Bringing in Investors
How to Create an "Offering Memorandum"
By Bill Tuller (click here to view the original article)
Overview
In order to attract investors you will need to prepare a sophisticated looking document that describes the investment opportunity and discloses the risks.
- Investors will not be interested unless you can convince them that it will be a sound investment. Typically potential investors are not stupid. They will not give you money unless they believe that you have the needed experience and you can convince them that you have carefully thought everything out
- It would be foolish for you not to disclose all know risks. If you don't do that you could face personal liability if the business loses money after the investment has been made.
The Offering Memorandum includes enough information about your business for an investor to make a decision on whether or not they want meet with you. The Offering Memorandum has the following main sections:
- Executive Summary
- Offering
- Risk Factors
- Company Description
- Financials
- Management
- Description of Capital Stock
- Investment Highlights
Components of an Offering Memorandum
Executive Summary:
The Executive Summary is usually one page in length. After reading the Executive Summary, an investor should be able to understand the business you are in, your products or solutions, the market for your products or solutions and how you are attacking the market to bring in revenue. You may want to include a financial summary within this section to quickly help an investor understand the size of your company.
Offering:
The Offering section describes how much capital you are planning to raise. Filling in the Price information is not necessary if you are unsure of the value of your company. If an investor is interested in your company, they will give you their own thoughts on valuation, but have a range in mind with which you are comfortable. Investors will also want to see the Current Capitalization Structure and the use of Proceeds.
A note on Use of Proceeds: investors like to see the capital used for investment into the company. A red flag is raised for an investor if the proceeds are used to pay off an existing loan or used to buy the securities of an existing investor who wishes to sell.
Risk Factors
Risk Factors are included to protect the company. Risk Factors are explicitly given to potential investors so they understand all of the risks in an investment in the company. If you are just presenting your Business Plan to an investor and do not have specific offering terms, a risk factor section might not be necessary.The types of risk factors to be disclosed might include things such as:
- Market risk. Risk of loss because of adverse changes in the market for the security or the factors that determine the value of the security.
- Impact of the business cycle. Implications of an economic downturn.
- Credit risk. Risk of loss as a result of the default of creditors or counterparties.
- Business risk. things such as increased levels of competition, product development delays, barriers to entry or access to finance.
- Liquidity risk. The risk that investors might be unable to exit or realize their investment because the market for the securities is illiquid, because of the terms of the security or because the issuer cannot
meet its obligations under the security.
- Operational risk. The risk of loss from fraud, systems failure or a legal issue (including enforceability of contracts, status of intellectual property rights and breach of regulatory requirements).
If an attorney or private equity professional is assisting you with your Offering Memorandum, they like to include a Risk Factor section to protect themselves as well. Have an attorney review or produce your Risk Factor section.
- HERE is a link to a good article about how to disclose risk in an offering memorandum
Company Description
The Company Description helps the investor understand your business. Include an Overview, the Market Opportunity for your business, the products or solutions you are selling, and your company strategy for the future at a minimum. Information on customers, partners and the competitive environment is also important.
Financials
The Income Statement and Balance Sheet should be included in the Financial Section. Investors usually like to see historical income statement data from the previous three years (if they exist) and projections going out two to three years. In today’s difficult economic environment, investors will not give you credit for huge increases in sales ten years from now. Investors also focus on the Quarter that just ended and the Quarter you are in. investors want to know if you met your projections last quarter and if you are going to hit your projections in the coming Quarter. Obviously, you lose credibility if you project overly optimistic results for the coming quarter and you fall far short of those projections.
Management
The management section should demonstrate the industry experience, leadership skills and business acumen that you and your team have. Do not worry if you have a few unfilled management team positions, all early stage companies have this problem. However, investors are looking for a CEO that has the vision for the company’s future as well as the management skills to run day-to-day operations. Investors also want to see someone on the management team that will be responsible for selling the product or solution to drive revenue. Also, if your company already has an influential board member or investor, make sure to highlight that fact.
Description of Capital Stock
Again, if you are only presenting a Business Plan, this section is not necessary. However, if you are undertaking a formal offering, investors will want to see the types of securities already in your capital structure and the types of rights these existing investors have. Also, if you have not settled on a valuation to put in your offering memorandum, you would not include a post offering view of the capital structure since it would depend on valuation.
Investment Highlights
As its name implies the Investment Highlights section helps potential investors understand why your business is a good investment. Call out your strengths in this section. Highlight how your management team plans to attack your market and generate revenue.
Bill Tuller is a second-year MBA student at UNC's Kenan-Flagler Business School. Additional documents and guides can be found at http://www.venturepresentation.com. .
CAUTION - Securities Law Compliance
- Bringing in an investor means giving the investor an ownership interests in your company
- An ownership interest given to an investor is considered a "security" under state and federal law and MUST first be registered before being sold UNLESS that security is covered by an exemption.
- CLICK HERE for an article about the available registration exemptions.
CLICK HERE for another good article about preparing an offering memorandum