The Business Plan 173and its workforce? What strategies are in place to meet legal and regulatory obligations?
Ownership.In this section, the founders describe the legal form of the business, the
contractual obligations of the owners to the firm and to each other, and, if the business
plan is a proposal for financing, the nature of the deal. Note that only after the reader is
familiar with the experience, reputation, and character of the entrepreneurial team is it
appropriate to ask for money.
A description of the firm’s legal form of business—sole proprietorship, partnership,
regular corporation, subchapter S corporation—includes a brief explanation of why this
is the best fit (see Chapter 8). It discusses any special aspects of the ownership structure,
such as subsidiaries, holding companies, or cross-ownership agreements. If the firm is
organized as a partnership, it lists the essentials of the partnership agreement and
includes the actual agreement as an appendix.
An exhibit can show the amounts of money the founders and executives have invest-
ed or will soon be investing in the business. It also shows the equity positions that these
investments represent. Another exhibit can show any rights to warrants and stock
options and indicate their precise nature (exercise price, expiration date). What propor-
tion of equity would be controlled if these were exercised? Are the shares held in bene-
ficial trust? Recent changes in the ownership of the firm should also be noted and
explained. What percentage of stock is owned by the employees? (See Chapter 8.)
If these investments are debt, the plan must specify for each the coupon, maturity,
and any special covenants in the loan agreement. What is the priority (seniority) of
repayment?
A brief outline of the deal structure belongs here. It describes the financing required
to start up the business or to fund development or expansion of current activities (see
Chapter 8). A three-to-five-year time frame is appropriate. Is the preference for new
debt or new equity? What are the potential sources for these funds? For what purposes
will the money be used? For equity financing, how much of the company will be offered
as stock? A structured deal includes the following information^23 :
- The number of shares of stock available for the offering, and the percentage of to-
tal ownership that this represents - The price per share of each unit^24
- The revised number of shares and each founder’s percentage ownership after the
proposed financing is completed - The effect of dilution on new investors’ shares^25
- The potential returns per share to the investor. These need to be consistent with the
previously reported financial plans. Avoid projecting something here that has not
been presented and validated earlier in the plan.
Critical Risks and Contingencies. In this section the new venture, following the rules
of full disclosure, reveals all material and relevant information that a prudent investor
needs. The nature of this information is inherently negative, including every reason why
someone would not want to invest in the venture. By fully revealing this information,
the entrepreneurs perform their legal and moral obligation to be forthcoming and hon-
est about the firm’s prospects. Should the investors lose their investment, full disclosure
can be a defense against claims of civil or criminal liability. This section typically includes