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Understanding Equity Financing Basics

This document discusses different types of equity and financing options for startups. It explains that common stockholders have residual ownership in a company and are paid dividends and capital gains last if the company succeeds financially or fails. Equity financing provides capital for startups in exchange for partial ownership, while debt financing involves borrowing money that must be repaid. The document contrasts the pros and cons of equity financing for startups, such as obtaining needed cash but giving up some control. It also covers public versus private equity and the tax implications of different equity structures.

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khase
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23 views3 pages

Understanding Equity Financing Basics

This document discusses different types of equity and financing options for startups. It explains that common stockholders have residual ownership in a company and are paid dividends and capital gains last if the company succeeds financially or fails. Equity financing provides capital for startups in exchange for partial ownership, while debt financing involves borrowing money that must be repaid. The document contrasts the pros and cons of equity financing for startups, such as obtaining needed cash but giving up some control. It also covers public versus private equity and the tax implications of different equity structures.

Uploaded by

khase
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Ethics/profit/corporate responsibility

^^reasons for a business


 
 
 
 Equity: Common Stock
Common stockholders = residual owners
Get $ last if company has financial problems
Some common stock pays dividends (but company doesn’t have to
 
Equity: Investors Gain
Dividends IF company pays them
Dividend = payment of some or all company profits and to shareholders
 
Equity: Total Return
Divdend Yield
+ Capital Gains
= Total Return
 
Dividends/Purchase Price +Current Purchase Price/Price at time purchased = Total Return
 
Equity: Selling Stock
Initial Public Offering = IPO
First time co. ever sells stock to public
Primary Market
 
Seasoned Equity Offering = SEO
Any other sale of stock to public after IPO
 
Equity: Selling Stock
IPOs and SEOs are only times $ goes to the company
After this - $ goes from buyer of stock to seller of the stock… Nothing goes to the company.
 
Selling Stock: Steps
Before selling any stock, the co. must meet SEC requirements, which requires file registration form
with SEC and part of this called the preliminary prospects.
 
Steps:
1. SEC approves application via registration form
2. Company prepares prospects and final registration
3. Expensive - generally 7% of state price
 
Deciding Type of Sale
Most are underwritten
IB buys all stock at agreed upon price
Takes risk of being able to sell it
 
Other types
Best Efforts
Auction
 
Auction - firm has risk to sell… sell shares @ price that all shares will sell, Google did this. Still have
intermediary
 
 
 
Startups need money for salaries and benefits.
 
Invest in needed resources:
Computers and software, office space, furniture, phone systems, travel, insurance, consultants, other
experts/networking contacts
 
Two Types if financing
Equity
Debt
 
Accounting Equation
A = L + SE
A = assets (everything business owns)
L = Liabilities (amount you owe)
SE = Shareowners Equity (internal investment)
You want to maximize assets, so increase debt or increase equity
 
Equity: Part ownership in company (% of a company's value or shares of a company's value)
Ie) Co's ownership divided into 100 shares, each share represents 1% ownership
 
Equity: External
Investor buys some ownership in company
Company never has to repay the $
Usually no obligation to pay investor anything
 
Equity: Internal
Owners/Investers
Take no profits (earnings) of company
Instead reinvest them in the company
Call retained earnings
 
 
 
Pro's: Start-Ups:
Get cash they require
Some investors bring expertise (high probability of success)
 
Con's:
Give up to much control to investors
Including decisions on employees/compensation/product+services sold
 
Cons: Taxation
Corp pays taxes as an entity
Owners pay personal taxes on any distributions to them
These distributions to owners are called dividends
 
Equity Types
Private
Public
 
Private:
Company only required to disclose info to owners
 
Public:
Company sells shares to the public: anyone who wants to buy and can afford to buy
Must meet SEC standards
Common stock = stock discussed on news
Usually voting rights to (elect board of directors and make they make major decisions)
 
 
 
 

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