Corp 2 Flashcards
What is venture capital?
Venture capital is money invested to finance new, early-stage, high-risk businesses with high growth potential. Investors often take equity and may influence management decisions.
Why is venture capital funding usually staged?
Staged funding motivates entrepreneurs to achieve milestones, reduces risk for the investor, and allows VCs to shut down failing ventures early.
Who are the common sources of venture capital?
Angel investors, corporate venturers, and private equity investors. Most VC funds are structured as limited partnerships with general partners managing investments.
What are the main exit strategies for venture capitalists?
VCs exit through IPOs, sales to large corporations, secondary sales, or management buyouts (MBOs).
What is an Initial Public Offering (IPO)?
An IPO is the first sale of a company’s stock to the public, usually to raise capital that exceeds private investor limits.
What is the difference between a primary and secondary offering in an IPO?
Primary offerings raise new capital by issuing new shares. Secondary offerings allow existing shareholders to sell their shares, providing no new capital to the firm.
What is the role of an underwriter in an IPO?
An underwriter buys securities from the firm and resells them to the public, assuming risk and setting the offer price.
What is underpricing in IPOs?
Underpricing occurs when shares are sold below their true market value, often causing a price jump on the first day of trading.
What is the ‘winner’s curse’ in IPO investing?
It’s the risk that uninformed investors receive more of the overvalued (cold) IPOs and less of the undervalued (hot) ones.
What are the components of IPO flotation costs?
Flotation costs include underpricing, underwriter spread, and direct expenses like legal and accounting fees.
What is a firm commitment underwriting arrangement?
Underwriters buy all the shares and resell them, taking on full financial risk.
What is a best efforts underwriting arrangement?
Underwriters agree to sell as many shares as possible but do not guarantee full sale.
What is shelf registration?
A regulatory process that allows firms to pre-register securities for future issues.
What is a rights issue?
An offer to existing shareholders to buy additional shares at a discount before the public.
Why might stock prices fall after a new issue?
Due to increased supply and market perception that management believes the stock is overvalued.
What is a private placement?
A sale of securities to a limited number of investors without a public offering, often cheaper but less liquid.
Who is a Qualified Institutional Buyer (QIB)?
An entity allowed under SEC Rule 144A to trade private placements, typically large institutions.
What is a prospectus?
A formal legal document that describes a security offering to potential investors, outlining risks and details.
What is the underwriting spread?
The difference between the price at which underwriters buy shares from the firm and the price they sell to the public.
What are the benefits of going public?
Access to capital, valuation through market price, wider investor base, and potential lower borrowing costs.
