Does anyone have experience with Private Placements?

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Usually (or at least in my case) the valuation is created by the firm that is conducting the private placement. And then all investors in that round accept that same valuation. The discount that is given to the initial investors is the fact that they receive shares at a much lower price then when the company goes public (say the investors in the private placement get in at $10/share and at the IPO it goes at $20).

And yes, the investors do bank on growth of the company until they hit the IPO. Going in on a private placement is fairly risky, because the company could potentially never go public if shit hits the fan.

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The initial valuation is technically not at a discount. The valuation is based on what the company is actually valued at. The "discount" is the fact that when the company were to go public it would be worth significantly more than what it was valued at when you invested in the private placement. So yes, the discount is in a way baked into the initial valuation.

In regards to it being extremely illiquid, that's why they're risky investments. They have a high risk which can result in a high reward or loss

I have worked on 4-5 private placement deals - but please note this is outside the US.

1) The lead investor usually sets the valuation for the round. Different terms are usually not set unless it's an existing investor, who then might get some discount.

2) We reach out to PE and VC funds - there is technically no upper limit, but typically it's around 100 for an average asset and 50 or so for a very good asset (maintaining the deal tracker for such a deal is really really painful)

3) Preferred shares usually. Though could be a mix of common and pref.

4) You can make money either through an IPO, or a strategic sale of the company, or the sale of your shares in future rounds. Yes they are betting that the valuation will improve.

Currently working on a private placement in my internship, so take what I say with a grain of salt this is just from experience from what I've learned so far:

Valuation is set typically by the lead investor or by the ibank/merchant bank, and all investors are made to usually follow that valuation. In my case being on the sell-side, we actually set the valuation for the investors that they could agree on and we went forward with that valuation set for all future/potential investors.

We usually market to private equity firms, VC, but also we sometimes approach private high wealth investors looking to take an equity stake (or debt stake) in whatever company's looking to be privately placed. The only "limit" on the number of investors would be if the investors aren't content w/ splitting more and more shares. Obviously the more investors there are, the less stock each investor receives. There isn't a set limit, but it's up to the bank to help determine a solid number of investors to receive stock. In my current offering, I believe there are up to 50 different entities (from funds to individuals) receiving stock.

Usually preferred. Post above me nails it on the head. Occasionally you'll find a mix of common stock but that ties in w/ part 2, the more investors means that sometimes you'll have common stock intertwined with preferred.

Again, same as above. The value is driven by any future valuations. What the post above me left out is that another means that the investor receives value is if they purchase straight equity in the company, which means that they can make money off of the company's performance in some circumstances. However, the main stream of revenue for investors is through any future valuations the company may have whether it be through an IPO or another sale or round of investments.

Hope this helped!

My firm reaches out to strategics as well as financial investors. Sometimes we do dual process PP/M&A.

From a Canadian perspective, private placements are essentially equity raises for micro/smaller cap companies. They are exempt prospectus requirements.

Who sets the valuation for the round? Once agreed upon, do all investors follow the same valuation, or are different terms set for different investors?

This can be the lead marketer, company, or significant investor.

How many investors can you legally market to?

You can collect $5,000 cheques from solely retirees if you wanted. As long as they are accredited investors. Usually you want value added investors though.

Do you typically issue common or preferred stock? What's difference?

Common stock. Up here PPs are normally for smaller venture listed companies. Normally comes with a nice warrant as well.

How do investors typically make money? Is it purely through a potential IPO? If they are coming up a fair valuation and investing based on that valuation, are they betting the valuation will improve so they make money down the line, or are they getting in at a discount?

Since PPs are basically a way for an investor to buy an illiquid stock, the exit is the same as with normal investments. Paper becomes free trading after four months, where a lot of people will just sell and hold the warrant. Really depends on the kind of investor buying into it. Obviously a company doesn't want someone who will simply ruin their market come 4mo + 1 day, but in a bad market they will take the money from wherever they can.