Chapter 16 - Chapter 16 1 What is"harvesting in the context...

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Chapter 16: 1. What is “harvesting” in the context of entrepreneurial finance? A) A seasoned equity offering B) A liquidity event brought about by the investor buying more shares in the venture C) Another name for the underwriting process D) The final stage of the entrepreneurial investment process, whereby investors receive the financial returns from their investments Answer: D 2. Provide an example of how the harvesting decision is different from the entrepreneur’s prospective than from the outside investor’s? Answer: Outside investors value venture opportunities with an expectation of a liquidity event that enables them to realize the return on their investment so that they can move on to other investments. While entrepreneurs also care about harvesting, they may want to stay with the venture. Harvesting allows entrepreneurs to earn returns on their human capital and opportunity costs associated with the start-up. 3. Identify which of the following is not a harvesting technique: A) an earn-out B) the management buys out the other investors’ ownership claims C) direct public offering D) private placement E) a SBA Micro-loan Answer: E 4. “Harvesting is not a critical component of the initial investment decision.” True, false, or uncertain? Explain. Answer: False. The value of the venture to both the entrepreneur and outside investors depends on expected return at the time of harvest. 5. Identify the economic benefits of harvesting by way of an initial public offering (IPO). Answer: The answer is multi-faceted. Some important considerations are:
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When the venture goes public, an ongoing market is created for its common stock. This may benefit an entrepreneur who wants, for example, to distribute some of the proceeds to family members. Having a public market for a stock means that the managers must report details of their decision making, including audited financial statements. This means that the managerial decisions will be scrutinized and monitored by outside market investors, possibly reducing agency costs and enhancing managerial discipline. Also a venture that already has gone public may be better able to raise additional capital by, for example, issuing new shares in a subsequent offering. Public equity also can be used as a medium of exchange, and IPO may enable an existing investor to time the realization of capital gains. 6. Identify the economic costs of harvesting by way of an initial public offering (IPO). Answer: Costs include out-of-docket costs, including underwriter fees and underpricing, as well as opportunity cost (what is given up by harvesting by way of IPO versus alternative harvesting approaches). Entrepreneurs who want to stay with the business once harvested may prefer not to have to deal with a public market for their company’s stock, including all of the reporting requirements and analyst scrutiny that it entails. 7.
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Chapter 16 - Chapter 16 1 What is"harvesting in the context...

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