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:

• Market dynamics
• Corporate structure
• Your business model
• Key success factors
  
  

5. Risks
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:

• Broader economic conditions for your industry
• Gaining market share
• Capital adequacy and working capital
• Cash flow and revenue growth
• Continuity of core personnel
• Changes in business model
• Key management and consultants
• Currency conversion
• Manufacturing and supply risks
• Intellectual property
• Majority shareholder risk
  ​

This list is only scratching the surface in terms of possible risks so be transparent. You know better than anyone what the major risks are facing your business.

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:

• Allotment and issue of new securities
• Minimum subscription requirements
• Opening and closing dates for the offer itself
• A reference to the Privacy Act and how you will keep details of any applications confidential
  
  

10.  Glossary of Terms
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.

Get busy
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.

If you need help crafting your Information Memorandum to ensure you attract the right investors, for your business or property development, contact me for a no obligation quote at [email protected].

Disclaimer
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.

I came across a link on Twitter the other day to a great article on writing an effective business plan.

80% of updates on Twitter are rubbish but every now and then you get a gold nugget like this which perhaps justifies being on Twitter in the first place. 

The article and was first published in the Harvard Business Review in the late 90s (yes that is last century) but the content of the article is still relevant in today’s fast-paced digital world.

The author was William A. Sahlman. Will is the "Head Proff" of Business Administration at Harvard so he is a man worth listening to. 

A sentence in the very first paragraph from Will’s article about writing a good business plan struck me:

Will goes on to say that nothing could be further from the truth and in his experience with hundreds of entrepreneurial start-ups:

I couldn’t agree more and have actually written about this subject in a previous article. I also get clients asking me all the time if we prepare our documents using InDesign. The answer? Yes. But not before a compelling business case has been crafted.

We have a preference for substance over style and work with you using the framework outlined below to create your business plan—before thinking about design. 

But if style and formatting aren't the problem when it comes to crafting a good business plan, then what is the issue with business plans? 

According to Will, the answer is relatively straightforward:

That doesn’t mean your business plan shouldn’t include any numbers at all. It just means that it shouldn’t be the major focus of your business plan:

Numbers deserve a couple of pages in any business plan but somewhere near the back of the document. Not the front.

Instead of focusing on the numbers, Will teaches his MBA students to structure their business plan around the following ingredients:

1. People - i.e. the men and women starting and running the venture, as well as the outside parties providing key services or important resources for your venture, such as its lawyers, accountants, and suppliers.
2. Opportunity - this is a profile of the business itself—what it will sell and to whom? Can the business grow and how fast? What are its economics, who and what stand in the way of success?
3. Context - this is the big picture—the regulatory environment, interest rates, demographic trends, inflation, and the like—basically, factors that fluctuate but cannot be controlled by the entrepreneur.
4. Risk and Reward - this is an assessment of everything that can go wrong and right, supported by a discussion of how the entrepreneurial team can respond.
   
   

Will goes on to elaborate in great depth the meaning of each principle so click here if you want to read the full article. The key point to note is that each principle is dependent on the other.

Will concludes the article by making it clear that business plans are a necessity but definitely not the "be all and end all" when it comes to securing investment:

In short, great businesses have the four parts of Will’s framework completely covered. If only reality was so complicit.

One of the great capital raising myths is that investors will carefully dissect the contents of your business plan before they decide to commit funds to your business.

The same belief holds true for the business plan’s partner in crime—the information memorandum (IM)—the more common disclosure document used by private companies in Australia when raising capital.

Start-ups and emerging companies have been lead to believe that these documents are a necessity. NEWS FLASH—investors are busy and they don’t have time to read these documents.

An IM is an IM, is an IM

While writing a business plan or IM may help you think through some of the more complex assumptions of your business, no serious investor will ever read it. By writing a business plan, entrepreneurs can identify potential holes in their business idea, but a lengthy business plan will not be of any real value to investors.

Business schools the world over teach their eager students (myself included) to write business plans because it can be broken down into a list of steps that are easy to teach, test, and grade. In the academic world, writing and publishing papers is how success is usually defined. 

In the real word, clarity mixed with brevity is far more important when it comes to the art of raising capital. This doesn’t mean you have to sacrifice on substance or quality. You can get the same results with a more targeted set of presentation materials.

The Act

Of course, when we are talking about disclosure, we are not referring to a prospectus—a compulsory document required by limited companies when raising capital from retail investors in Australia—we are talking about the requirements for proprietary limited companies; Pty Ltd, the primary vehicle of choice for start-ups while in their infancy.

Chapter 6D of the Corporations Act—better known as the ‘fundraising provisions’—regulates the way in which capital can be raised in Australia without issuing a formal disclosure document. A disclosure document is required in most cases but there are two very important exceptions.

If you are raising less than $2 million, from less than 20 investors, in any rolling 12 month period, then you are not required to issue a disclosure document. The same holds true if you are raising capital from sophisticated investors—people with more than $2.5 million in net assets, or whose gross income for the past two financial years is at least $250,000 per annum.

This legislation is set to change soon with the introduction for new rules for crowdfunding platforms. But these are the key provisions for now. And they clearly state that a formal disclosure document is not required in some circumstances.

Throwing the book at you

Nearly 10 years working in financial markets, and heavy involvement with a number of start-ups attempting to secure seed or expansion capital, tells me that formal documents are the last thing on the mind of investors’ before they invest in your business.

Investors will not read your business plan for the same reason that you don’t buy the first book that you are interested in buying. What you buy initially is the title and the look of the cover; then, if interested, you might proceed to the blurb on the back cover, made up of lavish praise from high-profile individuals, or perhaps go to Amazon and read some online reviews first.

If you’re still interested, you might read the summary of the book on the inside of the book jacket, or maybe even read a few paragraphs from the opening chapter. Then you might make up your mind. But reading the entire book? Forget it.

Reading a book front-to-cover is an entirely different matter, something that happens much later, or perhaps never, as many lonely books gathering dust on your bookshelf can attest to. And even when you do read the book, it typically happens long after you have purchased it.

Say more with less

So if producing a business plan or IM for investors is a futile exercise then what do you do?

At IEVOKE, we work with clients one-on-one to help them produce an essential kit of presentation materials. These include:

1. Business Speech
2. Slide-Deck
3. One-Page Summary
4. Articles & Research
5. Financials Template
   
   

We won’t waste your time preparing lengthy and verbose documents that no investor is going to read. We’ll help you construct a set presentation materials that captivates the attention of investors. We prepare these presentation materials as a complete package, or on an individual basis.

If you don’t get to your point quickly then investors will ignore you—just as you tend to ignore long rambling messages when you receive them. Investors have little if any sense of duty to read what you put before them. And remember one thing: investors are busy--very busy.

Legal Disclaimer
This article is general in nature and some of its content 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 commercial lawyer or advisor.

Before I begin, it is worth clarifying exactly who can and can’t go about raising capital in Australia. Public companies (i.e. Ltd companies with more than 50 non-employee shareholders) can raise funds from the general public by issuing securities. Private companies (i.e. Pty Ltd companies that have less than 50 non-employee shareholders) can raise funds from:

• existing shareholders and employees of the company or a subsidiary company, and
• the general public if the fundraising does not require a disclosure document.
  
  

I went through the exemption rules for capital raising’s that do not require a disclosure document in my first article. For the purpose of this article I will assume you are raising capital with a disclosure document.

As a general rule, if you are a Public Ltd company offering securities for sale then you must provide a disclosure document of some sort to potential investors. A disclosure document is the broad term used to describe all regulated fundraising documents for the issue of securities (for example shares or debentures).

There are four types of disclosure document:

• a prospectus
• short form prospectus
• an offer information statement, and
• a profile statement.
  
  

All companies entitled to raise capital can use a prospectus. You may also be able to use an offer information statement or a profile statement depending on the type of fundraising you intend to do and whether you satisfy the restrictions imposed on using those documents.

Entrepreneurs and SMEs raising less than $2 million, in a 12 month period, among 20 shareholders or less, are not required to issue a disclosure document. The same is true if you are raising any amount of capital from sophisticated investors or other certain classes of investors. Despite  this, prospective investors will still want to see some type of document like an Information Memorandum before they open up negotiations to provide capital. A Ltd company raising anything less than $10 million will need to provide an offer information statement. A full prospectus is required for Ltd companies raising any amount above $10 million whether publicly listed or publicly unlisted.

Disclaimer
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.

A shareholders’ agreement, or ‘business will’, is an agreement that attempts to regulate the conduct of those starting a new business venture. It is essential too for those seeking funds from new investors.

I wanted to focus this week on seven must-have terms for any shareholders agreement. To do this I spoke to Kristie Piniuta from Kubed Legal in Melbourne. A big thanks is due to Kristie who put together the list of seven based on her broad depth of experience as a corporate lawyer. This has included time spent working in-house for Boost Juice alongside Janine Allis. The seven must-haves include:

Drag-along rights enable a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. This ensures a clean sweep of of minority shareholders in the event of a full sale or acquisition.

Tag-along rights are used to protect minority shareholders. If a majority shareholder sells his or her stake, then the minority shareholder has the right to join the transaction and sell his or her minority stake in the company.

This is especially important for businesses with a lot of intellectual property. That’s not to say it is any less important for other businesses who have lots of cash flow and very little IP. Non-compete periods have to be reasonable in scope and duration to ensure enforce-ability. A confidentiality clause is obvious for a number of reasons and it is a commonly used for other contractual agreements like employment agreements and non-disclosure agreements.

The cost of a full shareholder’s agreement “starts at about $A2,000-$A3,000″ according to Kristie from Kubed Legal. This is the bare minimum and the cost will increase depending on the complexity and number of shareholder requirements.

Hopefully the terms above highlight a few key points for business owners embarking on a capital raising mission for the first time. If all parties are fully informed and provisions are drafted appropriately, a shareholders agreement should be able to sit in the bottom drawer gathering dust until a situation arises where it needs to be consulted. The cost of the agreement pales in comparison to the cost of a legal dispute if an agreement is not put in place.

Please feel free to contact Kristie at Kubed Lawyers at [email protected] if you have any further questions or if you need a shareholder’s agreement drafted.

Disclaimer
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.