Lesson 12: Equity Financing Flashcards
When a company wants to supplement their own funds who do they seej out?
Angel investors, other individual investors
Why has it become easier to find angel investors?
- There are more angel investors, and even angel groups. Angel groups are investors who decide as a group in what to invest.
- The cost of starting a business has dropped.
What are convertible notes?
Notes that pay interest, but may be converted to equity at a discount rate when the company starts issuing equity.
What are venture capital firms?
Limited partnerships that invest in many small private companies, providing diversification to investors. Sought out after angel investors.
What do venture capital firms get in return for investing?
The general partners receive a management fee of 1.5%-2.5% of committed capital plus 20% of profits (carried interest). Also typically get one-third if the board seats of directors.
What is a leveraged buyout?
When private equity firms buy out a public company using borrowed money and make it private
What can an existing private company do to raise capital?
Raise capital from private equity firms, institutional investors, or corporate investors.
How does a private company go public?
With an Initial Public Offering (IPO)
What is the advantage of going public?
Liquidity and greater access to capital
What is the disadvantage of going public?
Spreading the ownership lessens control and financial disclosures are costly
What is a primary offering?
When an IPO sells new shares
What is a secondary offering?
An IPO where stockholders sell their shares to the public
What do venture capitalists require for protection?
- Liquidation preference
- Seniority
- Participation rights
- Anti-dilution protection
- Board membership
What is the liquidation preference of venture capitalists?
If a company is liquidated, they receive a certain minimum amount before common stockholders get anything. Typically the minimum they receive is 1 to 3 times their investment.
What is the seniority preference of venture capitalists?
They get paid first from the proceeds. I’d this class is omitted and they have the same priority as earlier series, they are said to be pari passu.
What are the three ways an underwriter may sell an IPO?
Best efforts basis, a firm commitment basis, or an auction.
How is a best efforts basis performed?
The underwriter tries to sell all shares, but does not guarantee success
How is a first commitment IPO performed?
Most common type, the underwriter guarantees that all shares will be sold at the offer price. If all shares aren’t sold, the underwriter sells them at a lower price and eats the loss.
How are auction IPOs performed?
Not common, but investors bid for shares, and the highest bid gets the shares. All winning bidders pay the lowest winning price. If there aren’t enough shares for the lowest winning price, those bidders get a prorata portion of their bid.
What is a syndicate?
A group of underwriters managing an IPO
What is a red herring?
A preliminary prospectus part of the registration statement with the SEC that is distributed to potential investors.
What happens when the SEC approves and offering?
The company prepares a final registration statement and potential investors get a final prospectus. The final registration statement states the number of shares offered and the offer price.
What is a road show?
When company management and underwriters travel around the company to gauge interest.
What is book building?
The process of gauging demand and coming up with an offer price
