Raising finance (equity and venture capital)

lecture 1b

Share / Equity

- A tiny slice of ownership in a company. Owning shares makes you a shareholder (part-owner).

Ordinary Shares

- The standard type of share. Each share normally gives ONE vote. Whoever owns 50% + 1 share controls the company.

Nominal / Par Value

- The "face value" stamped on a share (e.g. £1, 50p, 10p). This does NOT change over time.

Issue Price

- What you actually pay to buy the share when it is first sold. Can be higher than nominal value.

Share Premium

• The difference between the issue price and the nominal value. E.g. if a £1 share is sold for £1.20, the premium is £0.20.

Authorised Capital

• The MAXIMUM number/value of shares the company is legally allowed to issue.

Issued Capital

• The shares that have actually been issued (sold). Always ≤ Authorised capital.

Share Premium Account

- A reserve that holds all the premiums collected. Under the Companies Act 2006 it CANNOT be used to pay dividends — it can be used for bonus issues.

Dividend

- A cash payment made to shareholders from profits. Only revenue profits (not capital reserves) can fund dividends.

Revenue Reserve

- Profits kept in the business from previous years. Can be used to pay dividends.

Preference Shares

- A different class of share — fixed dividend, paid first before ordinary shareholders, but NO voting rights.

Bonus Issue

- FREE shares given to existing shareholders in proportion to how many they already own. No new cash enters the company. Funded from reserves (e.g. share premium account).

Rights Issue

- New shares offered to existing shareholders at a discounted price. Cash IS received by the company. This IS a method of raising finance.

Pro Rata

- In proportion to existing holdings. E.g. a 1:4 issue = 1 new share for every 4 already owned.

Venture Capital (VC)

- Finance provided by specialist investors to start-ups or growing businesses where there is HIGH risk involved. In return for their investment they typically receive equity (shares) and/or a seat on the board.

Seed-Corn Finance

- Initial funding for a very early-stage business (up to ~£500k). May come from the founders themselves, friends/family, or external investors like VCs.

Founder Management Team (FMT)

- The people who founded and run the company.

Exit Route / Exit Strategy

- The way investors plan to eventually "cash out" — e.g. selling shares when the company floats on the stock exchange (IPO).

AIM (Alt. Investment Market)

- London Stock Exchange market for smaller/growing companies. Less regulated and cheaper to join than the Main Market.

FTSE 100

- The 100 largest companies by market capitalisation listed on the London Stock Exchange Main Market.

IRR (Internal Rate of Return)

- A measure of profitability of an investment. VCs typically want at least 60% IRR.

Dilution of Equity

- Issuing new shares reduces existing shareholders' percentage ownership. E.g. owning 20/100 = 20%, but after new shares: 20/160 = 12.5%.