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Entrepreneurs wonder: Business Plan or Private Placement Memorandum to Raise Angel Investor Capital

Guest post by: Karen Rands

Article Overview: Entrepreneurs wonder if they need to put a business plan together when they are selling equity and have a PPM, Private Placement Memorandum. Or, if they have a business plan do they need a PPM? Business Plans and Private Placement Memorandums serve two different purposes. One is used to build your business, one is used as a transactional document to sell a piece of your business. Read this article to learn the difference and how other documents are used in growing your business and raising capital

Entrepreneurs wonder: Business Plan or Private Placement Memorandum to Raise Angel Investor Capital

Business plans communicate different information than a private placement memorandum and serve a different purpose in your mission to grow a profitable business and raise capital so you can do just that. Let's first make sure we are on the same page when talking about Business Plans and Private Placement Memorandums.

Business Plan: A well run business with real potential to scale and grow will have a business plan that is their blue-print for building the business. They have an internal document that has the details about organization plans, production, distribution, compensation, and marketing strategies. We call this an operating plan. Investors want to know one of these is in place because it shows the company has a mature attitude regarding planing and preparing for growth. They likely will not read it in its entirety, but they will spot check areas as part of the due diligence process. Then there is the business plan a company uses to get money. The ‘Investor Ready" business plan differs from "bank ready" business plan. These business plan version summarize the operating plan in providing a high level over view of each section, not an executive summary, but about 16-20 pages, and the financial forecasts. The Investor Ready Business Plan is a marketing document. It is "selling" you company as an investment opportunity. It can be "confidential" without the same controls necessary for distribution of a PPM.

Private Placement Memorandum: This is a legal document that is provided to potential investors and serves to protect both the investor and the company. It is used for unregistered offering. Without one, companies can be sued for refund of the invested capital by their investors if they don't produce the results expected. The PPM establishes the risk of the investment and the process for liquidation of any assets should the company fail. It is highly confidential and should only be given to an investor that has stated an interest in investing, not just "this sounds good". The PPM usually is 60 or more pages, which is 2/3rds legal and regulatory information. It is not an entertaining read. Therefore, investors only read it when they are pretty certain they will be investing.

In reality, though, when a company decides to pursue a path of attracting angel investor money from "strangers" - not their friends and family - they need to put a plan in place that is not much different from the strategy one uses to attract and close customers that have never heard of your product before. To sell a product, you need to identify your target market, take action to introduce your product to them, communicate and educate, and the close them. So a company that is seeking angel investor money (from new investors not known directly by the company) needs to have 5 documents:

1. One page executive summary that provides a snapshot of the company's investment oppt. This is the most public piece of information and should be designed so anybody can read it.

2. Investor Ready Business Plan. This is the marketing document that is going to move the company along with the investor and garner interest. They may receive it after talking to you or a representative or after seeing a presentation. They may also receive it cold from one of their trusted sources, and therefore the document must be a compelling read and answer the fundamental questions an early stage Investor wants to know: how do they get a pay raise and what is their mitigation of risk. You should have someone, impartial and not connected or familiar with your business to review it before sending it out to a lot of investors. We often see business plans that jump from point A to point C and assume the reader knows point B, only because someone who knows the business well has reviewed it and connected the dots in their head. The business plan will end up in the circular file if it has this type of gap in it and other typical errors we see as companies go through our investor screening process.

3. Investor Pitch: the 8-10 minute presentation used during investor forums and when you get the initial face to face with a potential investors. Typically this is about 12-15 charts at the most, with some charts for back up and questions.

4. Private Placement Memorandum or Offering Memorandum. Depending on the amount being raised and the type of raise (Reg D 504, 505, 506) a full PPM may not be necessary. Always check with an attorney. You should have some document that communicates the structure and terms of the offering and the risks associated with that offering. Unlike a business plan that "sells" your business, a PPM is anything but that because in order to protect you against a lawsuit from a disgruntled investor, the risks and all the reasons not to invest need to be laid out very clearly--almost discouraging the investment unless by the most brave of investors---those willing to lose it all in the hope and the prayer this investment and this company will succeed.

5. Operating Plan. This is the blueprint to build your business. It is necessary for two reasons. First, investors may want to view it to make sure you have the right strategies for growing the business and using the funds they will give to you. Second, and more importantly, you cannot expect to grow your business with any sort of structured steady growth without a business plan. It communicates to your team what they are expected to do and it helps you chart your progress and anticipate shifts in strategy that will be needed to stay ahead of the competition and continue to improve your efficiencies.

These documents become your arsenal as part of your campaign to identify and talk to as many investors as possible so you can fill your funnel and find the few, the proud, who will believe in you and want to share the risk to reach the mutual reward of success as your company succeeds.

Related Articles
  Determining if a Business Plan or Regulation D PPM is your best option.
  The Fundamentals of Raising Capital from Investors
  The Benefits of a Structured Private Placement Offering
  Who Should You Use to Raise Your Capital?
  Who Are Angel Investors

Article Tags: angel investor, business investor, business plan, early stage, entrepreneur, executive summary, find angel investors, friends and family, investor forum, investor pitch, operating plan, ppm, private placement memorandum, raise capital, reg d



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