Lecture 7: Financing and Distributing Flashcards Preview

MOS 1023 Final > Lecture 7: Financing and Distributing > Flashcards

Flashcards in Lecture 7: Financing and Distributing Deck (75):

What is bootstrapping?

how entrepreneurs raise seed money to start their business


What is seed money from bootstrapping used for?

Is spent on developing a prototype of the product and also a business plan.


How long does bootstrapping usually last?

lasts 1-2 years


Who are venture capitalists?

are the people that help new businesses get started especially with early-sage financing. They are wealthy people who invest their own money.


What is another name for venture capitalists?

angel investors


What firms are the primary sources of funds for venture capital firms?

Financial and insurance firms


What are the 3 reasons as to why traditional funding does not work?

1. High degree of risk - don't know if the business will be successful
2. Types of Productive Assets- they have more intangible assets
3. Info asymmetry problems- the investor does not know as much about the product


What does venture capitalists investments give them?

equity investment, often in the form of stock that is convertible into common stocks


What is the most important role of venture capitalists?

to provide advice and council to entrepreneurs because they fall short on skills that are needed for growth


What are some tactics to reduce risk for venture capitalists?

1. Fund in stages (3-7)- not all at once
2. Make entrepreneurs make personal investments to prove their confidence in the business
3. Syndicating investments
4. in-depth knowledge about the industry


What is syndication?

when a venture capitalists sells a % of a deal to other venture capitalists

(splitting into 2 creates less risk)


What are 2 ways that syndication reduces risk?

1. increases diversification
2. sharing of investment shows that the investment is a good decision


What is the exit strategy of venture capitalists?

They are not long-term investors. They exit by selling their equity position.


How many years does it usually take for a venture capitalist to exit?

3-7 years


What are the 3 important details venture capitalists need to agree on in their exit strategy?

1. Time (when to exit)
2. The method of exit
3. What price is acceptable


What are the 3 types of buyers venture capitalists can sell to?

1. strategic buyer in a private market (create value through synergies)
2. Sell to a financial buyer (buying with the intention of holding it for 3-5 years then selling for profit)
3. IPO: selling a common stock in the initial public offering - does not sell all of the shares


What way do venture capitalists usually exit through?

strategic or financial buyers


How many new businesses are usually successful?



What is the usual annual return percentage venture capitalists receive back?



What does an initial public offering do?

1. A way to raise money
2. Gives an opening of a venture capitalist to exit


What are the 5 advantages of going public?

1. Equity can be raised higher in public equity is larger
2. More equity can be raised after the IPO
3. give entrepreneur ability to fund a business without giving up control
4. stockholders can buy and sell in a secondary market after IPO
5. easier to attract top management team in public firm


What are the 4 disadvantages of going public?

1. High cost of IPO
2. Out of pocket costs
3. Cost of complying with SEC disclosure
-> transparency (provide detail about firm)


How do you complete an IPO?

through the service of bankers who bring new securities to the market


What are the 3 service of bringing securities to market?

1. Origination- big businesses provide this for themselves
2. Underwriting
3. Distribution


What is origination?

- Banker gives the firm advice prior to selling it - then states if it is ready and get approvals for doing so
-then file a registration with SEC


What is preliminary prospectus?

allows investors to make intelligent decisions about investing a security issue


What is underwriting?

the risky part of investment banking


What two ways can securities be underwritten?

1. Firm commitment basis
-> investment banker promises the issuer a fixed amount of money even if the resell price is slower
2. Best effort basis


How much compensation does the investment banker get usually?



What is best effort underwriting?

there is not guarantee from the investment banker to sell the securities at a fixed rate


What is compensation based on in best effort underwriting?

number of shares sold


What are underwriting syndicates?

when underwriters combine to form a group which entitles them to receive a portion of the underwriting fee and allocation of securities


what is a selling group?

when you enlist other investment banking firms in a syndicate


What is one of the most difficult tasks of being an investment banker in IPO?

to determine the highest price that bankers will be able to sell all of the shares
1. consider value of cash flow
2. consider stock price
3. Conduct a road show


What is a road show?

A road show is when a manager makes presentations about the firm to potential investors


What are due diligence meetings?

before shares are sold when investment bankers have meetings to protect their reputation to reduce risk of lawsuits


What is a pricing call?

when the due diligence meetings are over, the issuer determines the final offer price


Who makes the pricing decision?

Management- rejection or acceptance


What 3 costs are associated with issuing stock in an IPO?

1. underwriting spread -> difference between proceeds an issuer receives and total amount raised
2. Out-of-pocket expenses: other investment fees
3. Underpricing: difference between offering price and the closing price at the end of the first day


What is the syndicates (the group formed) primary concern?

sell securities as quick as possible because conditions can change


What happens if securities are not sold within a few days?

the underwriting syndicate disbands and members sell the securities at whatever price


What happens in the closing?

the issuing firms delivers the security certificates and the underwriter delivers the payments


When does the closing usually take place?

The third day


What is the cheapest source of external funding?

private markets (bootstrapping and venture capital)


When does private placement occur?

when firms sell unregistered securities directly to investors


What are advantages of a private placement?

1. lenders are more willing to negotiate
2. solve financial issues without bankruptcy court
3. faster and more flexible


what is the disadvantage to private placements?

restrictions on resale of securities


What do private equity firms do?

pool money but invest in more mature companies and purchase 100% of the business


What is the goal of private equity firms?

to increase value of the firm for about 3-5 years then sell it for profit


What is a dividend policy?

policy regarding distributions of value to stockholders - when dividends are given out equity is reduced


A dividend

reduces the stockholders investment in a firm by returning some of the investment back to them


What is a pro-rata basis

in proportion to the firms shares
that they own


What is a regular cash dividend?

cash dividend that is paid out on a regular basis/ quarterly basis


What is an extra dividend?

management can afford to set the dividend low because it has the option to pay out extra


What is a special dividend

one time payment to stockholders that is larger then an extra and less frequent


What is a liquidating dividend?

a dividend that is paid to stockholders when a firm is liquidated (firm ceases to exist)
-> stockholder being the last to receive


What is the order of the dividend payment process?

1. Board vote- to pay a dividend
2. Public announcement- announces to pay it
3. Ex-dividend date- the first date that the stock will trade without rights to dividend
4. Record Date- 2 days after ex-dividend-> investor becomes a stock holder of record
5. Payable date - the stockholders receive the dividend 2 weeks after record date


Why is the dividend payment process not the same for private companies?

-shares are bought and sold less
- fewer stockholders
- no stock exchange


What are stock repurchases?

when a company repurchases its own shares not in proportion to the shares that they own


Do stockholders have to participate in a repurchase?

No they do not and then can choose when they pay taxes


What are the 3 ways that stock can be repurchased?

1. Open-market Repurchase
2. Tender Offer
3. Targeted Stock Repurchase


What is the most common way that stock can be repurchased?

Open-market repurchase


What happens in the open-market repurchase?

when companies have a large amount to distribute they use this because there is a limited # of shares per day


What is a tender offer repurchases?

large amounts of cash distributes without special dividends


What are the two kinds in tender offer repurchases?

1. Fixed Price: management announces price and the amount of shares
2. Dutch Action: price is lowered until it receives a bid


What happens in Targeted Stock Repurchase?

there is direct negotiation with a stockholder and used to buy blocks of shares


What is the reaction to targeted stock repurchases?

Negative. Because it may insist pessimism towards company driving down stock price


What are stock dividends?

when a company distributes new stock to existing stockholders -- no value change


What are stock splits?

the distributions of a larger outstanding shares - actual division of stocks into more then one share


What is the benefit of stock splits?

send a positive signal to investors about the future of the business


What is a reverse stock split?

number of stock shares of the shareholder is reduced


Trading Range Argument

successful companies use stock dividends or stock splits to make their company more attractive to investors


What is a round lot?



What is a odd lot?



After a stock trade, does the stock dollar appear to be higher then before?