Preparing to Raise Money

Our experience is that early stage companies looking to raise money are usually unprepared for the amount of detail that investors will look for. Not every investor wants the same depth of insight into your company and not every investor will look at every document. But if you build your “data room” around the documents outlined below, you will cover 90%+ of everything anyone could ask for. Think of this as a big Dropbox file which you allow investors to access. Just having this information in your data room so that others can look at it conveys a level of professionalism that investors find very reassuring – whether they look at the material or not!

Your Plan for Success – By far the most important part of raising money is the Success Plan which frames all your thinking. Force yourself now to write down exactly what it is you plan to accomplish. If you don’t have a model, using The Five Questions │ One Page® approach outlined below.

  1. “Why” does the organization really exist? – This is the emotional ethos of your organization – the reason you and people really come to work. As Simon Sinek says in his presentation on “Start with Why” (https://www.startwithwhy.com/), Martin Luther King said, “I have a dream.” He did not say, “I have a plan.” What’s your dream?
  2. “Where” is the organization headed long-term? – This is a compelling, aspirational view of your company’s long-term future. If you don’t know where you are going, any road will get you there. Where are you headed long-term?
  3. “What” will the organization achieve and how will we measure it? – This is a fact-based definition of success over the next 1 to 3 years, supported by specific measurable outcomes – your Goals for the business. This will tell you and the investor how you are succeeding. What outcomes do you plan to be held to in terms of sales, product launch timing, etc.?
  4. “How” will success be achieved? – These are the choices you make about the work needed to deliver the “What”’ who will be responsible for delivering it and when. No company, government or religion can do more than 3 to 5 “How’s” over a 3 to 5 year timeframe. Touch these “How’s” bases and you’ll be fine: Product, Sales, Marketing, People and Business Model.
  5. “Which” work will the organization not do? – This is a list of the work the organization agrees not to do – so it can focus completely on achieving the “What.” Here’s the place to gather and park all your ancillary dreams. It’s the place to show you can focus, focus, focus – by saying what you won’t do. Make this into your Won’t Do® List and hang it on the wall in your office so everyone knows what not to work on.

You can summarize all of this on just one page. Yes, you can. Here’s the format to use. Put this on page 1 of every presentation you make and it will show everyone how what you want to do fits into this “big picture.”

The Timeframe – Your expected timing is everything. You need to think through how many rounds of fundraising you really need – if everything goes as expected (which it won’t!). Is the round you are raising now (i.e., Seed or Series A) the last you expect to raise? Do you see one more round or two? How long do you expect to be in business before the company is sold? Whatever you lay out here will not be accurate; it’s hard to see what will happen next week, let alone 3-5 years down the road. But together with your One Page Strategic Plan, this at least gives would-be investors a chance to peer into your current thinking. If you are way off base from what they had in mind, this is the time to clear up the misunderstanding. There is nothing worse than having the wrong investor in the right company.

The DocumentsHere are the bare minimum of materials you need to assemble so that investors can “inspect before they invest.”

  1. Financial Forecast.
  • A clear outline of the Company’s financial goals – sales, margins, overhead, etc. from the point the Company was formed until it is sold.
  • Numerical data showing how much money is to be raised over what period of time, at what target valuations; with a high/medium/low projection of sale price based on industry-reasonable multiples. Investors want to see where your current financing fits into the larger picture, how long you expect to be in business with them, and what your belief is about the likely outcome.
  1. Corporate Records – Investors need to see how the Company is organized. Don’t leave anything out. No double-secret side deals. There can be no secrets from your investors.
  • Certificate/Articles of Incorporation and/or other charter documentation, including certificate(s) of filing as a foreign corporation, and all amendments thereto.
  • Bylaws/Operating Agreement of Company and all amendments thereto.
  • Minute books, including resolutions, minutes, notices, waivers, and/or consents of all director, committee and shareholder meetings.
  • Agreements among Company’s shareholders including voting trusts and proxies.
  1. Securities History.
  • All contracts relating to the sale or transfer of the Company’s shares from previous financings. This would include buy-sell agreements, subscription agreements, offeree questionnaires, registration rights or contractual rights of first refusal (or assignments of such rights); all agreements for the right to purchase shares, such as pre-emptive rights (or assignments of such rights), stock options or warrants; and any pledge agreements by an individual shareholder regarding Company shares.
  • Documentation of any convertible debt financing of the Company.
  • All agreements and documentation relating to repurchases, redemptions, exchanges, conversions or similar transactions involving the Company’s securities.
  • Governmental permits, notices of exemptions and consents for issuance of transfer of the Company’s securities and evidence for qualification under applicable blue sky laws.
  • Form D or any other forms filed to qualify for exemption under the Securities Act.
  • Detailed capital structure of the Company, specifying ownership interest allocations, including the options allocated to Management.
  1. Financial Matters.
  • Name and contact data of the tax advisor the entity is using to provide accounting and tax advice services.
  • Revolving credit and term loan agreements, indentures and other debt instruments, including promissory notes, all documents relating to shareholder loans, and any other evidence of indebtedness (including all amendments, renewals, notices, waivers, etc.).
  • Correspondence with Company’s principle lenders. Your investors need to know how your banker views your company.
  • Personal guarantees of the Company’s indebtedness by its shareholders or other parties, or agreements by the Company serving as guarantor for obligations of third parties.
  • Federal, state, and local tax returns and any correspondence with tax officials. For S Corp/LLCs, these typically include the CEO’s personal tax return.
  • Financial statements (prepared in accordance to GAAP or noted as to why they are not GAAP) since inception including quarterly balance sheets, earning statements, statements of shareholder’s equity and changes in financial position.
  • Financial and operating projections for the next 3 years, including projected income, cash flows, balance sheets and all material assumptions thereto.
  • All agreements and documents relating to other material financing arrangements.
  1. Operations and Business Development.
  • List of all major suppliers showing total and type of purchases from each during the most recent fiscal year, indicating which are sole sources. Including the contact name, e-mail, and telephone number for each of your suppliers – this in case would-be investors want to talk to them.
  • Agreements relating to the sale, lease or license of Company’s equipment, products, and/or services. Remember that leases are debt and be sure that leases are shown “GAAP appropriate” on your balance sheet.
  • List of all current accounts payable and the aging for them. Potential investors want to know if you are “stringing out” your supplier.
  • Any material Company operational agreements including commitments to pay for internet access, server systems, etc.
  • Marketing plan and detailed budget allocations, including projected milestones and the basis for your assumptions. The key here is for investors to understand what it costs you to acquire new customers – and retain your current ones.
  • Strategic partnership agreements (distribution, marketing, sponsorship, e-commerce, cross-promotional and joint ventures).
  • List of all material in-licensing agreements, including licensor’s name, address, phone, contact verification and title ownership/authority by licensor, with attached copies of the agreements.
  • List of all clients/customers as well as documents which define the relationship: Letters of intent, service/sales agreements and/or engagement letters, etc.
  • List of key competition (direct and indirect), their percent of market share (name source of info), and factors that will allow the Company to successfully compete against these market competitors. You must develop a basis for understanding the size of your market. Don’t guess and don’t say “billions.” Find the best services you can and tell investors where the data comes from.
  • Copies of all reports detailing usage (backend database information) of the Company’s website including unique visitors per month (and total), registrants per month (and total), web page views per month, etc.
  • Detailed description of your business model and the value proposition offered by the Company. In other words, explain how you make money.
  • List of other venture capital firms that have expressed interest in your business, including the person you talked to and their contact information.
  1. Management and Employment Matters.
  • All founder agreements, management employment agreements and indemnification agreements.
  • Biographies of all key management team members.
  • Schedule of all compensation paid since inception and projected for the next 3 fiscal years to all officers, directors and key employees. List separately salary, bonuses, and non-cash compensation (i.e., use of cars, etc.) so investors can see your compensation philosophy, not just the totals.
  • Agreements relating to consulting, management, independent contractor, financial advisor services, legal and other professional engagements.
  • Details of your directors/officers liability and E&O policies, severance programs and all other plans or arrangements.
  • All current Company contracts or agreements with directors, officers or shareholders of the Company (including receivables or payables to or from such parties). Remember that future investors have no interest in paying off old debts.
  • List of employees by department and by function (including independent contractors), including individual salaries and bonuses.
  • Forms of employment agreements, employee confidentiality agreements, noncompetition agreements and work-product ownership agreement. Investors want to see how well managed your business is and the use of these agreements is a great signal.
  • Description of sales commissions paid to managers, agents or other employees since the Company’s inception or projected in the future.
  1. Tangible and Intangible Assets.
  • List of all tangible and intangible assets.
  • List any proprietary assets including patents, patents pending, trademarks, trade names, service marks, copyrights, registered and proprietary internet addresses (URLs), franchises, licenses, and all other intangible assets including registration numbers, expiration dates, employee invention agreements and policies, actual or threatened infringement actions, licensing agreements, and copies of all correspondence relating to this intellectual property.
  1. Material Contracts and Obligations.
  • Any lease agreements for real estate and/or personal property, including location and address, description, terms, options, termination and renewal rights. If you are renting from an affiliated party, like the CEO’s uncle, disclose it right up front.
  • Material purchase, supply, and sale agreements currently outstanding or projected to come to fruition within 12 months, including a list of all contracts relating to the purchase of any inventory, equipment or assets in excess of $10,000.
  • Consignment, online vendor linking and royalty agreements.
  • Outsourced marketing, web development, business development and/or R&D agreements.
  • Franchise, distribution and agency agreements.
  • Documentation relating to all property, liability, and casualty insurance policies, including for each policy a declaration page and any amendments to the original since inception.
  • Agreements restricting Company’s right to compete in any business.
  1. Litigation, Claims and Legal Issues.
  • List of material litigation or claims asserted or threatened against the Company with respect to any action based in tort, contract or violation of any statute or regulation, including any injunctions or petitions for equity relief which may materially interfere with the Company’s operations or revenues.
  • Name, address and contact details for your Company’s lawyer.
  1. Miscellaneous.
  • Financial analyst reports, industry surveys, press releases, press clippings, including text of speeches by Company’s management team, especially if reprinted and distributed to the industry or media.
  • List of Board of Directors and Advisory Board Members, their biographies and a contact number for each.
  • Professional references for each of the key management team members, including name, address, telephone, and brief description of relationship.

It’s a big list, we agree. But remember, you are asking people you have never met for an investment they know nothing about. The more you can do to convince them that you know what you are up against, wants and all, the more likely they are to write a check.