Startup PPM – Best Practices for Startup Private Placement Memorandums
You are a startup and whether you are in the “pre-revenue” or just beginning to ramp, you are likely raising capital to fuel your nascent stage startup and you are trying to understand how your startup PPM (private placement memorandum) should be constructed. While there is no significant distinction between best practices with regard to the structure of a startup PPM and a PPM for advanced stage enterprises, there are nuances that need to be addressed given the fact that your pro forma (i.e. financial statements and related projections) are likely to be “light” within the context of having a substantial balance sheet or income statement.
A startup PPM, like every other PPM, incorporates the material elements of your business plan (aka “Information Memorandum“) or at minimum, your Executive Summary. In many cases, the Information Memorandum is an Exhibit to the PPM, as the “IM” provides your prospective investors with a comprehensive road map as to your intended business model, marketing and sales strategies, company management backgrounds, use of proceeds, projected revenue and profit forecasts and prospective ‘exit strategies.’ The PPM itself re-purposes the critical elements of the business plan, also referred to as ‘feasibility study’ and is otherwise the document that frames the terms and conditions of the offering–“how much for how much.” Startup PPM documents often frame the investment opportunity provides for the purchase of an equity stake in the enterprise, which can be inform of shares if the entity is a C Corp, or Units if the offering entity is a Limited Liability Company (aka “LLC”). Startups also raise capital by borrowing money through the sale of debt or notes-which provides investors with a fixed rate of return on their capital throughout a specified period of time. Notes are obligations on the part of the company and can be secured with certain collateral in the event the company is unable to pay interest on the debt or repay the principal amount upon the maturity date of that note. Unsecured debt precludes the lender from attaching a lien on specific assets of the company, but does position the lender as a creditor in the event of a default or an actual bankruptcy.
The decision to raise capital via debt as opposed to selling equity in the enterprise is generally made only when the management has a high degree of confidence that revenue generated can satisfy interest expenses on those notes or if the company has significant material assets, such as unencumbered real estate holdings or Intellectual Property in the form of patents that are deemed to have significant value that can be monetized through the sale of those patents or through the licensing of the underlying intellectual property.
Irrespective of the type of instrument being offered to investors, any Startup PPM will be advanced to prospective investors after those investors have reviewed your “Presentation Deck”, also known as Pitch Deck. Presuming you have assembled what is best described as a compelling, but otherwise compressed version of your comprehensive business plan, your prospective investors should then expected to be provided with your IM and thereafter, they will ideally ask for the PPM, which includes a subscription agreement and accredited investor questionnaire.
The team at Prospectus.com LLC has extensive experience preparing a full spectrum of documents that startup entrepreneurs are expected to advance in the course of framing their investment opportunity towards raising capital. Our in-house team and captive consultants work with startup entities across multiple silos, including technology startups within the fintech, medtech, martech, adtech and blocktech aka blockchain arenas, as well as startups introducing innovative consumer products and emerging cannabis enterprises. We also have domain expertise and support those in need of a feasibility study for a real estate project, a restaurant concept or those seeking to raise capital for a destination venue such as a hotel or theme park. Projects that we are engaged to assist in can include preparing the information memorandum along with the pitch deck and the crucial Startup PPM document.
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