Raising Capital: Priced Round (stock fundraising)
Founder and the investor agree in stock price
Stock Calculation Example: Monthly Revenue: 10K
- Multiply by 12 months to get 120K × 2 (a rough est of EBITA calc.)
- Variables:
- Addressable Market Size
- Tech Variable (is there a unique piece of tech that separates it?)
- Potential Margin (how much does it cost me to serve a potential customer?)
- Valuation Bumps to 4M for tech Firm (with the above variables agreed).
- Estimate Fund Need at 500K
- 11% of 4M valuation
- So, the company calculates (dilution of initial stock held) 500K/4M to to issue 125K stock to investor
Definitions
Institutional Investor – An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include banks, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments. Although institutional investors appear to be more sophisticated than retail investors, it remains unclear if professional active investment managers can reliably enhance risk adjusted returns by an amount that exceeds fees and expenses of investment management.
Initial Public Offerings IPOs
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company usually are sold to institutional investors[1] that in turn, sell to the general public, on a securities exchange, for the first time. Through this process, a privately held company transforms into a public company. Initial public offerings are mostly used by companies to raise the expansion of capital, possibly to monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors. The IPO process is colloquially known as going public.
IPO Advanced Planning
Procedure
IPO procedures are governed by different laws in different countries. In the United States, IPOs are regulated by the United States Securities and Exchange Commission under the Securities Act of 1933.[27] In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and operates the listing regime.[28]
Advance planning
Planning is crucial to a successful IPO. One book[29] suggests the following 7 advance planning steps:
develop an impressive management and professional team
grow the company’s business with an eye to the public marketplace
obtain audited financial statements using IPO-accepted accounting principles
clean up the company’s act
establish antitakeover defences
develop good corporate governance
create insider bail-out opportunities and take advantage of IPO windows.
Retention of underwriters
IPOs generally involve one or more investment banks known as “underwriters“. The company offering its shares, called the “issuer”, enters into a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell those shares.
Quarterly Finance ‘Earnings’ Reports
In the private sector, a quarterly finance report is a financial report that covers three months of the year, which is required by numbers of stock exchanges around the world to provide information to investors on the state of a company. “Private sector financial reports emphasize the ultimate impact of transactions for a given period” [1] (McKinney, 2004, p. 475).
In the public sector, quarterly reporting is meant to highlight a government’s revenues and expenditures for a quarter of the fiscal year as it is defined for that entity (in the United States, the fiscal year is different for the federal government than it is for other levels of government). According to McKinney, “governments stress how transactions will affect near-term financing…[and] decisions are related to annual or biannual appropriations, emphasizing balances and transactions related to near-term government financing – the operating budget.”
Prospectus ‘Outlooks’ – A prospectus, in finance, is a disclosure document that describes a financial security for potential buyers. It commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company’s business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors.
Speculation – Speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable at a future date. In finance, speculation is also the practice of engaging in risky financial transactions in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument—rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends, or interest.
Many speculators pay little attention to the fundamental value of a security and instead focus purely on price movements. Speculation can in principle involve any tradable good or financial instrument. Speculators are particularly common in the markets for stocks, bonds, commodity futures, currencies, fine art, collectibles, real estate, and derivatives
