Pricing shares in PPM
October 19, 2019
by a searcher from Georgetown University - The McDonough School of Business in Bettendorf, IA, USA
What kind of share price vs total raise did you do? In your experience was it better to have larger blocks or give potential investors the option of customizing their investment value? For example, on a $400,000 raise, you could do (at the extremes) $100k x 4 or 40 x $10k.
thoughts?
from IESE Business School in London, UK
Clearly you are looking for individual or fund who can afford to invest 10x search ticket size and be comfortable with related risks. $25-40 difference does not seem to be huge from this angle and searcher should target higher ticket per investor.
Here comes another thought - say we funded by 10 or less investors and 3 of them drop ahead of an acquisition due to various reasons (not target-related) - now we need to find an equity plug that may be tricky, especially if you are not in the US market. Having wider investor base where you know each other would help in such situations.
Now from investor perspective - even with sufficient funds one may prefer to buy option to invest at lower price, maybe invest in 3 SFs @$10k instead of 1 SF @$30k to spread the risk and have wider optionality at acquisition investment stage. Say one SF ends up unsuccessful, one will find great opportunity and another one will come with good opportunity. In this case investor can take 1-2 investment options in full and 50% premium from rollover of remaining 2x$10k tickets will cover unsuccessful SF ticket loss.
Looks like we are falling to a crowd around the table, can someone bring more chairs please? Neither investors, nor searcher would want to have too many people around as interaction can become unmanageable. Potential solution here may be to have active core investor base who want and can be involved in the process and passive investors with limited involvement.
It would be interesting to hear if there is such practice on the market and whether investment terms anyhow differ in-between investors as active ones may contribute via ongoing coaching, meetings with searcher, advice etc. Why would someone take small $10k ticket, have less than 10% stake and spend time for a benefit of other investors? This looks like the real factor limiting number of investors to around 12 rather than size of the ticket.
And 'last' point that should actually come as first - what is the size of the search fund raised? I wonder whether it is a bit more or lot more difficult to raise two-searcher fund.
Having said all the above - I am not a practitioner here and would be good to hear investor view. Maybe some will just say - I don't care of a search ticket, real decision comes at investment stage when you may loose real money.
from The University of Chicago in Chicago, IL, USA
Some would say that you can sell units at $10,000 each, but set a minimum at $100,000 and be better off because you get a minimum at $100,000 and it's easier for an investor to find the right level, given the minimum threshold (e.g., $110,000, $120,000, etc.).
That said, if units are sold at $40,000 each, then you have anchored 4x higher to start the conversation with prospective investors.
You might be asking what about half units, quarter units. I would discourage those - and I think most practitioners (lawyers, accountants, brokers, investors) would say the same thing.
Finally, don't forget about the accredited investor requirement. As a general proposition, searchers should really think long and hard before taking money from someone who isn't accredited under the securities laws and, further, before taking money from someone who can't afford to just completely lose the investment. The smaller the unit and minimum investment size, the more likely you are attracting and/or enabling investors who can't afford to invest. For that reason, I would discourage unit prices at $10,000/unit. For a funded search at $400,000, I would encourage you to think about $40,000 per unit and try to enforce that as a minimum (or better yet, look for an $80,000 minimum to participate (two unit minimum), but know that pricing units at $40,000 gives you some flexibility to drop for an exception.
By the way, typically, the numbers get higher if you are raising for an acquisition rather than search because the acquisition equity is usually a lot higher than the funded search equity. Same rules of thumb should apply generally, but, of course, every case is different and the details matter.
Like I said, just my two cents. Ping me and happy to discuss your specific case offline.