If you have completed your business plan and are now ready to raise money you need a PPM. Unlike the article I wrote last month about seeking loans that are convertible to stock, this is a straight up offering to sell stock in your company. You can download various versions of the Private Placement Memorandum off any legal website or contact me and I’ll email you a blank copy in WORD.
Why I love the PPM…let me count the clauses.
First things, first; tell them who you are, where you are, and how your company is organized: [your company] is an [blank] company based in [blank], [your state], organized [when] ago by [your executive team] who currently serves as its officers and board members. The principal business of [your company] is [what….] [your company] was incorporated under the laws of [state] on [date], and has its principal offices at [your legal address]
DESCRIPTION OF OFFERING
The company hereby offers an aggregate of [#] shares of its common stock for sale at a price of $___ per share. The Description of Offering is a three paragraph overview of the deal, how many shares are being offered at what price. It also sets out how many shares have already been issued to the founders and current stockholders. Most PPMs escrow the funds. Let’s say you are raising $3 million: The investors’ money is held in a bank escrow account until at least $1 million has been collected and deposited. That is referred to as the “threshold”. Once $1 million has been raised the funds can be released to the company for its use. If the offering fails to produce a minimum of $ by [specific date], the sale will be cancelled and the deposits will be returned to the subscribers, with interest at a rate of __% from the date of deposit. This protects the interests of the early investors should the offering fail to raise the threshold amount.
USE OF PROCEEDS
The proceeds of the offering will be budgeted for a variety of different purposes. Management presently contemplates the following allocation of the proceeds from this offering: This is a clear and succinct statement of how you plan to use the money.
CONTROL & DILUTION
The shares of stock that are being offered through this prospectus represent __% of the total shares of the company. If the offering is completed, [current stockholders] (who currently own 100% of the outstanding shares) will own __% of the shares, and will remain in control (usually) of the company. This section goes into the details of who currently holds the stock and the value of those holdings. It also lays out the rationale for the current stock price and the price point of the offering being made.
DESCRIPTION OF THE BUSINESS
This is information that is excerpted from your business plan. It is usually no more than a page or page and a half. It covers the origins of the company, a short description of its product/service, the compelling reason for its existence, sales and marketing aspects, and competitive landscape. Again, brevity is beautiful here. This is basically your “elevator speech”.
MANAGEMENT, BOARD OF DIRECTORS & KEY EMPLOYEES
This is the easiest section to fill out. It should have three sub sections, your executive management team (usually the founders), your board of directors (if any) and your key employees; [company] currently employs __# individuals, in addition to [management], and hires other individuals on a part time or commission basis for sales, editorial work, production, design and other matters. Once again it pays to be brief here, no more than 200 words to describe the background of each person. You are not trying to impress your potential investors here, that’s what your business plan is for.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the company consists of [#] shares of common stock, the only class of stock authorized to be issued. Each share of common stock of the company, when validly issued and outstanding, is entitled to one vote on all matters to be voted on by stockholders, to equal dividends and to a pro rata share in the company's net assets in the event of dissolution, liquidation or winding up of the company. Shareholders are entitled to cumulative votes for the election of directors. The common shares, when fully paid, will be non assessable and are not subject to any liability for further call and have no pre emptive subscription rights as to any securities of the company. This clause basically sets forth the rights of the stockholders.
Under this section you also provide a “Cap Table” which sets out the capitalization of the company prior to the offering and after the offering, assuming that you will attract sufficient capital to sell out your entire offering.
This is the part of your offering where you try to scare your potential investors off. It states that this is NOT a tax shelter; the market for the shares will be highly limited; that the company does not plan to pay “significant dividends” in the near future; that the investors should be prepared to hold this investment for a very long time; and that this venture is almost entirely dependent on the talents, experience and business relationships of the founders – and should anything happen to them that this entire business could close up shop. Still want to invest? You also have to explain in this section that the founders hold a vast majority of the shares and therefore almost 100% control over the business. Any rights that new shareholders have must be set forth in a separate shareholder’s agreement.
That’s about it. The Private Placement Memorandum is your business plan in a nutshell, with a very specific request for funds attached. Your PPM needs to be accompanied by a Subscription Agreement. The Subscription Agreement is the document that the investor fills out and states among other things that they are a “Qualified Investor” with substantial financial holdings and know the risks that they are taking with this investment. The investor can either attach a check to the Subscription Agreement, or more often wire funds directly into your escrow account.
For those of you unfamiliar with corporate finance even these simple documents can seem complex, but for financial professionals like us, and most attorneys, these documents are simply tools of the trade. If you have a compelling business venture you will want to attract investors — and they will want to give you money. My beautiful little PPM is one of the tools you will need to get this done. If you feel that you could use some guidance through the process, please feel free to call on us.