Chapter 13 Flashcards
Equity Financing
Sale of shares of stock in exchange for cash/capital to start/grow business
General Rule of Thumb with Equity Raising
Avoid seeking investment for as long as possible to receive better deal and allow venture to grow
Stages of Equity Financing
Seed Stage, Start Up, Early Stage
Seed Stage
small or modest amounts of capital are provided
start up stage
money is provided to enable entrepreneur to implement idea by funding R&D
Early Stage
larger funds provided for companies that have team in place and product or service tested/piloted but little to no revenue
Trade of Entrepreneurs make 2 measurement scales
control of company and financial gain
Control of Company scale
complete and little
financial gain scale
well below or close to potential
Failure
little control and well below potential financial gain
Rich
little control and close to potential financial gain
King/Queen
Complete control and well below potential financial gain
Exception
complete control and close to potential financial gain
Purpose of Valuation for Entrepreneurs
Entrepreneurs need to know value of business when seeking equity investors to know what they need to sell and for what price
how entrepreneurs value business (2)
based on firms potential in chosen market, benchmarking and other indicators
2 sites for valuation
BizBuysell and BizQuest
Pre Money Valuation
Company’s value before receiving outside investment
Post-Money Valuation
company’s value after receiving round of financing
Angel Investor
investor who uses their own money to provide funds to start up
Accredited Investor
investor who earns annual income of more than 200,000 or have net worth > 1million
What stage do Angel Investors invest in and how much is deal
invest in seed and start up, deal from capital association is 150,000 to 500000
Where to find Angel investors (2)
angel list, angel groups (>350)
Non affiliated angels
golf clubs, charity events, entrepreneurship networking event
Angel investors help hurdle of valley of death, what is it?
No steady stream of revenue and company burning cash
Venture capitalist
investor who generally invests in early and later stages because of perceived long term growth potential
General partner
manage investment fund
Limited partner
from whom Venture Capitalist raise money, pension, insurance, family, endowment
LPA
Limited Partnership Agreement
VC Firm Structure
Venture Capital Firm General Partner -> Venture Capital Fund (Limited Partnership) -> Investment Portfolio
3 things that venture capital firms look for
experience and talent in team
market potential for start up
time to exit event, liquidity, acquisition
Debt Financing
borrowing money to start a business that is expected to be paid back with interest in future
Sources of Debt Financing
Institutional Leaders, Private Parties
Institutional Lender Requirements (2) with description
- Equivalent amount of collateral: property owned by borrow / personal property
- Personal guarantee: venture has few assets to use as capital, entrepreneur has personal assets that will suffice
Loan Interest Rate
charge to start-ups is > large established companies (prime rate)
