An information memorandum (IM) is one of the first things an investor will ask for when you begin your capital raising mission.
An IM lays the foundation for your capital raising and sheds light on the past, present and future plans for your business.
Following is an outline of the main headings you will need at a minimum when preparing an information memorandum for your capital raising:
1. Letter to Investors
This can be a Chairman’s Letter or Director’s Letter. This letter gives a summary of where you’ve been and where you plan to go. Keep it short and punchy and no more than a page in length.
2. Investment Highlights
Pretty self explanatory. This can be five bullet points on what sort of return investors can expect if all goes to plan. It’s not just about the numbers though. If you are one of a few accredited providers of a product or service then this can indicate high barriers to entry for competitors, for example.
3. Executive Summary
This section is basically a short excerpt of all the proceeding sections. It is designed to give a snapshot of your business and why you want to raise capital. It saves prospective investors the time of reading through an entire document. You want to give enough info here to keep investors interested but it is not meant to be comprehensive by any means. Think of it as a teaser to the rest of the content in your document. It is also a chance to cover some milestones that your business has achieved to date.
4. Business plan and growth strategy
Now you’re getting into the nitty-gritty. This section can be a cut paste job from your business plan that you prepared before starting your new venture. Of course your business may have changed significantly since you last looked at your business plan so you want to update as appropriate. You want to give specific detail on the following aspects of your business at the very least:
Unless you are selling government bonds, then there is such a thing as risk. Even if you have a monopoly position or license to print money, you are still exposed to risk. It comes in many different shapes and forms, some of which you have control over and some of which you have none. Here you want to talk about risk factors related to:
6. Executive Team
This is a big one for SMEs. It is a good chance to extol the value of your senior management team. You also want to give more detail on your board of directors or advisory board members. Having a good management team is a big point of leverage as it shows reduced reliance on one key person with the backing, hopefully, of key executives via your board of directors or advisory board.
7. The Investment Offer
Time to go into detail with regard to your investment offering. What will investors receive in return for investment in your business? If you’re generating healthy profits and cash flow then your focus will be on an appropriate earnings multiple combined with an assessment of strategic value to find a valuation. 2x profits is the starting point for most private companies when discussing valuation. If you are an early stage company with little revenue then you will be more focused on strategic value by itself. This could be a database of subscribers, a patent, a signed contract from a potential buyer, a trademark, successful clinical trials, etc.
8. Financial Statements
Most investors will want to see at least two years of operating history including Balance Sheet, P&L and Cash Flow statements. Pre-revenue start-ups with little operating history need to focus on forward looking estimates for these items. When you are done forecasting, cut your revenue projections in half and double your expenses. Be realistic. You want to round out this section with some comments or assumptions underlying your financials.
9. How to Invest
Time to see the light and tell your prospective investors how they can apply for securities. Relevant instructions on how to access your application form are included here. Other details will include information on:
Here you want to highlight key terms and provide definitions. This is especially important for tech based companies in manufacturing or biotech for example.
11. Corporate Directory
Include details here for your solicitor, accountant, auditor, company secretary, registered office and provide a link to your website.
12. Application Form
This provides a chance to collect key information from prospective investors and provide an efficient means by which they can apply for securities and deposit funds.
The outline above at least gives you an idea of the minimum level of information required when raising capital. The bulk of this you can prepare on your own. Assistance may be needed when it comes to preparing financials, both historical and forecast, and when drafting relevant disclaimers.
The internet is littered with examples of effective IMs and disclosure documents so time to get googling if you want to see some real life examples.
Ben Hucker is the founder and principal of iEvoke. He has 10 years’ experience consulting to listed and private companies in Australia. Ben thrives on being an active member of the start-up and small business community and uses his passion for writing and business to help clients create a powerful business case for investors.
This article is general in nature and cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting professional advice from a corporate lawyer or adviser.