Chapter 23 Flashcards
what is an angel investor?
buy equity in small private firms
what is a venture capital firm?
limited partnership that specializes in raising money to invest in the private equity of young firms
who are the venture capitalists?
general partners of VC firm
what is carried interest?
fee generated by the fund by taking share of any positive returns
what is a private equity firm?
organized like VC but invests in equity of existing privately held firms rather than start-ups
what is a corporation that invests in private companies called?
corporate investor corporate partner, strategic partner, and strategic investor
when a company founder decides to sell equity stake to outside investors for the first time, how does he typically do it?
preferred stock
what is preferred stock?
issued by mature companies usually has preferential dividend and seniority in any liquidation and sometimes special voting rights
what is convertible preferred stock?
preferred stock gives option to owner to convert into common stock at some future date
what is pre-money valuation?
value of the shares prior to the funding round
what is post money valuation?
value of the whole firm (old plus new shares) at funding round price
what are two advantages of an IPO?
greater liquidity and access to capital
downside of ipo?
early investors diversify, lack of management focus
what is a primary offering?
shares that are sold in IPO that are new shares to raise new capital for first time
what is a secondary offering?
existing shares sold by current shareholders (Exit strategy)
what is a best efforts ipo?
smaller IPO, underwriter accepts deal: underwriter not guarantee stock will be sold but instead tries to sell at the best price possible. usually an all or none clause
What is a firm commitment IPO?
underwriter guarantees that it will sell stock at offer price
what is the difference between the underwriters purchase price and the offer price called?
spread - primary means of compensation for underwriter
what is the lead underwriter?
primary investment bank responsible for managing ipo along with group of other underwriters
what is the group of underwriters called who manage IPO?
syndicate
what are underwriters responsible for?
marketing and pricing IPO, as well as helping firm with all necessary filings
what is a registration statement?
form issuers must file that provides financial ad other info about the company to investors of IPO
what is the preliminary prospectus or red herring?
part o registration statement of IPO. distributed before offering.
when does company prepare final registration statement and what else do they prepare?
SEC approval - and they file final prospectus (offer price and number of shares)
what is a road show? does it impact valuation?
senior management and underwriters travel explaining deal. during this they get advice from potential investors about valuation
at the end of road show, what happens?
investors provide non-binding indications of their demand
why is what happens at end of road show important to valuation? what is it called
underwriters study total demand and adjust price until it is certain issue will succeed - called book building
what is a lockup provision?
pre-existing shareholders are subject to this prior to IPO and can’t sell their shares until 180 days after IPO
Do IPO’s tend to be over or under priced?
under-priced
What is winners curse?
adverse selection process in underwriting IPO’s. Underwriter underprices issues in oder for less informed investors to be willing to buy
The number of IPO issues is or is not cyclical?
it is cyclical
the long run performance of a newly public company is good or poor?
poor
what is a seasoned equity offering?
process in which public firm issues new shares. main difference between IPO is that price setting process is not necessary because a market price for the stock already exists
what two kinds of seasoned equity offerings are there?
general cash offer and rights offer
what is a general cash offer?
fir offers new shares to investors at large
what is rights offer?
fir offers new shares only to existing shareholders. most offers in US are this way
why is there a 2 to 3 percent drop after an IPO?
Belief companies only enter IPO’s when their stock is overvalued
what is a tombstone?
advertisement in newspapers which intermediaries advertise the sale of stock (both ipo an IPO) on.
what are the main sources of funding for private companies wanting outside equity?
angel investors, venture capital, institutional investors, and corporate investors
how does an auction ipo work?
market determines stock price by auctioning off company. investors place bids over period of time. sorts bids from high to low, and sells stock at highest price that will sell at offered shares. all winning bidders pay this price, even if they initially bid something higher.
what are the four weird things about IPO’s?
underpriced, cyclical, high costs, long run performance bad
