EEE 2023 Exam 2 chapters 6-10
Nondisclosure agreement (NDA)
cannot disclose company's trade secrets
Equity Financing
exchanging partial ownership of a firm, usually in the form ofstock, for funding.
Most investors look for an______
exit strategy
Crowdfunding
funding a project or new venture by raising monetary contributions from a large number of people, typically via the Internet. Crowdfundin
Efficiency
how well do we use or buy our assets
Historical financial statements
income statement, balance sheet, and statement of cash flows
=assets
liabilities + equity
Current Liabilities
obligations that are payable within a year.
Advisory board
offers help in providing direction and advice to the company, but it possesses no legal responsibility for the firm and gives non-binding advice
intern
person who works for a business short-term as an apprentice or trainee for the purpose of obtaining practical experience
Noncompete agreement
prevents an individual from competing against a former employer for a specific period of time
pro forma financial statements
projected estimates best guess for future financial performance Critical for business plan for new venture Ratios are used the same way for historical and pro forma statements
The pro forma Balance sheet
provides a firm a sense of how its activities will affect its ability to meet its short-term liabilities and how its finances will evolve over time.
Burn Rate
rate at which it is spending its capital until it reaches profitability
Liability of newness
refers to the fact that companies often falter because the people who start them aren't able to adjust quickly enough to their new roles and because the firm lacks a "track record" with outside buyers and suppliers.
Income Statement
results of the operations of a firm over a specified period of time.
Ethical dilemma
situation involves doing something beneficial for one's self or business but maybe an unethical conflict of values
Balance Sheet
snapshot of a company's assets, liabilities, and owners' equity at a specific point in time.
VC's invest
someone else's money Start a venture capital fund (Raise money 2% per year in expenses 20% of profits)
Stability
strength and vigor of the firms overall financial posture must keep debt in check and earn profit
Training programs
teach business ethics to help employees deal with ethical dilemmas and improve ethical conduct
IPO (initial public offering)
the first sale of stock by a firm to the public.
Angels invest
their own money high net worth Patience on exit (How big of a check to write 5% of net worth 10 deals? 100 net worth 5mil total 500,000 per deal)
Heterogeneous founders
they have different strengths
Liability of newness
we've never done it before (cant learn fast enough)
Founders Agreement
written dc that deals with how a company is agreed to be formed structured and how decisions are made ownership status and responsibility of owners
Personal Investment
What: Putting your own money into the company. • When: The earliest investment. • Good: Get started early. Show commitment. • Bad: Increases personal risk.
Diwight Eisenhower
"Plans are worthless planning is everything"
AFs $$$
$0 - $250,000 Most $5,000 to $25,000 per investor
Private Equity
$10 million - $10 billion
Angel Groups $$$
$100,000 - $10 million ("Syndication'"!)
Angels $$$
$25,000 - $ 5 million ("Superangels Most $50,000 to $400,000
Venture Funds
$250,000 - $50 million ("Early stage" & Mega VC's!) Most $2 million to $10 million
Subchapter S
Combines the advantages of a partnership and a C corporation. not double taxed owners are not liable for debts of business does not pay taxes profits and losses are passed through tax returns of owners
Operating agreement
Details of how the company is run included everything from founders' agreement how to buy out a founder and more
General Partnership
Form of business organization where two or more people pool skills and abilities and resources to rn a business the primary disadvantage is that all partners are liable for all the partnership's debt and obligations
Bottoms up approach
How do i get my first then second and so on to build it up
Liquidity
How quickly can I get cash?
Freelancers and virtual assistants are considered
Independent contractors
C corporation
Is a separate legal entity that, in the eyes of the law, is separate from its owners.
Partial list to include in a founder's agreement
Nature of prospective business Identity and proposed titles of the founders apportion of stock or division of ownership consideration paid of stock or ownership share of each of the founders identification of any intellectual property signed over to the business description of how founders will be compensated and how profits in the business will be divided provisions for resolving disputes buyback clause
are the attributes that strengthen the chances of afounder's success.
Prior entrepreneurial experience, relevant industry experience, and networking
Income statement = are you making money
Report of financial results of a companies operations (profit) over a given period of time
Top down
Sets realistic expectations Doesnt say how you get there
Balance sheet = understanding of debt and assets
Snapshot of a companies assets liabilities and owners equity at a specific point in time
Cash flow = are you liquid enough
Summarizes changes in a companies cash position for a specific period of time
Qualifications for subchapter S corporation
The business cannot be a subsidiary of another corporation. The shareholders must be U.S. citizens. Partnerships and C corporations may not own shares in a subchapter S corporation. Certain types of trusts and estates are eligible to own shares in a subchapter S corporation. It can only have one class of stock issued and outstanding (either preferred stock or common stock). It can have no more than 100 members. Husbands and wives count as one member, even if they own separate shares of stock. All shareholders must agree to have the corporation formed as a subchapter S corporation.
Ratio analysis
The most practical way to interpret or make sense of a firm's historical financial statements is through ratio analysis
Bootstrapping
Trying to get it going without outside investments or loan Personal investment Profit reinvestment Trade credit Accounts receivable financing
Contests
What: BP (or other) contest with prize money. • When: Very early in the company's creation. • Good: Free(!) money. No dilution. No fundraising, • Bad: Time invested to apply. Awards are small.
Personal guarantee loans
What: Bank loan backed by personal guarantee. • When: Whenever. (Or if rich enough and illiquid.) • Good: Cheap money. No dilution. No fundraising. Interest payments are tax deductible for company. • Bad: Effectively a personal loan that could lead to bankruptcy.
Accounts receivable financing
What: Borrow money against outstanding invoices. • When: When you have sales to very established clients. • Good: No dilution. No fundraising. • Bad: Not so cheap money.
Customer Financing
What: Customer pays an advance. • When: When product is customized and cannot be resold • Good: Cheap money. No dilution. No fundraising. • Bad: Can turn off some customers. Risk if used and product development fails.
Trade credit
What: Delay paying vendor bills. • When: Anytime, but limit to tight money situations. • Good: No dilution. No fundraising. • Bad: Vendor may cut you off or demand payment up front. May assess late tees.
Grants
What: Entity gives you money to solve a problem. • When: When there is significant technical risk. Poor investor appeal • Good: Free(!) money. No dilution. No fundraising. • Bad: Reporting Requirements. Time invested to apply. Slow approach.
Equity
What: Ownership of Stock in Your Company • When: Multiple Stages in Company Growth • Good: Partner in the Deal. Shared Risk. • Bad: Share of All Future Profits. Investor Oversight (not all bad!)
Profit reinvestment
What: ReInvesting profits into the company • When: All the time. (first 2 to 4 years anyway) • Good: Cheapest money. No dilution. No fundraising. • Bad: Delays the payout.
SBA loans
What: SBA backed bank loan. • When: For smaller amounts and after the company is established. • Good: Cheap money. No dilution. No fundraising. • Bad: Hard to get without assets.
historical financial statements
actual numbers looking backwards history of real financial performance
Rewards-based crowdfunding
allows entrepreneurs to raise money in exchange for some type of amenity or reward.
elevator speech (or pitch)
a brief, carefully constructed statement that outlines the merits of a business opportunity.
If a new venture organizes as a corporation, it is legally required to have
A board of directors
Virtual assistant
A freelancer who provides administrative-technical or creative assistance from a home office
Contract Labor
An independent contractor, in contrast, is someone who is in business for themselves, work on their own time and with their own tools and equipment, and perform services for a number of different clients. Project based pay
How to find investors
Angel Capital Association (ACA),
Bank loans
Banks Want 3 Years of History and Positive Cash Flow • Co-Signing a Bank Loan is (almost) a Personal Loan • Investing Savings Creates Personal Risk • Look For Equity Investors
Founder is the
driver Their experience network ethics and vision all have huge influence on company
Sole Proprietorship
- simplest form of business entity - A form of business organization involving one person and the person and business are one in the same - A sole proprietorship is not a separate legal entity the sold proprietor is responsible for all the liabilities of the business and this is a significant drawback
Forcasts
- An estimate of sales and expenses - Industry averages - The experiences of similar start ups - Revenue - COGS
Advantages of Sole Proprietorship
- Creating one is easy and inexpensive - The owner maintains complete control of the business and retains all of the profits - Business losses can be deducted against the sole proprietor's other sources of income - It is not subject to double taxation (only c has double taxation) - The business is easy to dissolve
Financial ratios
- Depict relationships between items on a firms statements - An analysis of FR helps a firm determine whether it is meeting its financial objectives and how it compares to peers
General Partnership Advantages
- Easy and inexpensive compared to a cooperation or limited liability company - The skills and abilities of more than one individual are available to the firm - Having more than one owner may maked it easier to raise funds - Business losses can be deducted against the partners other sources of income - Is not subject to double taxation
bootstrapping methods
- Hiring interns. - Sharing office space. - Leasing equipment instead of buying. - Minimizing personal expenses.
Partnerships
- If two or more people start a business they must organize a partnership corporation or limited liability company - Partnerships are organized as either general or limited liability partnerships
Disadvantages of Sole Proprietorship
- Libablility on the owner's part is unlimited - The business relies on the skills and abilities of a single owner to be successful of course the owner can hire employees who have additional skills and abilities - Raising capital can be difficult - The business ends at the owners death or loss of interest in the business - The liquidity of the owner's investment is low
Limited Liability Partnership Advantages
- Members are liable only for amount of their investment for debts and obligations - Number of shareholders is unlimited - LLC can elect to be taxed as a sole proprietor, partnership, S cooperation, or corporation, providing flexibility - Because profits are taxed only at shareholder level there is no double taxation
Pro Forma Financial Statments
- Projections for future periods based on forecasts - Typically completed for two to three years in the future - high tech companies may do 5 yr projections - Proforma FS are planning tools not required by SEC - PFS usually required in a business plan
Limited Liability Partnership
- Rapidly growing in US - Along with subchapter S it is a popular choice for start ups - The limited liability company combines the LL advantage of the cooperation witht he tax advantages of a partnership - A LL company does not pay taxes profits and losses and passed through to the tax returns of owners - A modified form of general partnership - Major difference is that a limited partnership includes two classes or owners; general partners and limited partners - The general partners are liable for the debts and obligations of the partnership but the limited partners are only liable up to the amount of their investment
Limited Liability Partnership Disadvantages
- Setting up and maintaining one is more difficult and expensive - Tax accounting can be complicated - Some of the regulations governing LLC's var by state Because llc's are relatively new there is not at much legal precedent available for owners to anticipate how legal disputes may affect their business Some states levy a franchise tax on LLCs which is essentially a fee the LLC pays the state for the benefit of LL
10 Exits (Selected from J. Huston, Ohio Tech Angels)
1) "Grand Slam Homerun" Exceeds 10X in 5 years (>58% IRR) C 2) "Lucrative Exit" <58% IRR, but at least a 1 - 10X return 3) "Harry Houdini" Escaped with a 1X return; No loss 4) "Lost a Little" Didn't lose it all (<1X but not a oX) 5) "My Grandkids' Company" Company is successful but there's no exit in sight. Maybe it will occur after my grandchildren inherit the Portfolio? 10 Exits (Selected from J. Huston, Ohio Tech Angels) 6) "Zombie" A walking dead venture which will never become a great company, nor will it die so I can declare the loss. 7) "Deductible Loss" It died and I got to declare the loss 8) "Funeral Expenses" Not only did I lose all my original investment, I had to also cover the costs of winding down the venture, plus pay accountants to provide the final accounting needed so I could take my tax deduction. 10 Exits (Selected from J. Huston, Ohio Tech Angels) 9) "The Worst Gets Worse" "The lass that keeps on losing" due to ongoing litigation expenses even after the company has no value. 10) "Angel Hell" In addition to losing all my investment plus a considerable amount of my time, media coverage tarnished my reputation, plus damaged my relationship with co-investors.
easy paperwork and little protection to lots of protection and paperwork
1. sole proprietorship 2. partnership 3. limited partnership 4. LLC limited liability company 5. S corporation 6. C corporation
Find directors who will
change you not just YES people
The most common sources of debt financing are
commercial banks and Small Business Administration-guaranteedloans
Market analysis
definition of overall market
Financial Ratios
depict relationships between items on a firm's financial statements, are used to discern whether a firm is meeting its financial objectives and how it stacks up against its industry peers.
