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CFS C10TX: Raising equity capital (the initial public offering (d. the…
CFS C10TX: Raising equity capital
Equity financing for private companies
a. sources of funding
i. Angel investors: individual investors who buy equity in small private firms
key terms: venture capitalist, carried interest
ii. venture capital firms : is a limited partnership that specializes in raising money to invest in the private equity of young firms
iii. private equity firms: is organised very much like a venture capital firm , but it invests in the equity of existing privately held firms rather than start-up companies
leveraged buyout (LBO)
iv. institutional investors such as pension funds, insurance companies, endowments and foundations
v. corporate investors- many established corporations purchase equity in younger, private companies. A corporation that invests in private companies is called many different names including corporate investor, corporate partner, strategic partner and strategic investor
b. outside investors
key terms
:
preferred stock:
: issued by mature companies such as banks usually has a preferential dividend and seniority in any liquidation and sometimes special voting rights
convertible preferred stock:
the preferred stock that usually gives the owner an option to convert it into common stock on some future date,
pre-money valuation and post- money valuation
c. exiting an investment in a private company
exit strategy: investors exit in two main ways:
through an acquisition
or through a public offering
the initial public offering
a. definition: the process of selling stock to the public for the first time
b. advantages and disadvantages of going public
advantages:
greater liquidity and better access to capital
disadvantages
when investors diversify their holdings, the equity holders of the corporation become more widely dispersed. This lack of ownership concentration undermines investors' ability to monitor the company's management, and investors may discount the price they are willing to pay to reflect the loss of control
c. types of offerings
i. primary and secondary offering
ii. best efforts, firm commitment and Auction IPOs
d. the mechanics of an IPO
i. underwriters and the syndicate: key term lead underwriter, syndicate
ii. SEC Filings
registration statement
preliminary prospectus
red herring
final prospectus
iii. valuation
road show
book building
iv. pricing the deal and managing risk
underwriting spread
over-allotment allocation or greenshoe provision
lockup
IPO Puzzles
a. underpricing
winner's curse
b. cyclicality
c. cost of an IPO
d. long-run underperformance
the Seasoned Equity Offering (SEO)
a. the Mechanics of an SEO
primary shares
secondary shares
tombstones
cash offer
rights offer
b. Price reaction
c. issuance costs
summary