Demystifying Data Rooms – Good Startups Start Early
- Dan Davies
- May 29
- 5 min read
Introduction
“Around $24,000,” my friend replied when I asked him to estimate how much it cost for a company to clean up its data room at the eleventh hour of an investment deal. Fortunately, the law firm wrote off the time, so in theory, the company didn’t pay $600 an hour for a lawyer to create the semblance of organization for potential investors. However, I couldn’t help but think to myself, “If I were going to have tens of thousands of legal fees written off, I’d quite like it to relate to the actual practice of law.”
Most founders start thinking about data rooms only when they’re preparing for fundraising, but a data room isn’t just a fundraising tool: it’s a startup’s organizational framework from day one, giving you a holistic view of your venture from the helm. And believe me, with the anecdote above, it’s far easier to build and maintain as you go along than scrambling at the last minute.
What is a Data Room?
A data room is a secure repository that tells a company’s complete story to outsiders. It’s where you house the documents that show potential investors or acquirers exactly what is happening with the past, present, and future of the business. While data rooms historically meant physical rooms with filing cabinets filled with papers, today, they’re almost universally electronic. Modern data rooms serve as the central hub during investment due diligence, mergers and acquisitions, and even strategic partnerships. A data room isn’t just where you store documents. It’s how you present your company’s narrative in an organized, professional manner.
Why Data Rooms Matter for Startups
The primary purpose of a data room is to streamline the due diligence process by providing potential investors or acquirers with the information they need to evaluate your company properly. When an investor asks for your cap table or your team structure, having them ready to share instantly not only maintains the momentum of the deal but also sends a powerful message: this founder has their act together. With a well-structured data room ready to share, you will no doubt have a clearer understanding of your venture and a better ability to articulate your vision; this clarity demonstrates your competence and helps build investor confidence in you. Don’t be the person who promises to “send them later” and generally appears disorganized.
Beyond the organization and efficiency gains, there are more strategic advantages. You decide what narrative your documents tell and in what order investors encounter information. This isn’t about hiding anything (transparency remains critical) but about presenting your company in its best light.
Take this example: you are consistently having to explain why a name no longer associated with the company is on your cap table. Instead of fielding awkward questions at a pitch, create an FAQ document at the start of your data room that explains who this person is and why it is a non-issue. Even better, spin it as a positive! Perhaps a founder left on the best of terms and is now one of your business's loudest and strongest advocates in its industry. Use your data room to tackle tough questions early on, taking control of them long before they become deal-killers.
The most overlooked benefit? It forces you to stay organized as you grow. When you’re maintaining a data room from day one, you’re building good corporate governance habits that will serve you throughout your company’s lifecycle.
How to Build Your Data Room
There should not be a massive time investment in building and maintaining your data room when you start early. Plan on spending 2-3 hours initially setting up, then just 30 minutes monthly to keep it up to date. Your first step is selecting a secure platform to host it; there are multiple options to choose from:
General cloud storage services (Google Drive, Microsoft 365, Dropbox) are an accessible starting point for early-stage companies. They’re familiar, easy to set up, and cost-effective. The key is ensuring that you’re securely managing third-party access and maintaining a professional organization by restricting users’ ability to edit.
Cap table management platforms, such as Carta, offer integrated file storage solutions. The upside is having your equity information and documents in one place; the downside is that Carta’s interface feels clunky when you’re navigating between many folders and files.
Virtual data room providers like Ansarada, Firmex, and DocSend offer sophisticated features, but honestly, they are often overkill for companies just starting out. While they include detailed user analytics, granular permission controls, and advanced security technology, they’re expensive and come with a steep learning curve to best utilize them.
Regardless of your choice, prioritize security and access management. You need the ability to grant and revoke access quickly, track who’s viewing what, and ensure your sensitive information stays protected.
Once you’ve chosen a platform, the next and most crucial step is to create a folder structure for the data room. This is where a founder can shine or completely miss the mark. There isn’t a universally accepted standard, but successful data rooms follow a logical structure that aligns with how investors think about due diligence. Consider using an industry-standard due diligence checklist as a starting point. The goal is organization that makes sense to an outsider unfamiliar with your business. For example, you may decide to start with these core sections:
Company Overview: Executive summary, pitch deck, FAQ document
Financial Information: P&N, cash flow, balance statement, cap table
Legal & Corporate: Incorporation documents, board resolutions, key contracts, published patents
Team & Stakeholders: Organizational chart, employee agreements, advisor details
Product & Market: Product demos, market research, competitive analysis
Customer Information: Reference customers, key contracts (with sensitive details redacted)
Now you’re ready to populate the data room, I’d recommend taking the “Goldilocks” approach: Not too little and not too much. You shouldn’t include every document about your business, especially those that reveal your most confidential information, like trade secrets, but there needs to be enough detail to provide an outsider with a comprehensive overview. And remember, you’re under no inherent obligation to include specific documents, but what you decide to include or not include mustn’t misrepresent your business or mislead an investor.
Conclusion
Starting your data room on day one isn’t about preparing for fundraising; it’s about building the organizational foundation that will define every important conversation you’ll have about your business. It is you putting your company’s best foot forward, showing that you’re organized, professional, and have a compelling story to tell about where you’re headed.
Ready to set up your data room? Here are some additional resources to help you:
This article is for informational purposes only and does not constitute legal advice.
