Equity financing

Question 1

What are the 5 types of financing for a private company?

Answer 1

• Angel Investors (hold convertible notes)
• Venture Capital Firms (invest in start-ups)
• Private Equity firms ( Invests in private firms, or buys a public firm and privatizes it in a leveraged buyout LBO)
• Institutional Investors (ex ; insurance companies)
• Corporate Investors (Invest in private companies)

Question 2

When a private company first sells equity, what type of stock does it typically issue?

Answer 2

Preferred stock

Question 3

What are the typical features of a convertible preferred stock?

Answer 3

-Liquidity preference
(Liquidation preference = Multiplier X original investment)
-Seniority
-Participation rights
-Anti-dilution protection
-Board membership

Question 4

What are the characteristics of preferred stock in a Mature company?

Answer 4

• Preferential dividend
• Preferential Liquidation
• Voting rights

Question 5

What are the characteristics of preferred stock in a young private company?

Answer 5

• No regular cash dividend
• Option to convert to common stock
• Senior claim on the firm’s assets

Question 6

What is post-money valuation?

Formula including pre-money valuation

Answer 6

Post-money valuation = Pre-money valuation + Amount Invested

Question 7

What is post-money valuation?

Formula including number of shares

Answer 7

Post-money valuation = Number of shares after funding round X Pre-money price per share

Question 8

What are the (2) formulas used to define percentage ownership?

Answer 8

Percentage ownership = Amount invested/Post-money valuation

Where amount invested = (#shares owned X pre-money price per share)/ Post-money valuation

Percentage ownership = # shares owned/Total # shares

Question 9

What is pre-money valuation?

Answer 9

Total number of shares prior to the funding round times the current price share

Question 10

What are the main advantages of selling shares to public (IPO)

Answer 10

• Greater liquidity

- Better access to capital

Question 11

What are the main disadvantages of going public (IPO)

Answer 11

• Dispersed Equity holding

- Compliance is costly and time-consuming

Question 12

What are the 2 main types of offering

Answer 12

• Primary offering (New shares sold to raise capital)

- Secondary offering (Existing shares which are sold by current shareholders closing their position in the company)

Question 13

What are the (3) mechanisms to sell shares?

Answer 13

• Best-efforts (no guarantee all shares will be sold)
• First commitment (guarantee all shares will be sold, underwriter must cover the losses)
• Auction IPOs (*All winning bidders pay the same price - lower)

Question 14

What are the (3) roles of underwriters?

Answer 14

• Market the IPO
• Assist in required filings
• Ensure the stock liquidity after the IPO