FIN 401 Lecture Notes - Lecture 7: Initial Public Offering, Angel Investor, Exit Strategy
30 Apr 2018
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March 13, 2018 Lecture 7 – FIN300
1
RAISING EQUITY CAPITAL AND DEBT FINANCING (CHAPTER 14)
Raising Capital in General
• All firms must, at varying times, obtain capital
• Financing options:
o Borrowing the money (debt financing)
o Selling a portion of the firm (equity financing)
• The choice significantly depends on the size of the firm, its life cycle stage, and its
growth prospects
Equity Financing for Private Companies
• Sources of funding
o Angel investors
▪ Individual investors who buy equity in small private firms
o Venture capital firms
▪ Specialize in raising money to invest in private equity of young firms
▪ In return, VCs often demand a great deal of control of the company
o Institutional investors
▪ Pension funds, insurance companies, endowments, and foundations
▪ May invest directly, or indirectly by becoming limited partners in venture
capital firms
o Corporate investors
▪ Many established corporations purchase equity in younger, private
companies
• Securities and Valuation
o When a company decides to sell equity to outside investors for the first time, it is
typical to issue preferred stock rather than common stock to raise capital
▪ It is called convertible preferred stock if the owner can convert it into
common stock at a future date
• Pre-money valuation
o The value of a firm’s prior shares outstanding at the price in the funding round
• Post-money valuation
o The value of the whole firm at the price at which the new equity is sold
Example #1
You founded your own firm two years ago. You initially contributed $200,000 of your
money and, in return, received 3,000,000 shares of stock.
Since then, you have sold an additional 1,000,000 shares to angel investors.
You are now considering raising even more capital from a VC. The VC would invest $18
million and would receive 6 million newly issued shares.
a) What is the post-money valuation?
b) Assuming that this is the VC’s first investment in your company, what percentage of
the firm will she end up owning?
c) What percentage will you own?
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March 13, 2018 Lecture 7 – FIN300
2
d) What is the value of your shares?
• Funding your firm with new equity capital, whether from an angel or venture capitalist,
involves a tradeoff
o You must give up part of the ownership of the firm in return for the money you
need to grow.
• The higher the price you can negotiate per share, the smaller the percentage of your firm
you have to give up for a given amount of capital.
Exiting an Investment in a Private Company
• Exit strategy
o A strategy detailing how investors in private companies will eventually realize the
return from their investment
• Two general exit strategies
o Acquisition
▪ Large corporations often purchase successful start-ups
o Public Offering
▪ Taking the firm public (start to trade on stock exchange)
Taking Your Firm Public – The IPO
• The process of selling st to the public for the first time is called an initial public offering
(IPO)
• Advantages:
o Greater liquidity
o Better access to capital
• Disadvantages:
o Equity holders more dispersed
o Must satisfy requirements of public companies
• IPOs include both primary and secondary offerings
o Primary offering
▪ New shares available in a public offering that raise new capital
o Secondary offering
▪ An equity offering of shares sold by existing shareholders as part of their
exit strategy
• Underwriter: an investment banking firm that manages the offering and designs its
structure
o Lead Underwriter – the primary investment banking firm responsible for
managing the security issuance
• Syndicate: other underwriters that help market and sell the issue
Taking Your Firm Public – Regulatory Filings
• Registration Statement
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Raising equity capital and debt financing (chapter 14) Equity financing for private companies: sources of funding, angel investors. Individual investors who buy equity in small private firms: venture capital firms, specialize in raising money to invest in private equity of young firms. You founded your own firm two years ago. You initially contributed ,000 of your money and, in return, received 3,000,000 shares of stock. Since then, you have sold an additional 1,000,000 shares to angel investors. You are now considering raising even more capital from a vc. Taking your firm public regulatory filings: registration statement. Ipo that contains all the details of the offering. The st. anger corp. needs to raise . 4 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. Taking your firm public other ipo types: best-efforts basis. Cleanex inc. would like to issue an ipo.
