The Importance of a Private Placement Memorandum

Many new businesses fail during the raising capital stage because of a lack of proper documentation.  This is due to many factors but the most likely are unprofessional marketing materials.  The following fall under that category and are key to getting start-up funds:

Business Plan

Private Placement Memorandum

• Investor Presentations

 

Since all of these three factors are extremely important when pitching to investors, it can be noted that if they are unprofessional then they will be rejected. 

Private Placement Memorandum

A Private Placement Memorandum is a necessary part of the documentation that new business owners must present to investors.  However, a vast majority of new business owners don’t have a clue as to the details of preparing such documentation.  Unfortunately, this lack of knowledge will keep you from being able to raise capital.  Therefore, this article is designed to help answer some of the questions surrounding the Private Placement Memorandum.  Hopefully, this will allow you to avoid some of the common errors.

Hiring a PPM Author

Honestly, it’s best to hire a professional to write your Private Placement Memorandum if you’re new to the idea.  Just be careful not to hire the wrong person.  In this field, cheapest is not usually the best way to go.  Finding the cheapest PPM author is one of the biggest mistakes made by beginners.  It usually goes like this: the owner hires the cheapest author and then wonders why they can’t get an investor to fund their 60 or 70 page stack of papers.  The reason is that there are different PPM for different investors.  You have to do your homework, obviously the cheapest man on the market is not gonna do that.     

What Does a PPM Do?

The use of a PPM is different, depending on what type of investor you are preparing it for.  Therefore, it’s best to go into both types in greater detail.

Venture Capital Firms

A Private Placement Memorandum for Venture Capital Firms must be written in a more equity control and technical language as this is the ears that the report is most likely to fall on.  With this type of firm, you want to offer them a shareholder’s dream.  You’re offering them discounted stocks and within a year, once you go public, the ability to sell these shares to the public for a 4 to 5 times profit. 

Angel Investors

A Private Placement Memorandum for Angel Investors must be written in a different tone.  Since Angel Investors normally have portfolios worth less than a million dollars, they need to get in and out of transactions much faster than Venture Capitalists.  Therefore, you need to promote what is known as “selling shareholder offering”.  

Now it’s easy to see why it’s a good idea to know who you’re pitching to before preparing a Private Placement Memorandum.  In fact, it’s a critical mistake to prepare this documentation before researching your target investors.  And this is one of the biggest mistakes of new business owners.  So now, maybe you can keep from making this one mistake that could cost you your business!   

About the Author: Gary Trump has been raising capital for over 20 years. In that time, he has gained a huge amount of knowledge about raising capital. As a entrepreneur , it is his goal to see that all businesses have a chance to grow, and he is  sharing his knowledge with you, free of charge. For more information on Business Financing please visit Gary at www.freecapitalraise.com

Photo Credit: photosteve101

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