Preparing your company for a financing round: A privacy action plan

As privacy and cybersecurity risks become more material to business operations, investors are no longer viewing data protection as a peripheral concern — they're treating it as a core indicator of a company's readiness to scale.

For companies preparing to raise capital, how personal data is managed, secured and governed has become a critical factor in the investment calculus. Robust data practices can directly impact valuation, negotiation leverage and overall deal certainty. This is particularly true for companies in data-intensive industries, such as direct to consumer businesses, software as a service vendors, the burgeoning artificial intelligence space, and regulated entities in the financial or health care sectors.

In today's regulatory environment, where enforcement actions and class-action lawsuits are on the rise, weak data governance can invite serious consequences — regulatory penalties, reputational damage, operational disruptions and a stalled deal process.

On the flip side, companies that demonstrate strong data protection and compliance practices can stand out in a competitive fundraising landscape. They not only reduce friction during due diligence but also signal to investors that they are built for sustainable growth and resilient operations.

There are five key actions every leadership team should consider taking to strengthen their data protection posture ahead of a financing round.

Conduct a data protection audit and remediate compliance gaps

Investors increasingly view privacy compliance as a threshold issue — an early litmus test for a company's operational maturity and risk posture. During diligence, companies are expected to clearly articulate what data they collect, how it's used and shared, and how they comply with evolving privacy laws.

Falling short in this area doesn't just raise red flags about potential regulatory exposure, it casts doubt on broader internal controls and the company's overall approach to risk management.

Conversely, a well-defined and proactive privacy program can serve as a competitive differentiator. As customers and partners grow more privacy-conscious, strong data governance isn't just a compliance requirement — it's a strategic asset.

Recommended actions:

• Map data flows across systems, vendors and products, and ensure compliance with cross-border data transfer rules across relevant jurisdictions — particularly with the EU or other privacy-conscious regions.
• Categorize and safeguard data across its life cycle — collection, processing, retention and deletion.
• Identify applicable laws: U.S. laws, including marketing laws such as the CAN-SPAM Act and the Telephone Consumer Protection Act, and sectoral laws such as the Health Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act, the Family Educational Rights and Privacy Act, the Children's Online Privacy Protection Act, the Video Privacy Protection Act, the Fair Credit Reporting Act and others, as well as the slew of state consumer health privacy and comprehensive privacy laws like the California Consumer Privacy Act; European and U.K. laws including the General Data Protection Regulation and the ePrivacy Directive; and other international regimes, such as Brazil's General Data Protection Law, and China's Personal Information Protection Law.
• Engage counsel to conduct a tailored assessment of data practices against legal obligations and industry standards.
• Document compliance efforts, remediations and risk mitigation steps. These materials will be reviewed during diligence.

Maintain a comprehensive, accurate and up-to-date privacy policy

A privacy policy is the storefront of the privacy program, often the first document investors review. If it is inaccurate, outdated or incomplete, it may signal broader compliance deficiencies or exposure to regulatory enforcement.

Inconsistencies between a company's actual practices and its public disclosures have led to investigations and enforcement actions.

In privacy, the key is to say what you do and do what you say.

Recommended actions:

• Ensure the policy clearly discloses the categories of data collected, the purposes of processing, data sharing practices and user rights — such as opt-outs and data access and deletion requests.
• Update the policy in response to changes in law or business operations.
• Make the policy easily accessible, clearly written and consistent with disclosures made elsewhere — for example, in product interfaces, consent banners or terms of service.
• Align internal practices with public statements and ensure consistency in that alignment as practices change and evolve.
• Where necessary, provide a "Notice at Collection," a "Do Not Sell or Share," or "Privacy Choices" link, and a "Consumer Health Privacy Policy."

Implement a robust cybersecurity program

Cybersecurity is no longer just an information technology concern — it's a critical business risk that directly influences a company's ability to secure financing.

High-profile breaches and escalating regulatory enforcement have made investors acutely aware of the potential fallout from inadequate security practices. A single cybersecurity incident can materially impact valuation, delay a deal or create costly post-close liabilities. As a result, investors are looking for evidence that a company has implemented reasonable, risk-based security measures aligned with its size, industry and threat landscape.

Failure to demonstrate even baseline controls — such as formal policies and procedures around access management, vulnerability monitoring, incident response planning and employee training — can signal operational immaturity and expose the company to reputational, financial and regulatory risk.

In contrast, a well-designed and well-documented cybersecurity program instills confidence. It tells a story of a leadership team that understands its risk environment and is proactively managing it. Beyond reducing friction in the diligence process, a sophisticated security posture can serve as a competitive edge, especially in industries where data integrity and customer trust are paramount.

In today's investment climate, cybersecurity isn't just a cost center — it's a value driver.

Recommended actions:

• Implement security controls, including encryption, multifactor authentication, access controls, penetration testing and regular patching.
• Maintain a documented and tested incident response plan. Be prepared to provide details on incident reporting procedures and roles.
• Evaluate and audit third-party providers and include appropriate data protection terms in vendor contracts.
• Conduct regular employee cybersecurity awareness training, including phishing simulations and secure handling of sensitive data.
• Engage reputable third parties to conduct penetration tests and vulnerability scans, document and remediate issues promptly, and maintain comprehensive logs to monitor potential threat activity.
• Implement physical safeguards like securing infrastructure and establishing protocols for asset disposal and restricted access areas.

Tip: Maintain documentation of policies, training records, assessments and corrective actions. Investors often request this as part of diligence.

Evaluate and document AI use

As the use of AI and machine learning expands, so too does regulatory and investor scrutiny. Investors increasingly expect companies to understand and mitigate the intellectual property, privacy, fairness and explainability risks associated with these technologies. This is particularly important for companies in regulated industries or those using personal data in consequential decision-making.

Recommended actions:

• Conduct risk assessments for AI models, including evaluations of privacy impact, bias and explainability.
• Understand the nuances of various licenses available from and signed with leading LLM providers, such OpenAI, Meta, Google, Anthropic and Microsoft.
• Identify and document whether personal data is used in training datasets or model outputs.
• Ensure that data subjects are informed of automated processing where required, and that appropriate consent, opt-out, and/or human review mechanisms are in place, particularly for high-risk or consequential decisions made or assisted by an AI system.
• Implement an AI policy and governance structure to encourage awareness and manage risk throughout all levels of the organization.
• Stay abreast of emerging regulatory frameworks, including the EU AI Act, Colorado AI Act and industry-specific guidance.

Monitor and mitigate litigation exposure from consumer tracking tools

Class action litigation related to privacy practices — particularly in the U.S. — has increased significantly. The plaintiffs' bar has targeted companies over the use of session replay tools, cookies, chatbots and pixels, often alleging violations of wiretapping statutes or state privacy laws. Collection and use of biometric information, even of employees, triggers strict scrutiny under biometric privacy laws. Investors are increasingly aware of these risks and may flag potential exposure as a diligence concern.

Recommended actions:

• Audit use of third-party tracking technologies on websites and mobile apps.
• Provide clear, conspicuous disclosures and obtain consent where legally required — particularly in two-party consent states such as California.
• Avoid default deployment of tools that record user interactions without proper notice.
• Consult regularly with privacy counsel to monitor litigation trends and adjust practices accordingly.

Final thoughts

Preparing for a financing round demands more than polished pitch decks and optimistic revenue projections. Today's investors are paying close attention to how companies manage privacy, cybersecurity and AI — areas facing intensifying scrutiny from regulators and plaintiff attorneys worldwide.

But effective risk management involves more than just checking compliance boxes. It's about showing operational maturity. Demonstrating a strong, proactive approach to privacy and data protection signals that your company is not only ready to scale but built for long-term resilience. This can accelerate the diligence process, build investor trust and ultimately enhance your valuation.

By addressing these critical issues early, you not only minimize the risk of unpleasant surprises during diligence — you also craft a narrative that sets your company apart as a responsible, forward-thinking data steward.

Jacqueline Klosek is a partner, Omer Tene is a partner, Federica De Santis, CIPP/E, CIPP/US, is a counsel, and Reema Moussa is an associate at Goodwin Procter.