Equity Financing: Private Equity & Venture Capital

Firms that lack the cash to undertake investment have to tap the _______________ issuing either debt or equity.

external financing markets

Most businesses start as ________ __________.

Sole proprietorships or partnerships

Sole proprietorships or partnerships account for _____ of U.S. sales

15%

Allows businesses to access outside capital and allows founders to diversify:

Incorporation

Independent legal entities owned by shareholders:

Corporations

Corporations account for 20% of U.S. businesses but ____ of U.S. sales

80%

Owned by shareholders but do NOT trade on an exchange. Firm discloses financial information to investors but not the general public:

Private corporation

Have stock that trades on the open market. These firms have to release financial statements to the general public:

Public corporation

Sources of Private Equity:

Angel Investor, Venture Capital Firms, Institutional Investor, Corporate Investors

Angel Investors:

Individual investors who buy equity in small private firms.

Venture Capital Firms:

Limited partnerships that raise money to invest in private firms.

Takes more active approach, lower risk due to later state investment:

Venture Capital funding

______ manage the VC funds and earn high fees (20%)

General partners

Institutional investors:

Invest in VC funds (limited partners) or directly invest in private firms. Examples include Pension funds and endowments. Largest institutional investor is Blackrock.

Corporate investors:

Provide capital to private firms for strategic reasons in addition to the potential for financing returns. (Microsoft investing into Facebook for % of shares and some power)

First round of outside private equity financing is often obtained from _______.

angels

Typical types of angel investors:

Family & friends, wealthy individuals, groups or syndicates.

Crowdfunding is

A new angel and is increasing.

In addition to providing capital, VC’s get board seats and _______ the firm closely

monitor

Where does the money for VC come from:

Comes from the VC fund, which is composed of it’s investors and the firm.

Young private firms often issue ______________ rather than common stock to investors

convertible preferred stock

Under convertible preferred stock, if the company does well, the stock converts to _____ stock, receiving the same financial payoff and voting rights as inside shareholders.

common

Under convertible preferred stock, if the company does bad, preferred stock has _____ in a liquidation event, so outside investors would get paid before common shareholders.

seniority

Young private firms raise money in _____ _______, seeking financing periodically as they grow.

funding rounds

Post-Money valuation:

Value of whole firm (old + new shares)

Pre-Money valuation:

Value of firms old shares at price of new funding round.

Funding your firm with new equity capital requires a tradeoff:

You must give up some ownership of the firm in return for the money you need to grow.

If you can negotiate a higher price per share, the percentage of your firm that you will have to give up for a specified amount of capital will be ______

smaller

Two main ways private equity investors exit:

Acquisitions or IPOs

What percent of venture capital exits are through mergers or acquisitions:

88%

Less common exit strategy, among the most successful startup firms:

IPOs