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15-2 How Corporations Raise Venture Capital and Issue Securities Young firms often require venture capital to finance growth. The issuance of securities is a complex process that the successful financier must comprehend.

15-3 Company Growth Venture Capital provides entrepreneurs with financing to grow their firms. Firms issue securities to further finance their growth.

15-4 Obtaining Venture Capital  Steps to obtaining venture funding: 1. Prepare a business plan. 2. Receive first-stage financing. 3. Receive subsequent staged financing.

15-5 Venture Capital Ownership: Example Suppose a Venture Capital firm offers to purchase 1 million of your firm’s shares for $1 each, which will give them 50% ownership in the firm. What value are they placing on your firm?

15-6 Types of Venture Investors  Angel Investors Investors who finance companies in their earliest stages of growth  Corporate Venturers Corporations that offer venture assistance to finance young, promising companies.  Private Equity Investing Investors who offer funds to finance firms that do not trade on public stock exchanges such as the NYSE or NASDAQ.

15-7 Venture Capital Management Venture Capitalist are not passive investors. What do they provide beyond financing?

15-8 The Initial Public Offering When a firm requires more capital than private investors can provide, it can choose to go public through an Initial Public Offering, or IPO.  Primary Offering –when new shares are sold to raise additional cash for the company  Secondary Offering –when the company’s founders and venture capitalists cash in on some of their gains by selling shares. Does a secondary offering provide additional capital to the firm?

15-9 Benefits of Going Public  Ability to raise new capital  Stock price provides performance measure  Information more widely available

15-10 Benefits of Going Public  Diversified sources of finance  Reduced borrowing costs

15-11 Arranging Public Issues Steps to issue a new public security: 1. SEC Registration Prospectus—a formal summary that provides information on an issue of securities 2. Select Underwriter / Undertake Roadshow 3. Set final issue price for public

15-12 IPO Flowchart InvestorsFirmUnderwriter Underwriter provides advice to firm 2.Underwriter pays firm for a number of shares 3.Firm provides shares to underwriter to be resold 4.Underwriter offers shares to investors 5.Investors purchase shares from underwriter

15-13 Underwriter Spread Assume the issuing company incurs $1 million in expenses to sell 3 million shares at $40 each to an underwriter; the underwriter sells the shares at $43 each. What is the spread for this deal? Spread - the difference between the public offer price and the price paid by underwriter

15-14 Underwriting Arrangements Firm Commitment: Underwriters buy the securities from the firm and then resell them to the public. Best Efforts Commitment: Underwriters agree to sell as much of the issue as possible but do not guarantee the sale of the entire issue.

15-15 Underwriting Arrangements: Capital To Firm How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees.

15-16 Underpricing of an IPO Example: Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each. By the end of the first day’s trading, the issuing company’s stock price had risen to $70. What is the total cost of underpricing? Cost of Underpricing: Underpricing: Issuing securities at an offering price set below the true value of the security.

15-17 Flotation Costs Flotation Costs: The costs incurred when a firm issues new securities to the public. What are some of the specific costs incurred when a firm issues new securities?

15-18 Types of Offerings After the IPO, successful firms may issue additional equity or debt.  Seasoned Offering  Rights Issue Issue of securities offered only to current stockholders.  General Cash Offer Sale of securities open to all investors by an already-public company.

15-19 Rights Issue: Example An investor exercises his right to buy one additional share at $20 for every five shares held. How much should each share be worth after the rights issue if they previously sold for $50 each? Pre-Rights Issue: Post-Rights Issue: +

15-20 General Cash Offer and Shelf Registration Benefits of Shelf Registration: 1. Security issuance without excessive costs 2. Security issuance on very short notice 3. Timed issuance to capitalize on favorable market conditions 4. Additional underwriter competition Shelf Registration: A procedure that allows firms to file one registration statement for several issues of the same security.

15-21 Private Placements In order to avoid registering with the SEC, a company can issue a security privately. Private Placement: The sale of securities to a limited number of investors without a public offering

15-22 Private Placements-Advantages  Do not have to register with SEC  Private placements cost less than public issues  Contracts can be customized for each investor

15-23 Private Placements- Disadvantages  Difficult for investors to resell security  Lenders often require higher return to compensate for higher risk. Private placements typically yield.5% higher than public issues