Chapter 23) Raising Equity Capital (Sources of Funding (Angel Investors (…
Chapter 23) Raising Equity Capital
Issues on Firms Financing
Firms raise capital to acquire the
needed to grow & remain profitable
To raise money, a firm can
buy, sell equity both
The sourcing of capital depends on factors such as state of the firms in its
expected cash flows, & its risk characteristics
is to raise the amount of money necessary at the
lowest possible cost
Equity Financing for Private Companies
Initial capital that is required to start a business - usually provided by the
& their immediate family.
Often, a private company must seek outside sources that can provide additional capital for growth.
It is important to understand
how the infusion
of outside capital will
affect the control of the company.
Sources of Funding
who buy equity in small private firms
Contributes a relatively large amount of capital to the newly established firms;
Receive sizable equity share;
May bring expertise to the firm;
Finding angels is typically difficult
Venture Capital Firm
A limited partnership that specializes in raising money to invest in the private equity of young firms
One of the general partners who work for & run a venture capital firm for limited partners
Venture capital firms offer limited partners advantages over investing directly in start-ups themselves as angel investors.
Limited partners are more diversified.
They also benefit from the expertise of the general partners
come at a cost.
General partners usually charge substantial fees.
Most firms charge 20% of any positive return they make.
They also generally charge an annual management fee of about 2% of the fund’s committed capital.
Such as pension funds, insurance companies, endowments, and foundations are active investors in private companies
Institutional investors may invest directly in private firms or they may invest indirectly by becoming limited partners in venture capital firms.
A corporation that invests in private companies
Also known as Corporate Partner, Strategic Partner, and Strategic Investor
While most other types of investors in private firms are primarily interested in the financial returns of their investments, corporate investors might invest for corporate strategic objectives, in addition to the financial returns.
Issued by mature companies usually has a preferential dividend & seniority in any liquidation & sometimes special voting rights.
Issued by young companies has seniority in any liquidation but typically doesn't pay regular cash dividends & often contains a right to convert to common stock.
Convertible Preferred Stock
Gives the owner an option to convert it into common stock on some future date
Most popular hybrid securities - preference shares & convertible notes
Claim on income (residual claimant);
Claim on assets;