VC Deal Lawyer

Depending on who you are raising money from, your initial contact with the investor(s) will take different forms.  If you are raising friends and family money, then you will most likely use a private placement memo format along with a subscription agreement as your initial contact.  This is so because at the friends and family level, you are proposing valuation and deal terms, not the investors, and all of this information is contained in the private placement memo.  At the friends and family level, you are dealing with investors that know very little about how to structure an emerging growth equity round let alone how to value such an enterprise or what deal terms to request.  The onus is on you, the company, to strike a fair balance on deal terms and valuation in the private placement memo – enough to protect the company, but delicious enough to attract investors.

If you are raising money from angels or institutional venture funds, then you will most likely utilize an executive summary format as your initial contact.  Angels and institutional venture funds play a more active role in valuation and deal terms.  Taking the time and expense to draft a private placement memo makes no sense when dealing with investors that have their own sense about valuation and deal terms.  The executive summary may eventually lead to a meeting, and then to a more formal company presentation that would involve a PowerPoint deck.  (For a good example of how to structure such a PowerPoint presentation see the template provided by Originate Ventures here and also see my earlier post and post).

Everyone has an opinion on what the executive summary should look like.  Most importantly, remember that the executive summary is meant to provide just enough information to pique the investor’s interest and lead to a more formal meeting where you can present the company on a broader scale.  The executive summary is a teaser, but it needs to contain the right information for the “tease” to turn into a meeting.  An executive summary should be 1 – 3 pages max.  Don’t include a cover sheet (just put your contact info and a JPEG of the company name in the header portion of the first page).  The following are the sections you should include.  Start all sections (excluding the intro paragraph) with a small section header.

• Intro Paragraph - it should be no longer than 2 or 3 sentences and should hit the two most important points head on:  (i) what’s your value proposition, and (ii) how big is the market.  I would suggest that investors who receive a lot of executive summaries lose interest and do not read past this introductory paragraph if these 2 or 3 sentences don’t grab their attention.
• Background - this section should lay out the background facts on the problem you are trying to solve.  If you assert real data then briefly show your source in a parenthetical after the sentence.  You want to leave the investor feeling as if there is a real problem to be solved here. 
• Solution - this is where you lay out your solution to the problem discussed in the “Background” section.  This is a description of what your company does and how you do it – your value proposition.  If there is proprietary technology, discuss it here. 
• Market- this section should discuss the size of your market as well as any barriers to entry.  If any section requires real data, this is it.  Show strong support for how big the market is.  Remember that investors are only interested in markets that they believe provide room enough for the returns they need to make.  That being said, don’t make the mistake of showing the top level market if your target is only a smaller subsection.  Don’t show how many consumer products are sold in the entire world if you are only focusing on selling widgets (a smaller subsection of all consumer products).  Don’t mislead.
• Financial Model – very simple.  How do you plan on making money.  Also, you should include projections here.  If the projections are based on any major assumptions, include those as well.
• Team - discuss the members of your team.  Provide their names as well as a very short bio.  Also include their title if they have one.
• Capital Raise – in this section, start out discussing any money that has been raised to date, including money put in by the founders.  Real founder money shows that the founders take this seriously and have some skin in the game as well, beyond just sweat equity.  You want to conclude this section with how much money you are asking for, how much of the company it buys (i.e., your valuation), and a short sentence on use of proceeds.

Another good resource for executive summary structure is Guy Kawasaki’s article.  His model aligns closely with mine, but he provides some additional sections and a bit more color on what those sections should include. 

Feel free to email me any questions or comments.