lecture_issuance_521_2011

lecture_issuance_521_2011 - How Securities are Issued...

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“How Securities are Issued” Topics Covered Venture Capital The Initial Public Offering (IPO) IPOs and Underpricing Market Reaction to Security Issuance Private Placement Rights Issue
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Venture Capital Considerations in Structuring the Deal Agreeing on the relevant numbers Management’s incentives (minimize principal/agent problem) VC wants to monitor (serve on Board) Funds dispersed in stages
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Venture Capital (background) Tremendous growth in venture capital financing in late 1990s (is an important source of funds) VC funds raise money from investors, then distribute that money to young companies Venture capital provided by pension funds, endowments, very wealth individuals (angels), and increasingly by corporations (way to hedge risk?)
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Sources of Venture Funds Pension Funds 41% Endow & Found 22% Individ & Fam 9% Corps (as LPs) 3% Financial 25% Source: 2001 data from 2002 NVCA Yearbook, prepared by Venture Economics, page 23
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VC Financing (source: Venture Economics ) 1996 1997 1998 1999 2000 $12B $15B $22B $56B $108B 2001 2002 2003 2004 $43B $22B $19B $21B
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Proceeds from IPO (Source: Renaissance Capital ) 2001 2002 2003 2004 $41B $24B $15B $43B 1996 1997 1998 1999 2000 $58B $52B $45B $93B $97B
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Venture Capital 2.0 Value 2.0 Value 1.0 equity original Your 1.0 assets Other 1.0 capital venture from equity New 1.0 equity new from Cash Equity and s Liabilitie Assets ($mil) Sheet Balance Value Market Stage First
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Stage Financing If first stage is successful, second stage will be needed. Why use stage financing? Option to abandon if unprofitable Option to expand if profitable at second stage Management has incentive to work hard
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Venture Capital 14.0 Value 14.0 Value 5.0 equity original Your 9.0 assets Other 5.0 stage 1st from Equity 1.0 assets Fixed 4.0 stage 2nd from equity New 4.0 equity new from Cash Equity and s Liabilitie Assets ($mil) Sheet Balance Value Market Stage Second
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Venture Capital Before 2 nd round of financing, equity worth $10 mil Entrepreneurs held ½ of old equity = $5 mil After 2 nd round of financing, entrepreneur holds 5/14, and VCs holds 9/14 of equity
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This note was uploaded on 01/02/2012 for the course FINANCE 347 taught by Professor Bayou during the Fall '11 term at NYU.

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lecture_issuance_521_2011 - How Securities are Issued...

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