Chapter 13
Preparing to raise equity (or debt) 3 Steps
1. determine how much money is needed 2. determine type of financing that is the most appropriate 3. develop a strategy for engaging potential investors or bankers
Angel Investors generally invest between ________________ in a single company
10k and 500k
Corporation
A legal "artificial" entity that is formed by filing specific documents with a state government
Limited Liability Company (LLC)
A legal form of business organization that is created by filing required documentation with a state government.
Why use equity capital (reenergize)
Bringing outside investors into an existing business can often reenergize it by providing new ideas, procedures, and processes
What is a primary concern for equity investors?
Growth Potential
An ________________ is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.
IPO
Most entrepreneurial firms that go public trade on the _______________, which is weighted heavily toward technology, biotech, and small-company stocks.
NASDAQ
Limited Partnership
One or more partners may have no liability for the debts and actions of the partnership.
Where to get the money if you need more than 5 million?
VC, IPO
Where to get the money if you need more than 1 million?
VC, private placement
_____________________ are looking for the "home run" and so reject the majority of the proposals they consider
Venture Capitalists
________________________ invest money in start ups in stages meaning that not all the money that is invested is disbursed at the same time
Venture Capitalists
Why use equity capital? (exposure)
You will reduce your own exposure to financial loss
Why use equity capital? (interest)
Your business will not have increased costs in the form of interest
An initial public offering (IPO) is what?
a company's first sale of stock to the public. (when a company goes public its stock is traded on one of the major stock exchanges)
The prototypical business angel is...
about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the start-up process. (number has dramatically increased over the past decade)
Which form of venture may be subjected to double taxation?
corporation (s corp, c corp)
Only certain legal forms allow for the entrepreneur to sell what?
equity
complete control over company, close to potential financial gains
exception
Little control over company, well below potential in financial gains
failure
Angel Investors are individuals who?
invest their personal capital directly in start ups
Financial Leverage
measure of the amount of debt relative to total investment
Angel Investors provide what?
mentoring, monitoring, guidance, connections and introductions to their widespread network, teach valuable business strategies
Equity Financing
money contributed to the venture in return for part ownership (usually in form of stock)
Venture Capitalist
money that is invested by venture capital firms in start ups and small ventures with exceptional growth potential (roughly 900 in the US)
The investor's view of Diversify
provide capital to ventures of differing risk profiles for the purpose of reducing overall risk, build portfolios
Optimum Capital Structure
ratio of debt to equity that provides the maximum level of profits
The investor's view is to get money so you must do what?
show resource providers that your venture has the potential to provide further financial rewards (growth potential)
Weighted average cost of capital (WAC)
the expected average future cost of funds
Venture capitalists often provide entrepreneurs with what?
valuable non-financial resources, may be highly involved in the venture
The entrepreneur's view of financing with equity (2)
(1) expensive (2) may create problems of control and decision making
How to calculate gain on investment?
(payout-investment+dividends)/invesment
Forms of Equity Financing (3)
angel investors, venture capitalists, initial public offering (IPO)
A distinct difference between angel investors and venture capitalist firms is what?
angels tend to invest earlier in the life of a company, whereas venture capitalists come in later
Where to get the money if you need between 100k and 1 million
bank loans, bank line of credit, angels, private placement, sba
How can entrepreneurs value their companies?
based on the firm's potential in their chosen market, checking out similar companies operating in the same industry to see how they are being valued
How do investors value startups?
based on your experience and past success, on usage of your product or service, progress with business (eg having a distribution channel set up)
Angel Investors are looking for companies that have the potential to grow how much?
between 30 and 40 percent per year
complete control over company, well below potential for financial gains
king/queen
Which form of business venture has a choice under federal tax law, of being taxed as either corporations or partnerships?
limited liability company (LLC)
Sole Proprietorship
most common, easiest to create, greatest amount of liability, can't sell ownership
Dividends (cost of equity capital)
payments of profits to the owners of corporations
Gain on Investment (cost of equity capital)
percentage amount that the payout of an investment differs from original cost
Cost of Capital
percentage cost of obtaining future funds
little control over company, close to potential in financial gains
rich
In this type of venture, a business owned by a single individual who is responsible for all debts and claims against the business (same as general partnership).
sole proprietorships
The investors view of Risk
the level of probability that an investment will not produce expected gains