Many start-up companies know they want to raise angel capital, but do not know how to proceed. They really want to know: “do I need a 50 page Private Placement Memorandum to raise money?”
The answer is: “It depends, but maybe not.”
There are two general approaches to capital raising:
- An “offering“ with fixed terms which can be circulated to a relatively larger group of potential investors, and
- A negotiated transaction with a small set of investors.
If you are going to engage in an „offering,“ you should prepare a full PPM. A well-prepared PPM takes a lot of work and advance thought on what terms will generate investor interest. In addition to the terms of the proposed offering, the PPM also includes a description of the company’s business, its financials, its risk factors, and its competition among other things.
Often, the negotiated transaction approach makes more sense for a start-up. With this approach, a start-up prepares a term sheet and negotiates the terms of the investment with a lead or small group of potentail investors. Once a deal is struck, the investors and the company sign investment documents, including representations and warranties about the material facts of the business, without necessarily having prepared and delivered a lengthy PPM.
Talk to your advisors and your potential investors about which approach makes the most sense for you.