Raising Finance (equity)

Question 1

What is seed-corn finance?

Answer 1

‘Seed-corn’ describes initial funding up to approx. £500k in most cases

Question 2

What are the characteristics of a limited company?

Answer 2

1. Legal entity, separate and distinct from its members. Thus can enter into contracts in its own name, and can sue and be sued in the courts.
2. Liability of members (shareholders), is limited to the amount they have invested. Thus if a Limited Company is sued or liquidated in order to settle debts, it will only pay out to the value of its current worth - the investors cannot be made to pay any more.

Question 3

How is seed-corn finance raised?

Answer 3

1. Founder management team (FMT) may have savings of their own
2. Beyond this the FMT need to look externally (business angels or Venture Capitalists)
3. There may also be friends and family who wish to invest

Question 4

What are the essential features of ordinary shares?

Answer 4

1. They carry voting rights (one vote per share)
2. Any person or party owning 50% plus 1 of the issued equity controls the company

Question 5

How can the share-capital of a company be expressed?

Answer 5

1. Authorised capital, the maximum amount a company is allowed to issue
2. Issued capital is that part of the authorised capital of which share certificates are in circulation
3. Authorised capital is greater than issued capital to leave room for future expansion

Question 6

If a £1 share is issued for £1.20, what is the nominal value, share premium and issue price?

Answer 6

Nominal value = £1
Share premium = 20p
Issue price = £1.20

Question 7

Why are shares sometimes issued at a premium?

Answer 7

1. Over time market value may well rise.
2. In future years there may be new issues of shares with a nominal value that is no longer realistic, and would therefore attract a premium
3. The excess monies collected by the company constitute a capital reserve

Question 8

What can capital reserve be used for under the Companies Act 1985?

Answer 8

1. Retain it for future internal investment
2. Make a ‘bonus issue’ of new shares
3. CANNOT be used to pay dividends

Question 9

Why are dividends unlikely in the early stages of company’s growth?

Answer 9

Early stage companies are unlikely to return a profit, and therefore dividends are unlikely.

Question 10

What are bonus issues?

Answer 10

1. The conversion of reserves into ‘free’ shares for existing shareholders, distributed on a pro-rata basis.
2. Devalue existing shares as share premiums will need to be reduced.

Question 11

What are rights issues?

Answer 11

New shares which are issued to existing shareholders pro-rata for a price which is usually a discount on the market price