Data room fundamentals

Hey all,

I wanted to give you my framework for looking at a data room. Here is what I look for:

Cap table 
The two main things here are founder equity split and a reasonable (10-20%) employee stock option pool (this is equity set aside to incentivize future hires as the startup grows).

Financials 
At an early stage there generally isn't much, I look at their monthly burn rate and recurring revenue.

Articles of incorporation
Generally I do not invest in LLC's due to increased taxes on my end. I look to see if ther startup is incorporated as a C corp.

Options pool 
As above a healthy option pool is between 10-20% depending on the key hires that need to be made as the startup grows. If there is no option pool then once can be created.

Team Bios 
At this point I have already spent significant time with each founder. I am mostly looking for founder problem fit, founder market fit and if the team has complimentary skills.

Intellectual property/ patents/ trademarks
The defensibility and exclusivity of IP is important. If IP is borrowed/ was created from previous research or university then I look at the exclusivity of the contract and its cost. Generally single digit equity/ royalties are reasonable, if there is a royalty it must have an expiration date.

Investor Terms 
I look at previous investor terms and if there is a lead (for this round) the current terms. The key things here being pro rata rights (generally are triggered at a certain cheque size), liquidation preference (specifically if previous investors have a fully participating liquidation preference) and if there is a most favoured nations clause.

Other important terms are the valuation (pre or post money), right of first refusal, anti-dilution provisions (generally these should not exist outside of down round protection), preferred to common stock conversion terms, dividends (generally startups do not pay out dividends as the focus is growth), board composition, voting rights (watch out for super voting rights) and drag along rights.

Customer/ partnership agreements 
I am mostly looking to corroborate what the founders have said here. I am also trying to estimate future revenue here and look at the termination terms.

Employee agreements  
All IP/ materials created must be owned by the startups and not the employee. When it comes to founders, all equity must be vested at least over 4 years with a 1 year cliff (they get nothing if they leave before 12 months).
 

Thank you for reading,

Rishad