finance

What is the main takeaway from the CB Insights study?

That many of the most successful startup exits were made by firms that didn't take huge amounts of VC money. Taking a lot to start with puts pressure on startups to grow fast and make profit for VC investors.

Considerations of who to approach

1. Find investors whose strategy and expertise fit your proposal 2. For early stage venture, seek local investors first 3. Look for a referral 4. Check references on investor

Which type(s) of funding are the following startups likely to use: 1. a new ecommerce website to sell only backpacks. 2. a new biotech process for developing anticancer drugs. 3. a new e-auction website (e.g. eBay or Quibids) that connects buyers and sellers.

1. Self financing 2. Angels if early stage or VC if later stage 3. Probably VC to make big move rapidly

puts

A bond that allows the holder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price is set at the time of issue, and is usually par value.

call

A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. Also known as a "redeemable bond."

What to do in first meeting?

1. Create excitement 2. Establish credibility 3. Begin to build relationship

three functions on an investment bank

advise companies on the mix and timing of security issues. underwriting/giving banks money. distributing/ selling stock through banks and brokerages then selling to consumer market

the legal definition of a corporation

an artificial being, invisible, intangible, and existing only in the contemplation of law"

two ways investors go about selecting a mixture or portfolio of investments to reduce risk

diversification and asset allocation

investment bank

financial institution engaged in issuing and reselling new securities.

three types of bonds

government bond, municipal bond, corporate bond

bond rating systems

rates and grades showing that amount of risk that a company won't be able to pay you back

security and exchange commission (SEC)

regulates. federal agency that administers U.S. securities laws to protect the investing public and maintain smoothly functioning markets

chief financial officer (CFO)

responsible for managing the firm's financial affairs and overseeing the firm's finance related activites

general partner

runs the business and faces unlimited liability for the firm's debts. the life of the partnership is tied to the general partner. it'd difficult to transfer ownership of the general partner's interest in the business-this usually requires a formation of a new partnership.

what is a bond?

security through which and issuer promises to pay the buyer a certain amount of money by a specified date "IOU"

market value growth charts

show amount of risk within a company

three types of business organizations

sole proprietorship, partnership, and corporation

diversification

spread risk out within same asset class. some will be positive and some negative but will balance out in the end

ethical and agency considerations in corporate finance

the agency problem (conflicts that arise out of the separation of management and ownership of the company) interferes with implementing the goal of maximizing shareholder wealth. when manager have little or no ownership in a firm, they are less likely to work energetically for the company's shareholders.

par value

the face value of a share of stock at the time it is originally issued

what is finance?

the study of how people and businesses evaluate investments and raise capital to fund them

book value

the value of a common stock expressed as total shareholders' equity divided by the number of shares of stock

partnership

two or more persons who come together as co owners for the purpose of operating a business for profit. no operation between the general partnership and its owners with respect to debts or being sued. profits of the partnership are faced to the partners as personal income. provides access to equity

corporation

typical organizational form chosen if very large sums of money are needed to build a business. legally functions separately and apart from its owners (the shareholders, also referred to as the stockholders). can individually sue and be sued, purchase, sell, or own property, and its personnel are subject to criminal punishment for crimes committed in the name of the corporation.

risk

variation of stock price. smaller company ='s lots of fluctuations. more risk more reward

asset allocation

what percentage should be put into different asset classes

area of finance that deals with determining the best way to manage its cash flows as they arise in its day to day operations is referred to as:

working capital management

How does angel investing differ from venture capital funding?

Angel- smaller amounts of money, individual investor most likely to have emotional connection, early stage interest without desire to be intrusive 2A Forbes Article on how to raise $ from VC

What are the motivations of the entrepreneurs that influence whether they use "bootstrapping" or seek venture capital?

Bootstrapping or self financing allows entrepreneurs to maintain control of operations and ownership equity VC route allows for bigger/faster strategic growth, when dominating market or moving fast is critical

What type of financing do you think most startups use and why?

Personal savings, credit, money from family/friends because it is the easiest/most available source

For startups using venture capital funding, what does an "exit" mean?

When they go public, IPO

sole proprietorship

a business owned by a single individual who is entitled to all the firm's profits and who is responsible for all the firm's debt

maximizing shareholder wealth

a principal goal, achieved by maximizing the stock price

limited liability company (LLC)

attractive alternative to the corporation for such a small business, a cross between a partnership and a corporation. no double taxation of earnings. the most a partner can lose is only what they invested. if an LLC looks too much like a corporation it will be taxed as one

area of finance that deal with determining what long-term investments the firm should take is referred to as:

capital budgeting

How a firm should raise money to fund investments is referred to as:

capital structure

market value

current price of a share in the stock market

financial markets

institutions that facilitate financial transactions

corporate bond

issued by a company as a source of long-term funding. more of these than all others. "risk free rate"

municipal bond

issued by a state or local government, lower yield/tax free income

government bond

issued by the federal government, can lower ratings

blue-chip stock

issued by well established company with a sound financial history and a stable pattern of dividends. ex: johnson and john sons, coca cola

the two classes of partnerships

limited and general

financial management team

makes investment (capital budgeting) decisions, capital structure decisions, and manages company's day to day operations (capital management)

equilibrium between supply and demand

market value/ reflects current situation of the company and future expectations/ growth rate

limited partner

only liable up to the amount the limited partner invested. Share can be transferred to another owner without the need to dissolve the partnership.

three ways stock values are expressed

par value, market value, book value