Every entrepreneur can (or at any rate should be able to) prepare a business plan for where s/he wants to see the company going and how it's going to get there. However, tailoring all the information that is in your mind and your business into tangible, coherent documents that will share your plans with investors is a whole other ball game. The manner in which you present such information and documents can have a significant bearing on the funding your business is able to attract, in a world where there's a scurry for early stage investment and the options, both for companies and investors, are aplenty. This article explores the way this can be achieved, from the perspective of a startup.
First off, let's discuss the linchpin for a prospective investor, the information memorandum (IM). As the name suggests, an information memorandum or IM, is a detailed document designed to provide critical information about different facets of your business, and maybe likened to a prospectus, issued by companies before an IPO. The IM is typically shared with a serious prospective investor, with whom general information about the company has already been shared.
A good starting point for understanding what should go into your IM, is to step into an investor's shoes, and analyse what information about your business would be most critical to them. Typically, this will include information about the company's history, its founders, existing funding and shareholding structure, current business plan, assets, performance metrics, identified risk factors, and in certain cases may also contain specific information broken down by business functions, such as sales, finance, marketing and operations.
Depending on the nature of your company, the IM will need to be adapted to set out the most important information front and centre. For a social networking application, its reach and functionality maybe key, whereas for a food delivery startup, its network of vendors and delivery agents may take precedence. Broadly, the section-wise information your IM should contain (beyond what has already been discussed above) is:
- Business information: general information about your industry, your business -- history, its product, founders, key competitors, regulatory framework, management structure, broad business, marketing and sales processes, and key proprietary assets.
- Financial information: historical financial statements, historical and adjusted EBITDA, gross merchandise value (GMV), compound annual growth rates, and financial projections.
- Transaction information: investment sought, proposed structure, key terms sought, if any.
Another aspect to ensure while preparing and providing an IM to a potential investor is confidentiality. A bare-all document like an IM provides a lot of in-depth information about your company, where it came from and where it is headed. Thus, before handing all this information on a platter, make sure that either the IM itself or a confidentiality and nondisclosure agreement that goes with it contains strict confidentiality provisions, restricting its reader from disclosing any information they come across in the IM.
Lastly, for a prospective investor, your IM should read like a user guide to your company. While considering an investment proposal from you, the investor should be able to quickly identify where, what and how much information is provided. Thus, crisp and clear presentation is important. Proper indexing and referencing will go a long way in helping you achieve this.
Once you have put together and shared your IM with potential investors, the next time you're likely to share detailed information with them is during a due diligence of your organisation. Here again, the collation and presentation of information is critical. A sound documentation and record keeping system in place from the very beginning will not only make it easier to provide specific information upon request by external parties, but will also go a long way in streamlining the availability of this information internally when required by the organisation. As with the IM, you should ensure that any information you share in the course of a due diligence should be protected by a confidentiality and nondisclosure agreement.
A due diligence of your organisation, whether legal or financial, will seek to lay your company bare for prospective investors. A large amount of data will be required to be shared, based on which, investors will decide whether or not to invest in your company, and if so, what the potential risks of doing so are. We often find that a lot of time and effort during the diligence process is spent in merely identifying the relevant documents needed from a company, and how they should be recorded and presented. More time is lost in asking for, identifying and reviewing documents in subsequent steps of the diligence exercise. In a seed or series A round of funding, time is always of the essence. The faster you can provide all the information needed by a client, and the better organised it is, the faster you move to signing on the dotted line and getting the funding and partnership your young business requires.
From a legal diligence perspective, make sure that all your corporate records are filed and maintained regularly, preferably filed chronologically. For things like consents and licences, organise and update them function-wise, such as employment, industrial, environmental, exchange control. As with an IM, clear indexing and referencing these documents from the very beginning will help you identify and provide the precise information or document sought instantly. Besides this, your key contracts, with customers and vendors should also be catalogued carefully with details such as their brief scope, value and term identified upfront. The same applies to any legal disputes that may have arisen in the course of your business.
In today's day and age, a majority of data rooms (this is where the information sought from your company will be shared) are virtual. This helps organising and sharing documents at a pace much faster than someone sitting in your office rooting through physical files. While a lot of large companies do this as process, even at a young stage, digitising your records and documents will go a long way in helping both you and your prospective investors. Lastly, although this goes without saying, you should ensure that your company provides all information requisitioned for by an investor in relation to the diligence, and that no information is intentionally withheld. At some point down the line, any information left out by design is highly likely to come back to haunt you, and that's a situation best avoided from the very beginning.
Shivpriya Nanda - The author is a Partner with JSA, Advocates and Solicitors. The views expressed here are her own.
Arnav Joshi, associate with JSA, Advocates and Solicitors, contributed to this article.
