Have a Startup? Be Afraid
“Fear is the mother of foresight.” – Thomas Hardy
I’ll come right out and say it. The point of this blog is to make you afraid. Now, before any of you tenacious entrepreneurs think I’m trying to slow your hustle, I want to tell you, the fear I’m talking about is the positive kind. The fear I want you to feel is the kind that strengthens you and makes you unbeatable thanks to the preparation it inspires. I’m using fear to help you understand what happens when you don’t properly protect what you’ve worked so hard to build.
A PPM Means Protection
As a securities attorney, I’m in the business of protecting startups and the first line of defense I add to every startup’s arsenal is the private placement memorandum (PPM). Let’s think of a PPM as the teflon coating on your venture. It keeps the SEC away. Without a PPM you should be scared.
A Thought Exercise for the Entrepreneur
How about we try a thought exercise about yes, vegan cheesecake. Imagine this…
After dozens of business ideas that fizzled out, you’ve finally found the one that hits. You’ve perfected the recipe for a vegan New York-style “cheesecake” that scored better in blind taste tests than the three most popular cheesecakes from the Big Apple.
Thanks to lots of samples and Instagram buzz, investors are now interested in taking your taste sensation from the farmer’s market to brick-and-mortar stores nationwide. It’s an easy sell. Your pitch deck is on point. Your glossy spiral-bound business plan dazzles everyone at the table. They can’t tell the difference between your “cheesecake” and the real thing! They’re willing to give you all the money you need, which means all the profits you’ve dreamed about. Let it sink in. Feels good, right?
Now, I want you to imagine giving all that money back.
One of your investors gets cold feet and decides he doesn’t want to wait for his return. He contacts a lawyer who starts going through that glossy spiral-bound business plan. Sure, it still dazzles but it doesn’t do much else. There are a lot of bold statements but nothing about the risks involved in bringing vegan cheesecake to the masses. You used words like “the first”, “best”, and “only” to solicit investment interest without mentioning the competition or the current market. Now this lawyer turns into a real pit bull and files a lawsuit. Other investors jump aboard and there’s talk of rescission. That means you’d be forced to return your investors’ money because your information was off. Yes, this is a thing. Goodbye vegan cheesecake.
So, how are investors able to sink your startup?
Your intent wasn’t to pull some Gordon Gecko-style scam on your investors. You only wanted to get them excited. Guess what? It doesn’t matter. Misstatements and omitted facts still make you potentially liable under US Federal Securities Laws. Intent to defraud is not a requirement for being charged under these provisions.
But here’s the good news…
All of the above can be easily avoided with a PPM. A custom PPM drafted by an experienced securities attorney supersedes the “pitch” in a business plan by presenting risks and information about your company in a bulletproof fashion. Even when a PPM is not technically required by law, it is the most effective way to protect yourself when a disgruntled investor tries to take you to court. Plain and simple: a PPM protects you from an investor suing you.
After all this lawsuit talk, maybe you’re more afraid. I get it. Finding out some regulation set up after the 1929 stock market crash could kill your entire startup is a scary thought.
Doing Things the Right Way Begins with a PPM
But now it’s time do things the right way and sleep easy at night. How about you treat your killer business idea with the respect it deserves and keep it protected? I chose this line of work because I love helping people succeed by offering simple steps to avoid complicated problems.
Here’s one: Get a PPM, avoid litigation, keep your cheesecake.
If you’d like to learn more about how a PPM can protect your own startup and keep you out of trouble with the SEC, click here to get a free consultation.