Offering Memorandum Writing Tips

Whether you are creating your private offering memorandum yourself or using a memorandum writing service, these two tips will help protect your company from legal risk and from giving away too much equity during the funding round.

Do Not Assume

Even if your investors are sophisticated, you simply cannot leave common disclaimers out of the private placement memorandum because you believe they have seen them multiple times. Make your explanations crystal clear, including the rules and restrictions of the security offering, the risks associated with the company, and how the investment process will work (escrow, minimum and maximum amounts, closing procedures, etc). Consider that this document is not only aimed at your current prospective investors, but at future, potential plaintiffs in a lawsuit against you. It must be a bulletproof record of your clear, honest, and compete communication with investors. Assuming you have done no wrong, it should help to protect you in a court of law.

Consider Convertibles

Rather than focusing only on protecting yourself from legal risk, spend time considering strategies which can protect you from the risk of giving away too much ownership. For many firms, offering convertible debt is a good way to accomplish this. Convertible debt, unlike straight equity, offers a guaranteed interest rate and does not involve giving away ownership or voting rights at the outset. At a future time when the company is valued for a subsequent round of financing, for example, the convertible debt can become equity at the price per share decided on at that time. This is sometimes called a bridge loan, as it provides a bridge for an early stage company from a time when it has not yet proven its business model, until it has and can support a much higher valuation.

Convertible debt also offers the advantage of being much simpler to explain (usually needing only a one or two page term sheet). Because the paperwork is simpler, it is also less costly to offer and negotiations with the lenders will move faster. Furthermore, the present shareholders do not have to worry about giving up control of the company when they issue debt as they do when issuing equity. You do have to worry about meeting the regular interest payments, however.

 

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Offering Memorandum Writing Tips
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