Private placement refers to investing in private companies in consideration for ownership interests in the company concerned. The ownership interests given to the investor may take the form of preferred shares, ordinary shares, warrants, promissory notes, and bonds. Basically, a private placement is non-public offering of securities where only a small number of private investors are allowed to buy them.
Private placement is most suitable for small businesses in the third stage of finance, looking to finance growth or expansion. If your business is at the startup stage, you should consider angel funding which is more appropriate at that stage than private placement.
If you are seeking private investors, you will need to prepare a private placement memorandum. Always ensure that the memorandum is prepared by an attorney with experience is private placement because omitting material information may expose you to suits by investors who lose investment money.
You will also need to prepare a sound business plan that will convince the investors that your business is moving in the right direction.
Where to find private placement funding
You can get private placement funding from accredited investors including;
- Households with annual income of $300,000 or a net worth over $1 million.
- Individuals earning at least $200,000 per year
- Venture funds, some banks and other financial institutions
Basic Steps in private Placement Funding
Valuation of your Company
Valuation of your company is an important step in private placement funding because it enables you to demonstrate the worth of your company to prospective investors. Additionally, it is important in demonstrating the company’s potential for growth. You should be careful in carrying out valuation because, if the value is too low but the company shows good prospects of growth, some investors will take advantage and buy shares at a very low price. Similarly, a very high value is not good for the company because it discourages prospective investors from buying the shares.
Developing a Subscription Agreement
Once you have obtained a valuation for your company, the next thing should be the preparation of a subscription agreement, which should be drawn by an attorney qualified and experienced in private placement. The agreement should have details of the types of share that your company is offering and the available stock.
Selling the Shares
The last stage involves selling shares to investors. In every community, there is an entrepreneurial group. You should be good at networking and ensure you meet lots of people; some may end up investing in your business.
Private placement offers viable alternative investors to small businesses because it does not have the constraints of taking a business public and ceding control. It is also cheaper and less time consuming than a public offering. However, it could be difficult finding the kind of investors you are looking for.