Is it time to bring some outside capital in to your startup?

It is important to prepare explainers and disclosures for potential startup investors, so that you set everyone’s expectations and protect yourself and the company from the possibility of disgruntled investors if the hockey-stick-shaped sales chart does not happen.

This is not a complete list of all that you will need to include, but some of the most important aspects of your disclosure are:

1.  Tell what you are doing:Startup investment

The disclosure document is usually called a private placement memorandum or PPM.  It needs to explain what you are working on in a level of detail that doesn’t lose the reader, but also allows them to distinguish your project from others in the marketplace or in their email inbox.  Then without getting too far into cheerleading, give the potential investor an idea of why this is worth quitting your day job to pursue full time.

2.  Tell what others are doing:

Do not say “we have no competition, because we are just that awesome and innovative.”  It sounds like a dodge, and no serious startup investor will believe it.  If your team succeeds, you will be replacing some product or service in the marketplace.  If certain aspects or features would replace one tool, and others will disrupt some other corner of the industry, there may be no single incumbent you view as true competition.  If that’s the case, then say so and explain it.

3.  Use of funds:

What are you going to do with the money?  The better idea you can give your potential startup investors of how their money will be spent, the better idea everyone will have of whether this makes sense and whether it looks like enough, too much, or not enough.  It is also a good planning exercise that will make your team think through how to prioritize limited funds.  Many teams do not go through this planning process until they have to explain it to potential investors.

4.  Pro forma:

You will do here what everyone does when it comes to showing your potential startup investors their potential return.  You will show a line moving up and to the right.  If that was not your plan, you would have kept that day job.  But keep writing.  Some detail about whether your main revenue is expected from direct consumer sales, partnerships, white labeling, corporate B2B investments, etc. will go a long way to putting your potential investors in the picture.  Projections are only projections, and you cannot guarantee the future, especially not your revenue and the behavior

5.  Restricted stock:

When you sell shares of a company privately, meaning not on a public stock exchange, your shares carry restrictions with them.  They cannot be bought and sold like a publicly traded stock.  Instead they have holding periods, for example, six months or a year, before they can be sold to new owners without being registered.  So you need to disclose those restrictions to your investors.  Active investors and venture funds will know all about it.  Disclose it anyway.

All in All:

All in all, we know as founders, investors, and counsel, that while some startups succeed, but many will fail.  Any tech startup investor worth meeting will know that his or her money is more at risk with your startup than with a mutual fund.  But the proper level of explanation and disclosure of what you plan to do, why, and toward what goals can go a long way to avoiding that message post-investment of “Hey, this isn’t what I thought you were talking about.”