COMMERCE 3FA3 Study Guide - Midterm Guide: Indirect Costs, Life Insurance, Greenshoe
5 Jun 2018
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The Financing Life Cycle of a Firm: Early Stage Financing and Venture Capital
1.
Internal cash (net income)
2.
Debt
3.
Equity - is last because it indicates lack the income needed for internal cash, and you are not qualified to
take on debt
The Pecking Order of Financing
Venture Capital
Venture capitalist success ratio:
are very successful,
breakeven,
go bankrupt
•
Pool funds from individuals, companies, funds, and endowments, is selective due to expense
•
Limit risk by providing financing in stages - first-stage, second-stage
•
Typically demand 40%+ of company equity, seats on board of directors, preferred stock, choice of senior
management
•
Financing for new, high-risk ventures. Small companies (private - not listed on stock exchange) use angel
investors or private equity. Large companies (public - listed on NYSE, TSX, NASDAQ) issue shares on stock
market, comprised of IPO and seasoned equity offer (SEO).
Financial strength, reserves necessary for additional financing stages
•
Good record of success with similar firms
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Industry specialization
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Style of involvement - hands-on, hands-off and level of bureaucracy
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Exit strategy - IPO or sale of company ideally performed in 3-5 years under certain circumstances
•
Characterised by:
The Public Issue
Access to greater future equity
•
Sets market price for company as an independent value created by a third party
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Existing shareholders gain ability to sell; benefits venture capitalists who want out, and future investors
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Regulation and administration changes leading to public disclosure seen by competitors
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High expense of issuing equity - payment goes to investment bankers, is not tax deductible, high cost of
raising
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Creation and sale of securities on public markets under provincial regulations (Ontario Securities Commission
(OSC)). Leads to:
Approval from board of directors - if number of authorized shares of common stock must be increased,
shareholders must hold a vote
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Prepare prospectus, a document for future investors describing details of issuing corporation and
proposed offering to potential investors (preliminary prospectus is red herring)
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Once approved, price determined, selling effort begins, final prospectus accompanies delivery of
securities or confirmation of sale
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Basic Procedure for a New Issue
Prospectus avoided for exempt securities which are sold in an except market at greater risk and lower
liquidity
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Securities sold directly to high net worth exempt investors
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Exempt Securities and Crowdfunding
Alternative Issue Methods
All IPOs are unseasoned new issues and cash offers
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General cash offer is an issue of securities offered for sale to the general public on a cash basis. Rights offering is
a public issue of securities offered only to existing owners - uncommon in Canada.
The Cash Offer
Underwriters formulate methods used to issue, price, and sell new securities. An underwriting group is a
Raising Capital
January 26, 2018
8:23 PM
Managerial Finance Page 1
Document Summary
The financing life cycle of a firm: early stage financing and venture capital. 1: debt, equity - is last because it indicates lack the income needed for internal cash, and you are not qualified to take on debt. Small companies (private - not listed on stock exchange) use angel investors or private equity. Large companies (public - listed on nyse, tsx, nasdaq) issue shares on stock market, comprised of ipo and seasoned equity offer (seo). Venture capitalist success ratio: are very successful, breakeven, go bankrupt. Pool funds from individuals, companies, funds, and endowments, is selective due to expense. Limit risk by providing financing in stages - first-stage, second-stage. Typically demand 40%+ of company equity, seats on board of directors, preferred stock, choice of senior management. Financial strength, reserves necessary for additional financing stages. Style of involvement - hands-on, hands-off and level of bureaucracy. Exit strategy - ipo or sale of company ideally performed in 3-5 years under certain circumstances.
