What are the 5 types of financing for a private company?
- Angel Investors (hold convertible notes)
- Venture Capital Firms (invest in start-ups)
- Private Equity firms ( Invests in private firms, or buys a public firm and privatizes it in a leveraged buyout LBO)
- Institutional Investors (ex ; insurance companies)
- Corporate Investors (Invest in private companies)
When a private company first sells equity, what type of stock does it typically issue?
Preferred stock
What are the typical features of a convertible preferred stock?
-Liquidity preference (Liquidation preference = Multiplier X original investment) -Seniority -Participation rights -Anti-dilution protection -Board membership
What are the characteristics of preferred stock in a Mature company?
- Preferential dividend
- Preferential Liquidation
- Voting rights
What are the characteristics of preferred stock in a young private company?
- No regular cash dividend
- Option to convert to common stock
- Senior claim on the firm’s assets
What is post-money valuation?
Formula including pre-money valuation
Post-money valuation = Pre-money valuation + Amount Invested
What is post-money valuation?
Formula including number of shares
Post-money valuation = Number of shares after funding round X Pre-money price per share
What are the (2) formulas used to define percentage ownership?
Percentage ownership = Amount invested/Post-money valuation
Where amount invested = (#shares owned X pre-money price per share)/ Post-money valuation
Percentage ownership = # shares owned/Total # shares
What is pre-money valuation?
Total number of shares prior to the funding round times the current price share
What are the main advantages of selling shares to public (IPO)
- Greater liquidity
- Better access to capital
What are the main disadvantages of going public (IPO)
- Dispersed Equity holding
- Compliance is costly and time-consuming
What are the 2 main types of offering
- Primary offering (New shares sold to raise capital)
- Secondary offering (Existing shares which are sold by current shareholders closing their position in the company)
What are the (3) mechanisms to sell shares?
- Best-efforts (no guarantee all shares will be sold)
- First commitment (guarantee all shares will be sold, underwriter must cover the losses)
- Auction IPOs (*All winning bidders pay the same price - lower)
What are the (3) roles of underwriters?
- Market the IPO
- Assist in required filings
- Ensure the stock liquidity after the IPO
