How To Draft a Winning Private Placement Memo

Moving on up, or more commonly phrased as “taking your business to the next level,” is the intention of virtually every company, startup or entrepreneur’s dream. While going it alone or bootstrapping may be the goal of many, in more instances than not help is required from outsiders. Running any kind of business takes loads of cash, which can quickly be depleted by the standard expenses all businesses face — payroll, rent, insurance and advertising, among many other financial obligations.

Many businesses — large, small and in between — make slim to no profit, particularly in the early phases of operation. Often, an influx of cash is required for growth, expansion and research and development (R&D) purposes. Being able to properly connect with the right investor to secure outside funding is a mandatory step for growth.

There are plenty of VC firms that are in business to finance (and get a slice of the pie from) companies that they feel are likely to grow — but there is also plenty of competition from other companies on their way up. Being able to get the attention of those who have the checkbook is vital. And a lot of that depends on being able to craft (and share) a well-written, persuasive private placement memo.

What Is a Private Placement Memo?

A private placement memo (commonly abbreviated as “PPM”) is a legal document drafted by the company seeking financing and provided to potential investors with the intention of presenting detailed information on its financials, company specifics and other relevant data (more on that below).

Other terms for a PPM include “offering memorandum” or “offering document.” A PPM is typically used in transactions that are considered “private” (meaning it is not a public company where its securities are registered in an exchange).

What Differentiates a Private Placement Memo From a Business Plan?

Although somewhat similar (and both have a lot of overlapping information) a PPM serves a different purpose than a standard business plan. A company’s business plan is essentially a detailed document that defines the company’s business core competencies, its objectives and how it plans on reaching those goals. A business plan typically has much less information than a PPM in the areas of financial data, company organization and marketing details. In short, a business plan is more or less a road map for its goals and objectives.

In contrast, a PPM places more emphasis on the financial aspects of the company and less on its marketing objectives and corporate structure. This is vital information for investors to make an informed decision on any financial input that may occur. It is far more of a legal and financial document than a standard business plan.

One of the PPM requirements is that it does a deep dive on financial and other legal issues that may (or may not) have an impact on future results. The PPM also includes information on the terms of the offering (what investors can expect for their input), any legal information (SEC disclosures, state or local regulations), a breakdown of risk factors and quite often the contract, which defines the legal terms of the transaction between the target company and the investor.

What Tools Should You Use?

Before the internet came of age, legal activity, which almost always included information that was confidential and proprietary, required a brick-and-mortar “data room.” Anyone connected with the business transaction would have to gather in one place in order to keep the sensitive information confined to a single location. This allowed only those with a reason to be there to access any documentation that referred to the transaction.

However, in today’s wired business environment, the idea of a physical location for legal and financial transactions is no longer a stumbling block in the process. With that change, gone are the strict physical controls needed for allowing only certain parties to access the appropriate hardcopy documentation.

Virtual Data Rooms

Now, more and more transactions are handled online — with users that can conceivably log in from any part of the globe. With business being done remotely, a new type of data room is required, one that cuts both expenses and time required in order to complete the transaction.

This online “room,” known as a virtual data room (commonly abbreviated as VDR) is an online room where companies can store, share and access sensitive and confidential data. A VDR gives administrators tremendous security options, including allowing certain parties to access only certain documentation, and timestamp and tracking options, which certainly streamlines and expedites any of these types of transactions.

Discover what information to include in an investor data room.

In Conclusion

For any company working on (or even planning) an M&A and drafting a private placement memo, partnering with a trusted third-party data room provider will help streamline the process, both logistically and financially. For all parties involved in the transaction, having access to the VDR will be a vital component to move ahead with the legal and financial process. It will allow the sharing of information to proceed smoothly and securely and will deliver peace of mind for everyone on both sides of the table.

Start your free trial to see how Caplinked can help secure your transactions through virtual data rooms.

Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.

References:

https://investmentbank.com/private-placement-memorandum/

https://www.investopedia.com/terms/o/offeringmemorandum.asp

https://www.thebalance.com/what-does-a-private-placement-memorandum-require-4176213

https://www.nolo.com/legal-encyclopedia/what-is-private-placement-memorandum.html

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