Why and How to Organize Your Dataroom

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Before a major financing transaction or the sale of a company, the investor or buyer will want to see most of the company’s legal and financial documents. This is called “due diligence.” If I asked you to share with me all of your company’s legal documentation, would you be able to provide me access to all material documents within a few hours? Would the documents be well-organized? Would they be complete (i.e., no meaningful documents or signatures missing)?

If not, this should be your goal. Before an investor or acquirer will put money into your company, they will want the opportunity to conduct a thorough due diligence review of your company’s legal records. There are a lot of discrete items that they will want to assess, but in general, they want to understand if there are any issues that should be dealt with before closing the deal (for example, revising founder vesting schedule; asking certain employees to enter into IP assignment agreements; having the board ratify previously unapproved corporate actions; revising the terms of customer or vendor contracts; getting the consent of third parties to the transaction).

It is common to discover matters in legal diligence that the parties will discuss and resolve during the course of the transaction. This can delay the deal, but the parties are typically okay with taking the time if it allows the transaction to occur. Here are the things you want to avoid as a result of incomplete corporate and operational records:

  1. The financing or acquisition will likely be on a tight timeline, and poorly kept records will slow down the deal and increase legal expenses.
  2. If your legal counsel does not have complete records, this could negatively affect preparation of the representations and warranties in the definitive deal document and preparation of the disclosure schedules (basically, increased deal risk on your company or your shareholders).
  3. The appearance of being disorganized could raise concerns with your potential investors or buyer about how well you run your business.

What you should be doing. Every company should maintain a virtual dataroom (using services such as Dropbox or Sharefile). The dataroom should contain a well-organized system of folders and subfolders. It should be updated in real-time (i.e., don’t wait to collect a batch of documents and then upload to the dataroom). Below is a suggested structure for how to organize your dataroom. A more mature or complex company might have additional categories. This structure aims to track a typical diligence request list which you might receive from an investor or acquirer. This is not a one-size-fits-all structure, but it is a good starting point.

  • General Corporate
    • Consents and Minutes
    • Bylaws and Charter
  • Capitalization and Agreements Regarding Securities
    • Capitalization Table and Stock Ledger
    • Series A Financing Agreements
    • Stock Incentive Plan and Related Agreements
    • Other Securities Agreements
  • Contracts
    • Customer Agreements
    • Employment and Contractor Agreements
    • Vendor and Supplier Agreements
    • Loan Agreements
  • Intellectual Property
    • Patents
    • Copyrights and Trade Secrets
    • Trademarks
  • Real Property
    • Leases
    • Ownership Records
  • Financial
    • Financial Statements
    • Insurance Records
  • Insurance and Litigation
    • Policies
    • List and Status of Claims

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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