Getting your financial house in order

This is the second post in a series. If you haven’t seen the first post, which provides an overview of the entire process, start there. To read the entire series, download our free ebook here.

If you’re a founder, you probably think you’ve got your financial house pretty well in order. And no doubt you do when it comes to budget planning, making payroll, paying bills, and everything else relating to the day-to-day operation of the business.

But if you’re planning a capital raise anytime in the near future, your financial house might need a little spring cleaning before you open the door for a partner.

For those who have never been through a funding round, the volume of information requests might seem overwhelming — especially if you don’t know in advance what’s expected.

For those who have never been through a funding round, the volume of information requests might seem overwhelming — especially if you don’t know in advance what’s expected. The further you progress in the funding process (see graphic below), the more detailed the information requests are likely to be.

Overview of the funding process

In this blog, we’ll outline the most common financial and operational information that investors request, what they’re evaluating, and suggestions for how to organize yourself and your team so the process doesn’t become a distraction to the business.

Aligning on value

At the highest level, an investor’s goal through this process is to accurately understand and put a financial value on the performance and potential of a business. More detail on how investors value a business here.

Some data is more important than others, and some investors dive deeper than others. However, most will want to see:

  • Annual financial statements
  • Financial projections
  • Revenue mix
  • Revenue by client
  • Operational metrics
  • A detailed cap table
  • Tax information

You might already have much of this data in existing reports or systems. However, even if you do, don’t underestimate the amount of effort it could take to verify the data and package it for external consumption. Even without a dedicated CFO in place, most firms are likely to have annual financial statements and tax returns at the ready. The breakdown of client and services revenue is usually more difficult.

If you have a larger, more complicated business (say over $30M in revenue), or you’re looking for a more substantial transaction or acquisition, it might be worth hiring an investment banker. If you want a list of the best ones, we are happy to make some referrals.

A deeper dive

Here is a more detailed description of the data and documents that you’ll be asked for during the process and what investors are looking for as they dive into the data.

Annual financial statements
Aka: How is your business performing?

Your annual financial statements provide a high level year-by-year snapshot of how the business has progressed and indicate its overall health. In early stage diligence, the last and current year statements should suffice. In later stages, investors will likely ask for a more historical view and may have the numbers assessed by an accounting firm.

The biggest things investors are looking for here are: revenue, revenue growth, gross margins and profits. For earlier stage firms, growth and gross margins are most important. Investors will want to dig into trends, as well as the anomalies. If you had a dip in revenue or margins during one quarter or year, be prepared to discuss why.

Come to the table ready to explain how your gross margins are being calculated. Investors will want to know exactly what costs are being included in the cost of goods sold (“COGS”) or cost of services (“COS”). COGS should include all direct labor costs and software costs required to deliver services to your customer.

The waters get muddied when companies split billable and non-billable time for delivery employees between COGS (direct expense impacting gross profit) and operating expenses or “OPEX” (indirect expense impacting overall profitability). It’s generally cleanest to allocate all costs for revenue generating employees (e.g. delivery) to COGS.

Financial projections
Aka: How much growth are you planning?

Financial projections are a way of forecasting your business’s income and expenses into the future. Ideally, you’ll come to the table with a three year projection but at minimum investors need to see a one year projection.

Financial projections help investors understand how you’re planning to grow the business organically before any investment. They’re looking for realistic growth numbers based on what has been achievable in the past. Smart investors will be looking for how they can add value to your business so that it grows faster and more profitably than you could have achieved on your own.

Detailed capitalization table and options schedule
Aka: Who owns what?

A capitalization table — cap table for short — is a detailed breakdown of who owns what shares in a company. An options schedule details when (and for whom) shares vest. Both of these documents are necessary for investors to understand who has economic interest in your company, to determine if an option pool will need to be created or expanded, and to calculate their ownership once they make the investment.

If you don’t have a cap table, then now is a good time to create one. As one of the most important records for your company, it’s critical to memorialize and keep current the ownership interests in your business. In theory, you can create and manage your cap table in Excel, but because cap tables can become complicated quickly (and because it is very important they be error-free), we recommend cap table software, such as Carta.

You also should consider working with a startup company lawyer, especially if you are thinking of raising capital or creating an option pool. More advice on how to think about option pools can be found here.

Revenue by client and revenue mix
Aka: Who is buying which services?

Investors will want to see a breakdown of your client base and your revenue mix (e.g. time and material professional services, fixed fee professional services, license resell, etc.). The breakdown of your customers should be a little easier, as hopefully you have some of this information in your CRM system. The level to which you break it down and report might vary. Your revenue mix might be a little more difficult if it’s tracked in multiple systems, but is just as important.

The combination of revenue by client and revenue mix helps illuminate your client concentration, which clients value your services, and which services they buy. This helps an investor evaluate both opportunity and risk in the business. For example, in an IT services business an over-reliance on resell revenue means customer loyalty might be less sticky. If customers can buy a license cheaper from another vendor, they might switch. By contrast, if your company sells mission critical services to loyal, repeat clients year after year, that relationship is much stronger.

Investors are also looking for client concentration. If a disproportionate amount of your revenue is tied up with one client, that presents a lot of risk if something happens to that one client.

Operational metrics
Aka: Can the business sustain its growth profitably?

Every type of business has a handful of operational metrics that are vital to success. Investors need to know that key operational metrics are solid today, and that it’s in the right shape to grow profitably and sustainably into the future. If financial projections point to 100% growth in the coming year, but reocurring revenue or backlog is minimal, that’s a red flag.

We could write a whole separate blog on IT services operational metrics (and probably will), but at a high level the most important metrics are: bookings, backlog, utilization, pipeline, headcount, employee attrition, revenue per employee, bill rate and customer satisfaction.

Tax information
Aka: Are there any outstanding risks?

At some point in diligence, you will need to provide corporate tax returns and other tax documents. Investors are looking to understand if there is tax liability exposure before they make an investment, and will generally hire an accounting firm to do the evaluation.

The tax accountant will review the company’s tax accounting methods, federal, state, and foreign tax filings, and sales & use tax filings. They will also want to review the company’s organizational structure to determine how the company will be treated post-transactions for federal, state, local, and foreign tax purposes.


If that seems like a lot, it’s because it is. Which is why we advocate knowing what’s going to be asked and working over a period of time to make sure you have the data and documents in order. Even if you don’t immediately pursue funding, knowing this data matters will help you plan more effectively.

It also helps to bring in a trusted team member who can help you analyze, explain and package the data, and to let your external tax advisor or accountant know if you’re planning to take an investment. They can be an invaluable resource for founders who still need to focus on running and guiding the business.

Next up in the series: Telling your story.

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