offer letter or employment agreement.
• Any plans, agreements, or arrangements providing benefits contingent on a change of control.
• Any severance or deferred compensation plans, including salary deferral agreements with employees or consultants, whether oral or written.
• Any employee benefit plan, including stock option plans, 401(k) plans, pension plans, and insurance plans.
• Any forms of agreement used with stock option plans, such as a form of option agreement, notice of exercise, and restricted stock purchase agreement.
• If the company sponsors a 401(k) plan, any determination or opinion letter and Form 5500 filings for the most recent year.
• All documents or information relating to loans made by the company to its employees, directors, or consultants.
• The company’s employee handbook.
• If the company has foreign employees, a list separated by country of all benefits provided to them.

Other information

• Any securities or ownership interests in other companies held by the company.
• All licenses, permits, or government authorizations held by the company or needed to conduct its business.
• A list of any current or past officers, directors, or key employees who hold a direct beneficial interest in any competitor, supplier, or customer, with a description of those interests.
• Any complaints regarding accounting, internal controls over financial reporting, and auditing matters received in the past three fiscal years.
• A description of all material off-balance sheet transactions or arrangements of the company or its subsidiaries, with copies of all relevant documentation.
• A company org chart, with future hires identified.
• Anything else you think is relevant.

Where to host your data room

I’ve used Carta’s data room feature and liked it, mostly for read-only watermarked documents and NDAs required to view. As of today I don’t recommend starting with Carta if you’re not already on it, because of their 2020 pricing structure.

I don’t recommend Google Docs, since I don’t think it’s secure enough. Dropbox is the most reasonable option for seed to Series A founders who aren’t running the data room through outside counsel. I also suggest DocSend for all deck exchanges. Understand that investors will screenshot everything and share it even when you disable downloads, so once one investor sees your deck, it will make the rounds. Just expect that.

What about NDAs?

Unless you have a truly groundbreaking deep tech innovation with unprotected IP, my take is that the vast majority of founders raising pre-seed to seed shouldn’t worry about NDAs for diligence. Check with your outside counsel on this. At seed, you want to be easy to work with, as much as you want your investor to be easy to work with. Series A is where companies do need to consider NDAs before sharing the data room, because by then you usually have confidential contracts you want to share safely.

Thank you to Perkins Coie LLP, who provided the bulk of the diligence checklist guidance.