What is Your Private Placement Memorandum Deal Structure?

Remember that as you flesh out your ‘deal,’ it needs to contain keywords that prospective investors will be searching for. These keywords must also be on your website, in your Private Placement Memorandum, and used in your Google AdWords Campaign.

• What’s the DEAL to Find Investors?
  Properly educating a prospect about your project’s details takes a great deal of time, several hours at the minimum. You cannot talk with every potential investor and tell them your story. You need to offer ‘prospects’ a deal structure in which the key points can be pitched in a short telephone call or email. A “deal” that is financially attractive and makes them “want to” read your Investor Offering Documents. There are many ways to conceptualize and structure a deal to create excitement with prospects. Remember, your deal must incentivize the prospect to read your Private Placement Memorandum Offering documents.
• The ‘deal structure’ becomes very important because it is directly tied to your Investor advertising strategy and the use of keywords in your ads.
• Is the company organized as an LLC, Corporation, or LP?
  I usually recommend an LLC. In new companies, offering the opportunity for earnings payouts or dividend payouts can mean the difference between the investor writing a check or not. The LLC provides the best vehicle for this since it avoids the double taxation inherent to Corporations.
• What date did you organize?
  Don’t use an old company. You then will need to explain the differences in dates. A new company is easy and cheaply organized.
• What State did you file? (Example: INDIANA)?
  Use the state you will operate in. It is easier and less headache than organizing out of state unless you have a good reason. You can always change it in the future.
• What is the exact legal name of the business?
  When organizing the company make sure you ‘lock up’ the website URL name simultaneously. Also, write it down for later. You are raising money from investors and need to get the name right in your Offering Documents.
• What is the business address?
  Initially, you can use your home address and modify it later.
• What is the name of the “Control Person”?
  Persons with 10% voting interest or more is deemed a control person. List the shares/unit amounts they own.
• Who will be the CEO / Member Manager for an investor to direct questions?
  Make sure you provide their CV (resume/curriculum vitae) in your business plan.
• What is the email address of the CEO /Member Manager for questions?
  Use the company name to set up an email account with your new URL. i.e., [email protected]
• Telephone number CEO / Member Manager for Investor questions?
  Most new phones allow for 2 mobile lines. Ask your provider for a 2nd line on your mobile that is dedicated to the contact number in your Offering Documents and advertising. It will also allow for a separate dedicated voicemail for incoming calls for prospects to leave messages.
• Who is the registered agent, and what is the address?
  If the company is organized in the same state as your residence, you can use your name and residence address. If it is organized out of state, you must Google registered agents in the state you are organizing and pay them to act as your company’s registered agent.
• Is the business operating or a start-up?
  Does it have existing earnings? A startup has a reason why it isn’t earning money. An existing operating company needs to explain why it isn’t earning money. Explain your business plan.
  If Operating, when did it start operations? You must provide explanations and a much more detailed business plan explaining everything. Example: If Operating, what was the prior year’s revenue?
• What will the Offering amount (ex $1,000,000) be?
  You must explain why this amount is in your ‘Use of Proceeds’ explanation.
• Number of Shares / Units authorized?
  You can authorize 5,000,000 shares/units. In the LLC operating agreement, you will specify an example: 1,000,000 (non-voting) approved for sale to investors, 2,000,000 voting authorized and issued to you.
• The number of shares/units currently outstanding?
  This is assigned in the Operating Agreement if an LLC or Articles of Incorporation is a corporation.
  Careful about identifying shares/units as Founders Share. They can be taxed if you are not careful. Contact me for a copy of the information circular explaining this.
• Number of shares/units to be Offered (ex 500,000)
  This can be any number you want.
  Equity ownership in LLC – Limited Liability Company, is evidenced by “units.” In a corporation, ownership is called shares. Shares and Units mean the same. You can differentiate the units/shares by titling them Series ‘A’ Series ‘B’, Common, Preferred, etc.
• What is the Offering Price (ex $2.00)?
  The lower the price, the greater the number of shares that the investor gets for their money. For example, sell them 1 share for $50,000 or 50,000 shares for $1 each. Which option do you think is more attractive to investors? Also, if the investor wishes to purchase $25,000 worth, a lower price point is easier than giving them a ‘fractional share’.
• Is there a minimum offering amount that needs to be raised for you to keep the investor’s monies? (ex $750,000)
  Whatever this number is, it should be explained in the business plan. For example, your offering amount is $3,000,000, but the minimum amount to raise before you can start is $750,000. You need to explain why you can still execute your business plan with a lesser amount.
  Initial monies received should be held in escrow until a certain amount is reached, enabling you to execute your business plan. What threshold amount must be reached for the funds to be released?
• Is there a minimum amount that the investor must invest(Example: $25,000)?
  You set the minimum amount that the investor must initially invest. Careful not to ask for too much? It depends on the risks. (Depending on structure, real estate risks are much less than in startups, where the money spent is gone.)
  Include the option to take an amount less than the minimum set in the Offering in your PPM.
• Issuing 2 or more classes of UNITS? Investors:
  Voting? Non-voting?
• What will you call the units?
  Example:
  For Investors – Non-voting – Preferred, Series ‘A’
  For Owners – Voting – Common Units
  For example, you cannot have different rights or privileges for different shareholders/unitholders in the same class of Shares/Units. You need two ownership classes if your ownership is voting and the investors’ ownership is non-voting.
• Investors: Do you wish to provide incentives?
  Example: Are annual profit distributions based on free cash flow? Advisable. This is especially true if you are organized as an LLC.
• Will you be paying an annual dividend?
  If the dividends are cumulative, you still owe it even if you don’t pay it when owed.
  If the dividends are non-cumulative, if you don’t pay it when due, you don’t owe it in the future.
• Create a good description of the business purpose in one or two sentences.
  This is for the Offering Documents and will refer to your business plan addendum for all additional information.
• Do you need to advertise for investors?
  Generally, the best answer is YES.
  Regulation D Rule 506(c).If you intend to advertise for investors, you will file under Regulation D – Rule 506(c).
• No limit as to offering size.
• All investors must be “accredited investors” only.
  If you need to advertise for investors, you need to consider carefully how this can be structured so interested prospects can find your information. (keywords)
  Regulation D Rule 506(b) up to 35 Non-Accredited Investors but cannot advertise and MUST HAVE PRIOR RELATIONSHIP with all non-accredited investors.
  You cannot elect a 506(b) offering if you need to advertise. Also, taking money from non-accredited investors could result in liability due to the potential suitability of the investment.
  1. Do you want to create a possible exit strategy for investors?
     Yes…Careful how you word this…For example, saying you intend to go public is a no-no.

• What percentage of the business do you wish to sell to investors?
  This is somewhat dependent on what you bring to the table. It’s a case-by-case judgment.
• Do you have a LOGO?
  You can have a logo created for very little money. Google it.
• Do you have patents, copyrights, etc.?
  Be careful that the Offering Documents specify the ownership title. If you keep title to patents, copyrights, etc., make sure you memorialize it in writing and disclose it in your Offering Memorandum.
• Have you created a business plan to add as an addendum to the PPM?
  You only need to complete the business plan before sending out the PPM. The information in the business plan is different than what is in your Offering document. Both documents can be prepared concurrently. It isn’t necessary to wait for the business plan to be prepared to then create the PPM. In fact, it is likely that in the process of doing the PPM you will change some items in the business plan.
  Your business plan should include all the information that explains what you intend to do with the money, who you are, and the risks specific to your business, including a SWOT Analysis. The Offering documents will contain general risk disclosures, but your business plan disclosures should be specific to the business you are operating.
• What are the salary requirements?
  (Usually, if the CEO/member manager(s) are taking a salary, it should be similar to that of other same-size companies in similar industries and circumstances.) You could also structure it as a draw against future profits depending industry. However, startup salaries should be less than $75,000 until you are making money.

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