The reading level for this article is Novice
The Offering Memorandum includes enough information about your business for a Venture Capitalist to make a decision on whether or not they want meet with you. The Offering Memorandum has the following main sections:
• Executive Summary
• Risk Factors
• Company Description
• Description of Capital Stock
• Investment Highlights
If you are not undertaking a formal offering and just want to present your business plan, the only sections you will need are the Executive Summary, Company Description, Financials and Management sections.
Below is a synopsis of how each section should be presented and what a VC is looking for:
The Executive Summary is usually one page in length. After reading the Executive Summary, a VC should be able to understand the business you are in, your products or solutions, the market for your products or solutions and how you are attacking the market to bring in revenue. You may want to include a financial summary within this section to quickly help a VC understand the size of your company.
The Offering section describes how much capital you are planning to raise. Filling in the Price information is not necessary if you are unsure of the value of your company. If a VC is interested in your company, they will give you their own thoughts on valuation, but have a range in mind with which you are comfortable. VCs will also want to see the Current Capitalization Structure and the use of Proceeds.
A note on Use of Proceeds: VCs like to see the capital used for investment into the company. A red flag is raised for a VC if the proceeds are used to pay off an existing loan or used to buy the securities of an existing investor who wishes to sell.
Risk Factors are included to protect the company. Risk Factors are explicitly given to potential investors so they understand all of the risks in an investment in the company. If you are just presenting your Business Plan to a VC and do not have specific offering terms, a risk factor section might not be necessary.
If an attorney or private equity professional is assisting you with your Offering Memorandum, they like to include a Risk Factor section to protect themselves as well. Have an attorney review or produce your Risk Factor section.
The Company Description helps the VC understand your business. Include an Overview, the Market Opportunity for your business, the products or solutions you are selling, and your company strategy for the future at a minimum. Information on customers, partners and the competitive environment is also important.
The Income Statement and Balance Sheet should be included in the Financial Section. VCs usually like to see historical income statement data from the previous three years (if they exist) and projections going out two to three years. In today’s difficult economic environment, VCs will not give you credit for huge increases in sales ten years from now. VCs also focus on the Quarter that just ended and the Quarter you are in. VCs want to know if you met your projections last quarter and if you are going to hit your projections in the coming Quarter. Obviously, you lose credibility if you project overly optimistic results for the coming quarter and you fall far short of those projections.
The management section should demonstrate the industry experience, leadership skills and business acumen that you and your team have. Do not worry if you have a few unfilled management team positions, all early stage companies have this problem. However, VCs are looking for a CEO that has the vision for the company’s future as well as the management skills to run day-to-day operations. VCs also want to see someone on the management team that will be responsible for selling the product or solution to drive revenue. Also, if your company already has an influential board member or investor, make sure to highlight that fact.
Description of Capital Stock
Again, if you are only presenting a Business Plan, this section is not necessary. However, if you are undertaking a formal offering, VCs will want to see the types of securities already in your capital structure and the types of rights these existing investors have. Also, if you have not settled on a valuation to put in your offering memorandum, you would not include a post offering view of the capital structure since it would depend on valuation.
As its name implies the Investment Highlights section helps potential investors understand why your business is a good investment. Call out your strengths in this section. Highlight how your management team plans to attack your market and generate revenue.