By Spencer Achiu – November 2023
Let’s say you have a brilliant business idea, or you are looking to scale your existing venture. The question on your mind is, “how do I secure the funding I need?” You are not alone. Almost every startup and most established businesses grapple with this question. In this guide, we will break down three ways receiving investments can be accomplished: Private Placement Memorandums (PPMs), Convertible Notes, and Simple Agreements for Future Equity (SAFEs). We will also delve into the legal nuances, investor types, and key considerations to help you make an informed decision.
Private Placement Memorandums (PPMs)
What It Is:
A PPM (Private Placement Memorandum) is a comprehensive legal document that offers a deep dive into your company, providing potential investors with all the information they need to make an informed decision. Like a biography of your company, a PPM offers a comprehensive view including risk factors, use of proceeds, and management’s discussion. It is the classic go-to option for businesses that want to leave nothing to chance.
Who It is for:
Investors who want a detailed understanding of your business and may offer more than just capital—think expertise, connections, and resources. This type of investor might also help you to navigate and expand into new markets. It may also be more favored by risk-averse investors that prefer to invest in companies that have the resources to assemble this level of investment vehicle (highly detailed, takes time and resources to assemble) and that makes them feel a bit safer about their investment.
PPMs offer the highest degree of legal protection and control over investor relations. However, they require strict compliance with securities laws, making them a bit cumbersome (a typical PPM will range from 65-100 pages or more depending on the attachments) but also more informative and more secure.
What It Is:
A flexible short-term debt that can be converted into equity later. Think of Convertible Notes as a “try before you buy” option for investors. They can invest as debt initially and later decide whether to convert it into equity or have the instrument automatically decide for them based on specific triggers.
Who It is for:
Investors who want the option to invest but also the relative safety of a debt instrument. It is perfect for a broad range of investors, from those fully sold on your business model to those still on the fence. It is a win-win for those who are still evaluating your business performance.
Convertible Notes offer tax benefits and allow you to set terms for debt repayment or conversion, but they also have the potential to complicate future fundraising efforts. They are much less complex than PPMs (a typical convertible note is less than 20 pages even for more complex versions) but still provide plenty of options and protections for both investors and the company they are investing in. Do note that sometimes a PPM is used to offer convertible notes to investors, so they are not mutually exclusive.
Simple Agreements for Future Equity (SAFEs)
What It Is:
A straightforward agreement that gives investors the right to future equity in exchange for immediate investment. SAFEs are the new kids on the block, offering a quick and straightforward way to secure funding without the complexities of PPMs or even Convertible Notes.
Who It is for:
SAFEs are best suited for high-risk-tolerance investors, particularly in the tech industry, who are comfortable with minimal terms and subject to plenty of speculation. It’s also best suited for tech companies that want to court these investors and need to raise money for their start-up as quickly as possible and with as little time and expense as possible.
SAFEs are simple (a typical format for a SAFE range in the 5 to 7 page range) but come with significant legal risks, including potential disputes over valuation caps, discounts on the eventual equity price, and other potential investor claims arising from inconsistencies in methodologies used from one SAFE to the next. They can make future investor rounds more complicated, depending on how they are put together.
Questions to Ponder
- What resources do you expect from your investors besides capital?
- How involved do you want your investors to be?
- Can your company quickly become profitable to repay loans?
- Are you willing to give up control in exchange for investment?
- How many investment rounds are you planning?
- What types of investors are you targeting?
- Are you open to investment from personal contacts like family and friends?
- Would you prefer a few committed investors or a larger pool of passive ones?
- What is your exit strategy?
Navigating the funding landscape can be complex, but understanding your options and aligning them with your business needs can make the journey smoother. Take the time to consider what is best for your venture, and you will be well on your way to securing the funding you need.
Expert Guidance Makes All the Difference
At Navvee, we are more than just attorneys; we are your strategic partners in achieving your business goals. Whether you are considering a stock or asset acquisition, or seeking a unique, legally sound, and cost-effective structuring solution, our team can provide invaluable insights. We help you navigate the regulatory landscape, understand potential tax implications—bringing in a certified tax advisor for the more complex tax issues—and manage the complexities that come with each type of transaction. We are committed to standing by you throughout the process, ensuring a smooth and successful deal.
Feel free to reach out to us at Navvee to discuss these questions and any other concerns you may have. We are here to guide you every step of the way.
About the author: Spencer Achiu is an attorney with Navvee Business Advisory and Law, which is headquartered in the Las Vegas, Nevada metropolitan area. Spencer obtained his law degree and Master of Business Administration from the University of Nevada, Las Vegas in December 2022. Spencer was admitted to the Nevada Bar in May 2023.
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Disclaimer: The information provided in this article is for general informational purposes only and should not be taken as legal advice. The contents of this article do not establish an attorney-client relationship, and the reader should not rely on the information provided herein for any legal matters. If the reader has specific legal questions or concerns regarding their situation, they should consult with a qualified attorney who can provide advice tailored to their specific circumstances. The author and publisher of this article do not assume any liability for actions taken or not taken based on the information contained in this article.
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