Chapter 12 Choose Smarter Instruments Flashcards
(18 cards)
What are the main types of financial instruments for venture development?
Equity, hybrid, debt, and leasing instruments.
Each type has its own use, cost, risk, and method of repayment.
What is the advantage of using the right financial instruments?
They align entrepreneurs’ and financiers’ interests, lowering risk and cost of financing.
What are equity and hybrid instruments?
Common stock, preferred stock (convertible), convertible debt, warrants, franchising, and employee stock-ownership trusts.
What is a non-controlling common share?
Shares sold without voting rights or with fewer voting rights than other shares.
Often sold to family, friends, and unsophisticated investors.
What is preferred stock in venture financing?
Convertible to common stock, offers priority in liquidation and dividends, and includes clauses for control.
What is a convertible instrument?
An instrument that can be converted from one form to another, such as from a loan to common stock.
What is a warrant?
A security that allows the holder to buy shares at a designated price for a defined time period.
What are the main responsibilities of a franchisee?
Financing the franchise, paying an upfront fee, and paying a royalty based on sales.
What are the advantages of limited partnerships?
- Limited liability to passive investors
- Pass-through of profits and losses
- Potential use of a corporation as a general partner
- Flexible profit and loss allocation
What are the disadvantages of limited partnerships?
- Limited transferability of interests
- Complexity in organization requiring legal assistance
What is an Employee Stock Ownership Plan (ESOP)?
An employee benefit program allowing employees to acquire stock in the corporation.
How does an ESOP differ from other pension plans?
An ESOT must primarily invest in employer securities, while other pension plans do not.
What are some debt and leasing instruments?
- Trade credit
- Various types of loans
- Leases
What is floor planning?
A financing method for larger equipment, repaid when the inventory is sold.
What is installment financing?
Financing offered to customers by vendors, allowing the purchase of durable goods.
What is the key to using debt effectively?
Ensuring funds can earn a higher return and that cash flow is available for payments.
True or False: Debt instruments typically require cash flow, personal guarantees, and/or collateral.
True.
What is the role of financial instruments in the relationship between financiers and entrepreneurs?
They help bridge gaps, allowing for appropriate risk-return alignment.
