A deal memo, short for deal memorandum, is a document that summarises the key terms and conditions of a proposed investment deal. It's used to facilitate discussions and negotiations between potential investors and the target company, acting as a reference point and providing clarity on the specifics of the potential transaction.
Deal memos generally include:
Overview:
A description of the company, its product or service, business model, industry, market, and competitive landscape.
Key Terms:
The critical financial terms of the proposed investment, such as the investment amount, the valuation of the company, the type of securities being offered (common shares, preferred shares, convertible notes, etc.), and the rights associated with those securities.
Use of Funds:
How the company intends to use the investment to grow its business, including aspects like product development, sales and marketing, hiring, expansion into new markets, etc.
Risks and Mitigation Strategies:
The potential risks associated with the investment and how the company plans to mitigate them.
Investment Rationale:
The strategic reasons behind the investment, including the potential for return, the alignment with the investor's portfolio and investment strategy, and other value-adds.Exit Strategy: A brief discussion of potential exit strategies, which could include an initial public offering (IPO), acquisition by another company, or sale to another investor.
The deal memo is typically drafted by the investor after conducting initial due diligence on the company, and is used to gain approval for the investment from the investor's investment committee or other decision-making body. It's not a legally binding document, but rather a tool to clarify the terms of the deal, inform decision-making, and facilitate negotiation.
