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Record Keeping

Mastering Due Diligence: A Guide to Strategic Record Keeping

In the dynamic landscape of early-stage business endeavors, meticulous documentation management is the key to unlocking a pathway to successful fundraising or acquisition. By refining their approach to record keeping, burgeoning companies can significantly enhance their prospects. The seemingly straightforward act of organizing and storing documents can, in fact, become a catalyst for expediting transactional processes. Establishing a standardized system for categorizing and managing files streamlines the due diligence process and reduces legal fees and deal timelines for all stakeholders involved. 

When and How Do I Start?

Companies can start or improve record keeping at any stage, but the earlier, the better. The first key is determining the types of records the company wants to place in a data room. Below is a brief list, and the company’s advisors/investors can provide guidance. After determining what contracts to include, the company should also determine how often they are updated and by whom and design the process to store from that. In the early stages, the CEO likely sends hiring paperwork, so they should have the task of ensuring that when a new hire starts, all final docs are properly stored with a common naming convention. The company should only store countersigned final files, not any draft agreements, as outside parties do not need to see unsigned or incomplete agreements.

What is a Data Room?

A data room is a centralized and reviewable repository of files for outside investors or acquirers to review the company’s information. Investment banks use expensive software packages to create the data room with many great features, but early-stage companies do not require this level of sophistication. Lower-cost (or free) file-sharing tools like Google Drive, Box, and Dropbox work well with one major caveat – the process owner should create a new room for each investor/acquirer. These software tools are meant to be collaborative; a single user can often see everyone else with access to that room. Maintaining multiple rooms, while more work, eliminates their ability to know who else may be interested in a transaction.

What Goes into the Data Room?

What items to include in a data room depends on the room’s purpose. Investors may ask for and should be able to find customer-level information. However, the company may not want to share a full customer list in an acquisition until a signed LOI. Regardless of the purpose, the information presented should only include the necessary and final files required for investors or acquirers. Among the types of documents to load:

  • Employee documents included full roster (past and present), offer letters, IP agreements, and option/stock agreements
  • Corporate formation documents
  • Major customer and vendor agreements
  • Bank Statements
  • Financial statements, including budget vs actuals
  • Tax returns
  • AR and AP Aging reports
  • Board Meeting Minutes
  • Prior funding documentation

How Does This Increase the Odds of a Transaction?

Having a fully built data room ready before the process starts reduces the time it will take for investors and acquirers to review the business. The old sales adage “Time kills all deals” applies in these transactions as they should be seen as a sales process, as the company sells either a portion of the equity or all of it. Once past the term sheet (investment) or LOI (acquisition), the due diligence gets much more thorough, and the data requested is much broader. Company counsel will help, but that help can be costly if the company is not properly ready for the data request. Understanding what files and data the company has and what is missing increases the response time and can highlight what the company can include or exclude from the legal representations.

Additional Perspective

The information described above is based on my experience within companies as they prepare for transactions and as an outside advisor who has seen many transactions challenged by poor documentation. From another perspective, the Bagchi Law team wrote a post: HOW STARTUPS CAN NAVIGATE THE DUE DILIGENCE PROCESS WITH EASE detailing how to prepare for due diligence that covers the reason and importance from their viewpoint.


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