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Unformatted text preview: Chapter 13 SECURITY STRUCTURES AND DETERMINING ENTERPRISE VALUES FOCUS In this chapter, we discuss important concepts in structuring securities a venture uses to raise funds. We introduce the notion of primitive securities (like bonds and common stocks) and consider other more complex securities (like warrants and convertible preferred) that derive their value from the primitive securities. We introduce the enterprise valuation method, a straightforward technique for valuing a venture using complex financial securities. LEARNING OBJECTIVES 1. Describe the types of securities often involved in venture financing 2. Discuss the structural considerations involved in designing venture securities 3. Draw simple diagrams describing the payoffs to calls, puts, and warrants 4. Value a venture as a complete enterprise and relate that value to the value of the securities involved in supporting the enterprise CHAPTER OUTLINE 13.1 COMMON STOCK (COMMON EQUITY) 13.2 PREFERRED STOCK (PREFERRED EQUITY) 13.3 CONVERTIBLE DEBT 13.4 WARRANTS AND OPTIONS 13.5 OTHER CONCERNS ABOUT SECURITY DESIGN 13.6 VALUING VENTURES WITH COMPLEX CAPITAL STRUCTURES: THE ENTERPRISE METHOD SUMMARY LEARNING SUPPLEMENT 13 DISCUSSION QUESTIONS AND ANSWERS 1. What is common stock or common equity? What is the purpose of preemptive rights? Common stock: the least senior claim on a ventures assets (residual ownership) Pre-emptive rights : the right for existing owners to buy sufficient shares to preserve their ownership share 2. What is preferred stock? What is participating preferred stock, and what is meant by 184 Chapter 13: Security Structures and Determining Enterprise Values paid in kind (PIK) preferred stock? Preferred stock: equity claim senior to common stock and providing preference on dividends and liquidation proceeds Participating preferred stock: preferred stock with rights to participate in any dividends paid to common stockholders; or, stock with an investment repayment provision that must be met before distribution of returns to common stockholders Paid in kind (PIK) preferred stock: preferred stock that has the option of paying preferred dividends by issuing more preferred stock 3. What are the basic design features for financial securities used in venture investing? Typically, venture investing securities need to address the type of financial claim (equity, debt, convertible) and the voting rights assigned. It is common for the security to have debt-like seniority in promised payments and be convertible in to an equity claim in successful ventures. There is almost always some claim of equity-like ownership. 4. Why is the conversion feature in convertible preferred important for venture investors?...
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This note was uploaded on 12/05/2009 for the course FIN Fin 595 taught by Professor Shabbir during the Spring '09 term at CSU Dominguez Hills.

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