Posted on January 7, 2013 @ 08:14:00 AM by Paul Meagher
After an investor contacts you and have exchanged initial pleasantries, the investor might ask your for a memorandum of offer, also called a private placement memorandum (PPM). They might ask you for such
a document as part of the due diligence required to finalize any deal with you. You have the option of getting an attorney to put one together for you. The advantages of doing this are that an experienced
corporate lawyer will know what should be in the document and will include all necessary legal provisions to protect the parties involved. The downside it that this might cost more money than you are prepared
to fork over, especially, if you are looking for capital in the first place.
Another option is to find a site that offers downloadable PPM templates (often in Microsoft Word format). Usually these PPM templates are not free and include generic legalese that you can chose to incorporate into
your document or not. Purveyors of such templates will generally add a disclaimer that you should have an attorney review the final document; supposedly saving you money because the lawyer only has to review the document and not create it from scratch.
A final option is the do-it-yourself approach in which you use your own common sense to figure out what sections should be included in your PPM document and you add a few paragraphs to address each major section of the PPM document. I'm by no means an expert on developing such PPM documents so what follows is some
cobbled together information on what should be included in such documents. Some templates want you to include your business plan as part of the document but my feeling is that this should be a separate document or you risk having a document that is too long for an investor to want to read. Also, I think you can forgo alot of the legalese that makes for an unreadable bloated document and use plain english when
you complete each section. Include a legalese section at the end if you want rather than bloating the document with it.
So here are some sections that you might want to include in your memorandum of offer document. The document is designed to give the investor a clear sense of the current and future financial state of the company. It provides key information that an investor will need in order to conduct due dilligence on your company prior to making an investment. It is a disclosure document where you reveal your companies financials and operational data so the expectation is that you are being completely honest and are not leaving out any financial or risk data that may later come back to bite you or the investor. As a "memorandum" it should not be an overly long document; 10 pages or less would be best if you want the investor to read it and respond quickly. You can cherry pick parts out of your business plan to include in this document if you want.
So here is one suggested structure for the document contents:
- Summary: Synopsis of the offer and the type of company making the offer.
- Risk Factors: Disclose any risk factors relevant to the offer or the company.
- Use of Proceeds: Describe in specific terms how the money will be used.
- Capitalization: Where is the company at finanically. Company assets and liabilities.
- Dilution: Disclose whether other investors have a stake in the company.
- Selected Financial Data: Provide some financial data regarding the company and the product/service offering.
- Analysis of Financial Condition and Results of Operations: Provide some insight into the financial state of the company,
historical revenues, projected revenues, costs associated with the operation.
- Business: Provide some market/competitive data regarding the proposed product/service offering.
- Management: Provide information about the Management team. Include compensation amounts if relevant.
- Principal Stockholders: List any persons, companies, or major partners with a stake in the company.
- Description of Securities: Provide a formal characterization of the what is being offered to investors. If you
are selling a part of your company as so many shares at a given price, then this is the place to spell that out.
- Terms of the Offering: Describe any specific conditions or restrictions on the offering.
I encourage you to google "private placement memorandums" and based on your own research refine what I am suggesting should be included in a PPM. The important point is to have a document that investors can refer to in order to gain a better understanding of the offer and the financials of the company.