What documents do I need to raise Private Equity?

Entrepreneurs may be overwhelmed and somewhat suspicious of the fees and services that investment banks and other financial service providers offer them, in pursuit of private equity. Below are the commonly needed documents, with explanations to help entrepreneurs figure out what services are appropriate.

1) If you plan to approach any investors (accredited individuals or institutions), you will want a one-two page executive summary and a PPT. The first is used by your or your sales people as a hand-out or with e-mails, to ascertain general interest, and therefore it needs to be brief. No investor wants to receive a 60 page business plan out of the blue. The second is used for meetings. You can design a PPT so that slides can be added/deleted for 10, 20, and 30 minute presentations. The PPT for investors is NOT the same as a PPT for any other kind of sales or marketing. It defines the market potential of the company's niche and why the management team is the right one to marshal the investor's money better than other companies making the same pitch.

2) If you plan to approach institutions, you need to develop what is called a Disclosure Document. This is a business plan plus information pertinent to institutional investors. It is usually briefer than the PPM that follows, because institutions are regarded as more knowledgeable investors, and because they will determine the terms of the offering, not the entrepreneur.

3) If you plan to approach accredited individuals, you need to develop what is called a Private Placement Memorandum. This is a business plan plus information designed by the SEC to protect investors by describing in detail the risks associated with investing in this industry and this company, and detailed descriptions of how much is to be raised, the uses of minimum/maximum funds if raised, and protections of money. The protection is an escrow account with two signatures. The money is not released to the company until a defined minimum is raised. In addition, the PPM includes a subscription document, to ensure the suitability of the investor for the risk of an illiquid investment. The PPM has a time limit, usually 3 – 6 months, after which the offer is no longer valid and any moneys are returned to the initial investors if the minimum was not met.

Naturally, you can revise your executive summary and PPT in response to market feedback. However, once you publish a PPM, you may not change the terms during the offering period.

Only about 5% of start-up companies secure funding beyond the friends and family stage. So entrepreneurs should think carefully about the best use of their time and money. Early stage companies pay more, in terms of a percentage of the firm, for equity than do later stage companies, which can negotiate better terms. So an entrepreneur who pend all his time chases capital at the expense of expanding sales is setting himself up for less attractive investment terms.

There are numerous business writers who write business plans. There are fewer that write DDs and PPMs, and they are usually securities attorneys and investment bankers. This is because the securities industry is so highly regulated, that relatively few people know what entrepreneurs need, what investors want, and what the SEC requires, to protect both the entrepreneur and the investors. The costs vary across the country and across professional designations. For example, an investment banker who is engaged to sell the deal and who will receive a commission for moneys raised, may undercharge for the time spent writing the PPM or DD, whereas an attorney or business writer cannot accept a contingent fee, and therefore needs to charge his or her hourly fee for writing.
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tags: Articles |  Entrepreneur |  Investment |  PowerPoint Presentations |  Private Equity