4 EIE 020608 Raising Money - Sources

4 EIE 020608 Raising Money - Sources - Raising Money -...

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Unformatted text preview: Raising Money - Sources Frdric Martel Lyon, June 2 nd , 2008 Factors that determine financing: Current status / Maturity of the company Nature of its assets Owners preferences for debt or equity Firms economic/growth potential Raising Money: Strategy Does the company really need money ? Many businesses can be boot strapped In fact historically this is how it worked If the company needs money, will it be able to provide Adequate Return ? Acceptable level of Risk ? Adequate Liquidity (exit) ? Debt or Equity Financing? Potential Profitability Financial Risk Voting / Control Debt or Equity? Entrepreneurs typically prefer debt Allows them to appropriate as much as of the benefit as possible + retain sole control Can default Debt is unattractive to investors in emerging technology Usually little collateral or predictable cash flow Information asymmetry is lessened by ownership position shared ownership gives some control High interest rate to offset risk will stifle growth or cause default Sources of Money Equity or Debt Dilution vs Risk Pure Debt players want to protect Downside Example : Banks : they are not supposed to take risk Pure Equity players want to optimise Upside Example : First round VCs : little downside protection In between players want a cocktail of Upside potential and Downside protection Entrepreneurs will want a mix of both Finance Losses with Equity and Assets with Debt Equity financing Debt financing HIGH LOW LOW HIGH Equity Financing Debt Financing Potential Profitability Financial Risk/Control Tradeoffs Among Potential Profitability, Financial Risk, and Voting $28,000 income on total assets of $200,000 14% return on assets ($28,000 $200,000) 14% return on $200,000 ($28,000 $200,000) No debt equals $200,000 equity With no debt and all equity: Debt Versus Equity Equity: Owners get to keep all of the profits in return for accepting the risk of lower returns $28,000 income on total assets of $200,000 14% return on assets ($28,000 $200,000) 18% return on $100,000 ($18,000 $100,000) $100,000 debt (10% cost) equals $100,000 equity With $100,000 debt and $100,000 equity: Debt Versus Equity (Contd) Debt is Risky: Lenders have first claim on profits and must be paid even if there are no profits. Questions Lenders Ask Lenders Questions What are the strengths and qualities of the management team?...
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This note was uploaded on 09/04/2008 for the course ENTR 101 taught by Professor Jeff during the Spring '08 term at Sabancı University.

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4 EIE 020608 Raising Money - Sources - Raising Money -...

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