Keeping a Clear Fundraising Paper Trail

If the business overview has enough sizzle, the investors will soon be asking for the steak. The meat of the deal should be presented in two key documents: a PowerPoint presentation and a financial spreadsheet model. Just as the presentation slides should illustrate both present and future business concepts, the financial model should give both historical financial data and financial projections.

There are no definite rules about how far into the future to plan. Daniel included three-year financial projections in Business District's current fundraising efforts. "But the further we go with experienced investors, I think five years [of projections] is more often required," he explains.

Term Sheets and Data Rooms

If you've found interested investors, expect them to seek out more information on your business and the opportunity. In the case of a formal offer to invest, they will include a term sheet -- a simple document spelling out how the investor would like to proceed.

"The term sheet forms the overall framework for the deal," says Gilroy. "When it's signed by both sides, it creates the period of diligence and exclusivity."

That period of exclusivity gives the investor time to do detailed research into your company and market. To complete their due diligence, the investor will likely require yet more documentation from the business owner. Typically, all kinds of historical business documents are assembled and kept in a "data room." In the simplest cases, the data room may be little more than a binder of tax returns, bank statements and other documents. These days, data rooms of any size are often virtual, existing only on secure Web sites where documents are shared electronically.

Agreements and Articles

Assuming all goes well, Gilroy says, there are three cornerstones of the legal transaction that will cement the investment deal: a stock purchase agreement, an investor rights agreement and the revised articles of incorporation. Quite simply, the stock purchase agreement is the sales contract by which the stock of the company is exchanged for the investment capital.

The investor rights agreement sets up the rules and responsibilities of each shareholder group (particularly when there are several classes of stock). And both of these documents will impact the fundamental articles of incorporation for the company, which, depending on the particular state laws, may describe how many shares are issued and how the company is governed.