Raising Capital

Flashcards about raising capital, venture capital, equity capital, and IPOs.

What is Venture Capital?

Financing for new, often high-risk ventures, usually entails some hands-on guidance.

Where do venture capital funds come from?

Individuals, pension funds, insurance companies, large corporations, and university endowment funds.

What should you look for in a Venture Capitalist?

Financial strength, compatible management style, references, contacts, and a clear exit strategy.

What is the difference between a VC firm and a Bank?

VC firms provide equity shares and early-stage financing, are involved in management, and are less regulated, while banks provide debt and stable stage financing.

What are the two types of equity sales?

General cash offer (open to the general public) and a rights offer (open to existing shareholders).

What is an IPO?

A company’s first equity issue made available to the public; also called an unseasoned new issue. All IPOs are cash offers.

What is an SEO?

A new issue for a company with securities that have been previously issued. A seasoned equity offering of common stock can be made using a cash offer or a rights offer.

What is a red herring?

A preliminary prospectus that is distributed during the waiting period of SEC registration.

What services are provided by underwriters?

Formulate method used to issue securities, price the securities, sell the securities, and price stabilization by lead underwriter.

What is a syndicate?

A group of investment bankers that market the securities and share the risk associated with selling the issue.

What is the spread?

The difference between what the syndicate pays the company and what the security sells for initially in the market.

What is Firm Commitment Underwriting?

Issuer sells the entire issue to the underwriting syndicate, which then resells it to the public. The syndicate bears the risk of not selling the entire issue.

What is Best Efforts Underwriting?

Underwriter makes their “best effort” to sell the securities at an agreed-upon offering price. The company bears the risk of the issue not being sold.

What is Dutch Auction Underwriting?

Underwriter accepts a series of bids including the number of shares and price per share. The price everyone pays is the highest price that results in all shares being sold.

What is the Green Shoe provision?

Allows the syndicate to purchase an additional 15% of the issue from the issuer to cover excess demand or oversubscription.

What are Lockup agreements?

Restrictions on insiders that prevent them from selling their shares of an IPO for a specified time period, commonly 180 days.

Why do stock prices tend to decline when new equity is issued?

Possible explanations include signaling and managerial information, as well as signaling and debt usage.

What are Rights Offerings?

An issue of common stock offered to existing shareholders, allowing them to avoid dilution from a new stock issue.

What does Dilution mean?

A loss in value for existing shareholders, including percentage ownership, market value, book value, and EPS.