Chapter 15 Flashcards
Define venture capital?
Money invested to finance a new firm
VC organisations are dedicated to this type of investment
Note
Success of new firms depends heavily on managers, tf SHs are keen to provide incentives for managers (eg. by buying preferred stock)
Restrictions can be placed on management by VC company and then funds dispersed as firm succeeds
6 stages of a firms growth from nothing to going public?
1) SEED MONEY: low level financing provided to prove new idea
2) START-UP: early stage firms that need funding for expenses associated with marketing and product development
3) FIRST ROUND: early sales and manufacturing funds
4) SECOND ROUND: working capital for early stage firms that are selling
5) THIRD ROUND: also called Mezzanine financing, it is expansion money for a newly profitable firm
6) FOURTH ROUND: also called bridge financing, it is intended to finance the firms ‘going public’ process
What is a venture capitalist?
Investment firms that makes venture investment, providing capital for start-up or expansion
They look for higher rates of return, and bring managerial expertise to the firm
What are business angels?
Private investors with huge amounts of personal capital, who look to invest in business ignored by FIs for being too risky
Read
Bit below business angels
Point regarding riskiness of VC?
High uncertainty tf need to identify losers early on; don’t throw good money after bad!
RofR roughly 13%/year
What is the IPO?
First offering of stock to the public
What is a primary offering?
New shares are sold to raise additional cash for the firm
What is a secondary offering?
Existing shareholder decides to cash in by selling part of their holdings
See
page 4 ‘motives for IPO’
4 steps of an IPO?
1) Select underwriters
2) Form registration statement, take key info from it and make prospectus
3) (optional) Road show
4) Once have go ahead from SEC, stock is issued at agreed price
Role of underwriters? (3)
- provide firm with financial advice
- buy the issue
- resell issue to public
What are blue-sky laws?
Laws in each state that the issues must comply with that regulates the sales of securities
What does a prospectus do?
It provides key info on the issuing of securities
What is a road show?
A talk to potential investors to gauge interest/max WTP for shares etc.
What is a spread?
The difference between the public-offer price and the price paid by the underwriter (normally roughly 7%)
What is underpricing and why is it done?
When the underwriter sells shares below the true value to ensure they all sell
Way an underwriter can reduce their risk?
They can sell on a ‘best-effort’ basis tf can return stock to firm that they can’t sell (if v. risky)
Explain the largest cost of an IPO?
Usually it is underpricing of stock, roughly 17.9% in US and more elsewhere; it effectively transfers wealth from original SHs to the new ones (eg. Ebay from $18 to $47 in one day after IPO)
See and learn
US bookbuilding method page 6 v important
Way of gauging share price to sell at for an IPO?
Open auction: investors submit their bids stating how many shares and at what price and highest bidders get the shares (reduces underpricing costs)
Define general cash offer?
Sale of securities to investors by an already public company
How can a shelf registration reduce hassle for firms wrt gaining finance?
It allows firms to file one registration statement for several issues of the same security
Define private placement?
Sale of securities to limited (max 35) investors with no IPO
Avoids SEC registration hassle but then more difficult to resell!
Read bottom of notes ch15
now
Define rights issues?
Issues of securities offered only to current stockholders (also called privileged subscriptions/issues)
see and understand bits mentioned in bottom of notes for slides
now
