An investment memorandum is a written document that sets out a business, its plans, its numbers and the terms of a raise in enough detail for an investor to decide whether to invest. It’s often shortened to IM, and some founders and advisers call it an information memorandum. An investor usually reads it after the pitch deck has got them interested, and usually without the founder there to explain anything, so it has to answer their questions on its own.
I’ve raised £250m+ for my own companies and funded more than 750 businesses with over £1bn, so I’ve seen raises as a founder, as an investor and as a lender.
Investment Memorandum vs Pitch Deck vs Business Plan
The three documents cover a lot of the same ground, which is why they get confused. What separates them is what each one is for, when the investor reads it and how much detail it carries.
| Document | What it’s for | When the investor reads it | How much detail |
|---|---|---|---|
| Pitch deck | Getting an investor interested enough to take a meeting | First, often before any conversation | Short slides, one point on each |
| Business plan | Setting out how the business will be run and grown | When they want the full picture of the operation | The market, operations, team and projections in full |
| Investment memorandum | Setting out the business as an investment, so the investor can decide | After a first meeting, once they’re seriously considering it | Written in full, with the financials, use of funds, risks and terms |
A business plan is mainly about the business. An investment memorandum is about the business as an investment: what the investor is being offered, what the money is going to be used for, what could stop the plan working and how they could get their money back. Much of the content can come from the business plan, but the IM is organised around the investor’s decision.
The pitch deck works in headlines, with the founder filling in the detail in a meeting. The IM is read with nobody there to fill anything in, so it’s written in whole sentences and every number in it has to be one the founder can show the source of.
Where the IM Sits in a Raise
In a private round, the deck gets the first meeting. An investor who’s still interested after that meeting wants the full picture, and the IM is where they get it. Things an investor is looking for include:
- a founder and a team who can deliver the plan
- a product or service that solves a real problem for real customers
- evidence that customers want it, known as traction
- future plans that show how the business grows and what the money is going to be used for
- terms that make sense for the risk the investor is taking
Once an investor wants to go ahead, the price and the main rights are agreed in a term sheet. They will then do their due diligence and check what they have been told is true. That’s where the data room comes in: the online folder holding the accounts, contracts, share records and other documents behind each claim in the memorandum. Completion follows, when the legal documents are signed, the money arrives and the new shares are issued.
Investment Memorandum Structure, Section by Section
The structure below works as an investment memorandum template for a private funding round. Sections can move or be added to fit the business: a business that owns property might add a section on its assets, and one built on a patent might add one on its intellectual property.
| # | Section | What goes in it |
|---|---|---|
| 1 | Important notice | That the document is confidential, who it’s for, and the legal statements needed for the countries the investors are in |
| 2 | Summary | What the business does, the amount being raised, the structure and the main reasons to invest |
| 3 | The business | What it sells, to whom, how it makes money and how far it has got |
| 4 | Market and competition | Who the customers are, how many there are, what they spend and what they use now |
| 5 | Traction | Revenue, customers, contracts or pilots, with dates and a definition of each figure |
| 6 | Management team | Who runs the business, what each person has done that matters for this plan, and the hires planned |
| 7 | Strategy and future plans | What the business will do with the money and what it expects to achieve |
| 8 | Financials | Historic accounts, current management accounts, projections and the assumptions behind them |
| 9 | Use of funds | The amount and what it is going to be used for, line by line |
| 10 | Terms of the raise | The amount, the pre-money valuation or the structure, the minimum investment, any tax relief and the timetable |
| 11 | Risks | What could stop the plan working and what the business is doing about each one |
| 12 | Exit | The ways an investor could get their money back |
| 13 | Appendices | Team biographies, a summary of the financial model and a list of key contracts |
The summary. It’s written so that an investor who reads only that page knows what the business does, how much it’s raising, on what terms and why it’s worth backing.
The management team. The investor is backing the people as much as the plan. Each person’s entry says what they’ve done that’s relevant here, such as running a business in the same market, building the product or selling to the same customers. A business that depends on the founder for every sale and every decision shows how the hires in the plan change that.
The terms. The founder sets the terms and puts them in the IM: the amount, and either the pre-money valuation, which is what the business is worth before the money goes in, or the structure, such as a SAFE, an advance subscription agreement or a convertible loan note. How the founder arrives at the number is covered in startup valuation.
The terms section also shows who owns what before and after the round, taken from the cap table, and whether the round qualifies for a tax relief scheme for investors, such as SEIS or EIS in the UK.
The exit. An equity investor gets their money back when the business is sold, when someone buys their shares or through dividends. The IM says which of these the plan points towards and roughly when, without promising a return.
Financials and Use of Funds
The financials section shows the history as far back as it exists and the projections built on it. The projections come from the financial plan, and each one carries its main assumptions: how many customers, at what price, what each costs to win and how long they stay. The historic figures match the filed accounts and the management accounts, the monthly figures the business produces for itself, because those are among the first documents an investor asks for in due diligence.
The amount being raised is built up from its parts. It’s the cost of the plan added up line by line, not just a round number plucked out of the air. Say a business is raising £1.5m to open a second site and build a sales team.
| What the money is going to be used for | Amount |
|---|---|
| Fitting out and equipping the second site | £450,000 |
| 4 sales hires for 18 months at £75,000 a year each, including employer costs | £450,000 |
| Marketing | £200,000 |
| Stock and working capital | £180,000 |
| Legal and accounting costs of the raise | £60,000 |
| Contingency | £160,000 |
| Total | £1,500,000 |
The memorandum also sets out the plan the money gets the business to: what the next milestone is and what it costs to get there, such as the second site trading at a profit or a set level of monthly revenue. The time that takes, plus a margin in case things take longer or cost more, is how long the money has to last.
Risk Section
The risk section sets out what could stop the plan working and what the business is doing about each risk. An investor looks for the risks in due diligence anyway. A risk the memorandum already names, with what’s being done about it, is one they can weigh up straight away instead of having to raise it themselves.
| Risk | Example | What the business is doing about it |
|---|---|---|
| Customer concentration | One customer brings in a large share of revenue | The contract’s renewal date, and the sales plan for winning new customers |
| Key person | The founder makes most of the sales | The sales hires in the use of funds |
| Delivery | The second site opens late or costs more | The contingency in the raise and a fixed-price fit-out contract |
| Market or regulation | A change in the rules for the sector | What the change would mean and how the business would adapt |
| The raise itself | The full amount isn’t raised | A minimum amount that still lets the plan go ahead, and what changes if only that is raised |
Every statement in the IM has to be true and complete. One that turns out to be untrue or misleading can give an investor grounds for a claim against the company and the people behind it, which is one reason a lawyer usually reviews the document before it goes out.
Length and Format
There’s no fixed length. It depends on the size of the raise, how complicated the business is, the structure being used and how well the investors already know the sector. A straightforward business raising from investors who know its market needs less explanation than one with several revenue streams, property and overseas operations.
The IM is written in full sentences, with tables and charts for the numbers, and it’s sent as a PDF or through the data room, where the founder can see who has opened it. It’s marked confidential, and each copy can be numbered or watermarked with the investor’s name. The same figure appears as the same number in the deck, the memorandum, the financial model and the data room.
The Rules on Sending an IM
An IM invites someone to invest, so in many countries it’s treated as a financial promotion, and who it can be sent to is regulated. The rules that apply are the ones in each country where the investors are.
In the UK. Under section 21 of the Financial Services and Markets Act 2000, a person can’t communicate an invitation or inducement to invest in the course of business unless they’re an authorised person or the content is approved by one. Private raises often rely on exemptions in the Financial Promotion Order, such as the ones for certified high net worth individuals and self-certified sophisticated investors. For those, the investor has to have signed a statement within the previous 12 months, and the IM has to start with a prescribed warning in bold inside a black border, along with a statement explaining the exemption. Otherwise, the content is approved by an FCA-authorised firm before it’s sent.
In the US. A company raising under Rule 506(b) of Regulation D can’t use general solicitation or advertising. It can sell to up to 35 non-accredited investors in any 90-day period, and if it does, those investors have to receive disclosure documents and financial statement information set out in the rules.
Elsewhere. Australia, Canada, Singapore and the UAE each have their own rules on who an offer of shares can be made to, so the check is made in each country where the investors are.
Because of these rules, a lawyer usually reviews the IM before it’s sent. In the UK that review confirms which exemption the raise relies on, or the content goes to an FCA-authorised firm for approval.
When You Need an Investment Memorandum
An IM tends to be needed when investors will make their decision from a document rather than from weeks of meetings with the founder. That includes raises from:
- high net worth individuals and family offices, who may be putting in a large amount and want the full picture in writing first
- angel syndicates, where members follow a lead investor and read the same document
- investors in several countries, who each need the same complete picture
- a raise with more moving parts, such as a tax relief scheme, property or other assets in the business, or several classes of investor
It tends not to be needed for a small round from people who already know the founder, or for an early round on a SAFE or an advance subscription agreement from a few angels who have met the founder several times. A venture capital fund leading a round may work from the pitch deck, the financial model and the data room, and ask its own questions instead.
The term information memorandum is also used when a business is being sold. There, the seller’s adviser sends it to possible buyers to describe the business for sale. It does a similar job, but for a buyer of the whole business rather than an investor buying new shares in it.
FAQs
What is an investment memorandum?
An investment memorandum is a written document that sets out a business, its plans, its financials, the risks and the terms of a raise, so an investor can decide whether to invest. It’s usually sent after a first meeting, once the investor is seriously considering the deal.
Is an information memorandum the same as an investment memorandum?
Yes, in a funding round the two terms are used for the same document. Information memorandum is also the name for the document a seller’s adviser sends to buyers when a business is for sale, which describes the business for a buyer rather than setting out an investment.
How long should an investment memorandum be?
There’s no set length. It needs to be long enough to answer an investor’s questions without the founder there, and that depends on the size of the raise, how complicated the business is and how well the investors know the sector.
Is an investment memorandum legally binding?
No. The IM describes the business and the terms on offer, and the binding documents come later: the subscription agreement, the shareholders’ agreement and usually new articles of association. What the IM says still has to be true, because an investor relies on it when deciding to invest.
Do you need a lawyer for an investment memorandum?
Not to write it, but a lawyer usually reviews it before it’s sent. In many countries, including the UK and the US, a document inviting people to invest is regulated, and the lawyer checks it goes only to investors it can lawfully be sent to and carries the statements the rules require.
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This is general information on how investment memorandums are used in a raise and isn’t legal advice.
