Company should
decide on the terms and structure of the offering based on the series of
preliminary and informal meetings with the potential investors along with the
research on current market conditions and recently closed, similarly situated
offerings. The offerings are described in the section along with the number of
shares and the price. Name of every
distributor must be mentioned if the security is offered through underwriters,
brokers or dealers (to the extent permitted by federal and state laws). Other
than this certain other information must also be included, like:
- The terms and
nature of the relationship between the issuer and each party must be disclosed.
- The commission
to be paid must be disclosed.
- The requirement
of the distributor (e.g. guaranteed or best efforts offering).
- Any special
rights, such as the right of a particular underwriter to sit on the board of directors
along with any indemnification provisions or other material terms of the
offering.
Depending on the
incorporation of the company there are various options on the types of equities
that can be sold through a private placement:
Equity Shares - Membership Units and Stock
The shares can be
sold in the form of membership units in the company if the business is
incorporated as an LLC or limited partnership such membership units can be
either preferred or general units. Preferred units are preferred while paying
dividends, but they may or may not have any voting rights (similar to a limited
partner).
The share can be
sold directly to the investors if the business is incorporated as a
corporation. In both cases, the company is sharing ownership with investors and
must keep in consideration that ultimate control goes to the party or parties
with more than 50% of the shares.
Convertible Debt
Convertible debt
can be sold, instead of selling shares directly to the investor. Although there are many kinds of
convertibles, these instruments (sometimes called convertible debentures,
convertible loans, or convertible bonds) usually start as loans or bonds with a
given interest rate.
Investors are
given guaranteed returns for the first few years. These debts are converted to
ownership share based on some method of valuation, which is pre-decided, or the
principal can be paid back to the lender. The decision of converting the bond
in to stock or getting back the principal solely depends upon the discretion of
stockholder.
This method is
similar in some respect with equity and some with debt. The initial risk of
investor is lessened by offering guaranteed return, and conversion to equity is
an upside possibility in the long run. This option is suitable for those cash
generating start-ups, who would like to delay the point of having to value the
company until a later date.
Links Used:
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