MGMT 159: Introduction to Business and Entrepreneurship

Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock.

Participating Preferred Stock

Investor gets their invested dollars back THEN get their % ownership in the remaining proceeds.

Lessons I’ve Learned

Every business venture or investment, whether it succeeds or fails, can teach you valuable lessons.

Your failures can teach you more than your successes.

There is no magical, riskless formula for a business that can guarantee success.

If there is such thing as a guaranteed homerun investment, nobody is going to offer it to you!

D Main Tendencies

Control, Competitive, Demanding, Decisive, Leaders, High Achievers, Risk Takers, 10% of Worlds Population

I Main Tendencies

People, Social, Generous, Emotional, Trusting, 15% of the world’s population, They are fun loving and very likable, Life of the party

S Main Tendencies

Team, Participants, Patient, Loyal, Friendly, Steady, Reliable, 60% of the world’s population

C Main Tendencies

Standards/Regulations/Order, Perfectionists, Fact finders, Analytical, Systematic, 15% of the world’s population, Provide order, Organization, Clarity

The Big 5 Personality Model

Openness, Conscientiousness, Extraversion, Agreeableness, Neuroticism

Maslow’s Hierarchy of Needs (Top to Bottom)

Self-Actualization, Esteem, Love and Belonging, Safety Needs, Physiological Needs

Groups

share identity and purpose

Teamwork

collaborate deeply towards shared goals

Tuckman’s Stages of Development

Forming, Storming, Norming, Performing, Adjourning

Why does communication in teams matter?

It can be the cornerstone of team success and facilitates coordination, decision making, and problem solving.

Barriers to Communication

Cultural & Language Differences, Physical Separation (remote/global teams), Hierarchical Structures (lack of open dialogue), Personal Biases or Assumptions

How can we improve communication?

Inclusive Team Culture, Technology Tools, Active Listening, Transparency & Openness, Regular Meetings & Feedback

What are the Four Roles of Management?

I, E, A, P

What does “I” stand for in the Four Roles of Management?

WHO Organic

What does “E” stand for in the Four Roles of Management?

WHY Change

What does “A” stand for in the Four Roles of Management?

HOW Efficient

What does “P” stand for in the Four Roles of Management?

WHAT Effective

What is Bounded Rationality?

The idea that decision-making is limited rather than perfectly "optimal."

What are the three primary constraints for Bounded Rationality?

Cognitive Capacity, Information Gaps, Heuristics

When expected value is equal, people make risk averse decisions when probability is framed as a

gain

When expected value is equal, people make risk seeking decisions when probability is framed as a

loss

Groups may make better decisions than individuals due to

increased cognitive capacity

What are the cons to teams compared to individuals when it comes to making better decisions?

They take longer to make decisions and require substantial process skills to get maximum benefit.

When is receiving feedback ineffective?

When it’s defensive, Attacks giver, Denies feedback, Is disrespectful, Ignores or shows little interest, Doesn’t listen, Rationalizes/gives excuses

When is receiving feedback effective?

When it’s open, responsive, accepts feedback, respectful, stays engaged, listens actively, sincerely tries to understand

Income Statement is also known as the:

Profit & Loss Statement (P&L)

Sales (Revenues)

Selling Price x Quantity

Expenses

Cost of Goods Sold (COGS), Selling General and Administrative (SG&A), Non-Operating Expenses (Interest expense, etc.)

Profits include:

Gross Profits, EBITDA (Earnings before interest, taxes & depreciation, Pretax Profits, Net Profit after taxes

How to calculate Gross Profits?

Sales - COGS

How to calculate EBITDA?

Sales - COGS & SG&A

Net profit after taxes

Sales - All Expenses

What are the 3 key elements of the balance sheet?

Assets, Liabilities, and Equity (Net Worth)

Assets include:

Cash, Accounts Receivable (A/R), Inventory, and Machinery & Equipment

Liabilities include:

Accounts Payable and Notes Payable

How to calculate Equity (Net Worth)?

Assets - Liabilities

Cash Generation - Cash Used = ?

Cash Flow

Cash Accounting: When are Revenues and Expenses recorded?

Only when cash physically moves.

Accrual Accounting: When are Revenues and Expenses recorded?

When the economic event occurs, regardless of cash flow.

When is Revenue recorded under the Accrual method?

When it is earned. (e.g., The job is finished or the product is delivered, regardless of when the customer pays.)

When is an Expense recorded under the Accrual method?

When it is incurred.

When is Revenue recorded under the Cash method?

When the cash is received. (The money must be physically in hand or in the bank account.)

When is an Expense recorded under the Cash method?

When the cash is paid out. (The money has physically left the bank account.)

Accounts Receivable (A/R)

People owe you $

Accounts Payable (A/P)

You owe people $

What is Depreciation in the context of Capital Expenses?

The process of spreading the cost of a long-term asset (like a truck or machine) over its useful life, rather than recording the whole expense at once.

Why is Inventory important for cash flow?

It represents "tied-up cash." The business has paid for the goods but hasn't yet converted them back into cash through sales.

Profit

You record a sale the moment you finish the job, even if the customer hasn't paid you yet.

Cash Flow

Only cares about when the physical money hits your hand.

Net Income + / - Balance Sheet Items = ?

Cash

What counts as a Balance Sheet item?

Change in A/R, Change in A/P, Change in Inventory, Other “Working Capital”, Capital Expenses, Depreciation, Cash Flow

Straight Line Depreciation

Reports equal depreciation expense each year throughout the entire useful life until the entire asset is depreciated to its salvage value

Accelerated Depreciation

Allocates a larger portion of an asset’s cost to expense in the early years of its useful life and less in later years.

What is the rule for Straight Line Depreciation?

The asset’s cost is spread out in equal annual amounts over its entire useful life until it reaches its salvage value.

What is the rule for Accelerated Depreciation?

The asset takes higher depreciation expenses in the early years and smaller expenses in the later years of its life.

How does Straight Line versus Accelerated Depreciation differ in timing?

Straight Line stays the same every year, while Accelerated is "front-loaded" to reflect assets that lose value quickly when new.

What is the definition of the Break-Even point?

The point where Total Revenue minus Total Expense equals zero, meaning the business is making no profit but also suffering no loss.

What is the formula to calculate Break-Even Units?

Fixed Costs / Contribution Margin

What are Fixed Costs?

Expenses that remain the same regardless of how many units the business sells.

What are Variable Costs?

Expenses that increase or decrease directly in proportion to sales growth and production volume.

How do you calculate the Contribution Margin?

Sales - Variable Expenses

How does Contribution Margin relate to Gross Profit?

It’s essentially the same as Gross Profit.

What is Bootstrapping?

Starting a business without external help or working capital.

What are common early-stage bootstrapping sources?

Founders’ Capital, personal savings, credit cards, and second mortgages on personal property.

What are later-stage bootstrapping sources?

Company earnings, lines of credit, SBA loans, asset-backed lending, and accounts receivable factoring.

Who are the primary providers of early-stage Equity Financing?

Angel Investors, seed-stage Venture Capital, or Corporate Strategic Partnerships

What are the later-stage sources of Equity Financing?

Large Venture Capital firms, Corporate Venture funds, Mezzanine financing, and Investment Banks.

What’s it called when you keep 100% ownership but take on all the personal risk.

Bootstrapping/Debt

What’s it called when you share the risk with investors, but you give away a piece of the company’s ownership in exchange for their cash.

Equity

Financial Return Angel

An investor with low industry experience and low entrepreneurial experience who primarily focuses on the financial return of the investment.

Professional Entrepreneur Angel

An investor with high entrepreneurial experience but low experience in that specific industry; they know how to build businesses but are new to your particular field.

Operational Expertise Angel

An investor with high industry experience but low entrepreneurial experience; they are often former executives who understand the market perfectly but may not have started a company themselves.

Guardian Angel

An investor who has both high industry experience and high entrepreneurial experience, offering the most comprehensive value to a start-up.

What are the funding sources for Angel Investors?

They use their own capital, family, friends, and high-net-worth individuals.

What are the funding sources for Venture Capitalists?

Institutions and high-net-worth individuals

What financial instruments do Angels typically use?

Equity and SAFE agreements

What financial instruments do Venture Capitalists typically use?

Equity and Convertible Notes

How much do Angels invest at what company stage?

They provide smaller funding for early stages.

How much do Venture Capitalists invest at what company stage?

They provide larger funding for later stages.

How much sophistication and due diligence process do Angels have?

They typically have lower sophistication and perform less due diligence.

How much sophistication and due diligence process do Venture Capitalists have?

They have higher sophistication and use professional teams of experts for deep due diligence.

What is the typical post-investment role for an Angel?

Active role

What is the typical post-investment role for a Venture Capitalist?

Strategic role

What is the level of risk for Angel investing?

Extreme Risk with a high chance of losing all money.

What is the level of risk for Venture Capitalist investing?

High Risk with a moderate chance of losing all money.

What is Pre-Money Valuation?

The value of a company before it receives a new investment or funding round.

How do you calculate Post-Money Valuation?

Pre-Money Valuation + New Investment

How to calculate Investor Ownership %?

Investment Amount / Post-Money Valuation

How to calculate new Ownership % (you/existing owners)?

Your Shares/Total New Shares Outstanding

Operating Cash Flow (Indirect Method)?

Net Income + Depreciation ± Change in Working Capital

Annual Straight Line Depreciation Expense

(Cost of Asset - Salvage Value) / Useful Life

Asset-based Valuation

Focuses on the value of a company’s assets or the fair market value of its total assets after deducting liabilities

Market-based Valuation

Values a business by considering the market prices of comparable assets or businesses that have been sold recently.

Economic Income = ?

Cash Flow or Some Proxy for Cash Flow

Sum of Discounted Future Economic Income = ?

Present Value of Economic Income and is a Starting Measure of A Business’s Value

What is the fundamental structure of a SAFE?

A warrant (a right to get equity later)

What is the fundamental structure of a Convertible Note?

A debt instrument (a loan that converts to equity)