Chapter 23

Question 2

what is an angel investor?

Answer 2

buy equity in small private firms

Question 3

what is a venture capital firm?

Answer 3

limited partnership that specializes in raising money to invest in the private equity of young firms

Question 4

who are the venture capitalists?

Answer 4

general partners of VC firm

Question 5

what is carried interest?

Answer 5

fee generated by the fund by taking share of any positive returns

Question 6

what is a private equity firm?

Answer 6

organized like VC but invests in equity of existing privately held firms rather than start-ups

Question 7

what is a corporation that invests in private companies called?

Answer 7

corporate investor corporate partner, strategic partner, and strategic investor

Question 8

when a company founder decides to sell equity stake to outside investors for the first time, how does he typically do it?

Answer 8

preferred stock

Question 9

what is preferred stock?

Answer 9

issued by mature companies usually has preferential dividend and seniority in any liquidation and sometimes special voting rights

Question 10

what is convertible preferred stock?

Answer 10

preferred stock gives option to owner to convert into common stock at some future date

Question 11

what is pre-money valuation?

Answer 11

value of the shares prior to the funding round

Question 12

what is post money valuation?

Answer 12

value of the whole firm (old plus new shares) at funding round price

Question 13

what are two advantages of an IPO?

Answer 13

greater liquidity and access to capital

Question 14

downside of ipo?

Answer 14

early investors diversify, lack of management focus

Question 15

what is a primary offering?

Answer 15

shares that are sold in IPO that are new shares to raise new capital for first time

Question 16

what is a secondary offering?

Answer 16

existing shares sold by current shareholders (Exit strategy)

Question 17

what is a best efforts ipo?

Answer 17

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

Question 18

What is a firm commitment IPO?

Answer 18

underwriter guarantees that it will sell stock at offer price

Question 19

what is the difference between the underwriters purchase price and the offer price called?

Answer 19

spread - primary means of compensation for underwriter

Question 20

what is the lead underwriter?

Answer 20

primary investment bank responsible for managing ipo along with group of other underwriters

Question 21

what is the group of underwriters called who manage IPO?

Answer 21

syndicate

Question 22

what are underwriters responsible for?

Answer 22

marketing and pricing IPO, as well as helping firm with all necessary filings

Question 23

what is a registration statement?

Answer 23

form issuers must file that provides financial ad other info about the company to investors of IPO

Question 24

what is the preliminary prospectus or red herring?

Answer 24

part o registration statement of IPO. distributed before offering.

Question 25

when does company prepare final registration statement and what else do they prepare?

Answer 25

SEC approval - and they file final prospectus (offer price and number of shares)

Question 26

what is a road show? does it impact valuation?

Answer 26

senior management and underwriters travel explaining deal. during this they get advice from potential investors about valuation

Question 27

at the end of road show, what happens?

Answer 27

investors provide non-binding indications of their demand

Question 28

why is what happens at end of road show important to valuation? what is it called

Answer 28

underwriters study total demand and adjust price until it is certain issue will succeed - called book building

Question 29

what is a lockup provision?

Answer 29

pre-existing shareholders are subject to this prior to IPO and can’t sell their shares until 180 days after IPO

Question 30

Do IPO’s tend to be over or under priced?

Answer 30

under-priced

Question 31

What is winners curse?

Answer 31

adverse selection process in underwriting IPO’s. Underwriter underprices issues in oder for less informed investors to be willing to buy

Question 32

The number of IPO issues is or is not cyclical?

Answer 32

it is cyclical

Question 33

the long run performance of a newly public company is good or poor?

Answer 33

poor

Question 34

what is a seasoned equity offering?

Answer 34

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

Question 35

what two kinds of seasoned equity offerings are there?

Answer 35

general cash offer and rights offer

Question 36

what is a general cash offer?

Answer 36

fir offers new shares to investors at large

Question 37

what is rights offer?

Answer 37

fir offers new shares only to existing shareholders. most offers in US are this way

Question 38

why is there a 2 to 3 percent drop after an IPO?

Answer 38

Belief companies only enter IPO’s when their stock is overvalued

Question 39

what is a tombstone?

Answer 39

advertisement in newspapers which intermediaries advertise the sale of stock (both ipo an IPO) on.

Question 40

what are the main sources of funding for private companies wanting outside equity?

Answer 40

angel investors, venture capital, institutional investors, and corporate investors

Question 41

how does an auction ipo work?

Answer 41

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.

Question 42

what are the four weird things about IPO’s?

Answer 42

underpriced, cyclical, high costs, long run performance bad