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72 Cards in this Set
- Front
- Back
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Investors who meet a list of SEC criteria, making them eligible to invest in private placements of stock.
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Accredited investors
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The number of shares that the company has available to sell at any point in time.
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Authorized Stock
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A development-stage company that has no specific business plan or purpose.
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Blank Check Companies
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Something of greater value than the loan to provide security of repayment to the lender.
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Collateral
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The amount of money, or price per share, that the buyers in the marketplace are willing to pay for a stock.
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Collective wisdom of the marketplace
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Funds that are obtained for a venture through borrowing and that must be paid back.
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Debt Capital
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A distributed portion of the firm's earnings.
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Dividends
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A brief statement of the company and its goals that can be delivered in about 20 seconds or less–the time it takes to ride several floors in an elevator.
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Elevator Speech
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Funds that are obtained for a venture through investing and that do not have to be paid back
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equity capital
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The method by which investors can realize a tangible return on the capital they invested.
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Exit Strategy
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The practice of selling accounts receivable at a discount to a factoring firm.
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Factoring
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The practice of assigning title to inventory to a lender for the purpose of securing funds to stock inventory for sale.
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Floor Planning
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The initial offering of a company's shares on a public stock exchange, such as the New York Stock Exchange or NASDAQ.
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Initial Public Offering
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Section 3(a)(11) of the Securities Act; it facilitates the financing of local business operations.
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Intrastate offering exemption
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A company whose principle business is to invest in other companies.
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Investment Company
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A proposed window in time targeted by investors so as to place a limit on their involvement in the early-stage funding deal.
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Investment Horizon
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Shares in a company that have already been sold to investors.
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Issued Stock
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The use of debt to increase the return on equity.
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Leverage
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A preapproved loan amount that an entrepreneur can borrow in part or in total without additional application paperwork and as long as loan amounts are paid back.
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Line of Credit
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The total number of shares issued by a company multiplied by the market price of a share.
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Market capitalization
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A loan that is under $5,000.
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Micro-loan
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An estimate of the future earnings potential of a company that issues stock.
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Multiple
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The use of accounts receivable as collateral for a loan.
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Pledging
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The value of a business after investment capital has been obtained; the post-money value is equal to the pre-money value plus the amount of capital added through the new investment.
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Post Money Valuation
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The value of a business as it is, without any new money added.
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Pre-money valuation
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The present earnings of a company times its multiple divided by present earnings.
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Price/earnings ratio
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A document that is used as a prospectus in a private offering of stock. The PPM fully discloses information about the company that an investor needs to know. Also, a statement that must be provided to investors purchasing a Regulation A offering.
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Private placement memorandum (PPM)
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An instrument that states the obligation to repay a loan and the terms of repayment.
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Promissory note
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A Securities Act exemption for public offerings not exceeding $5 million in any twelve-month period
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Regulation A
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A section of the Securities Act that outlines certain exemptions for public offerings.
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Regulation D
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An endorsement that contains the words "for deposit only" along with the payee's signature; it states how the instrument is to be deposited and is much safer than a blank endorsement.
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Restricted securities
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A guaranteed line of credit that remains available to an entrepreneur without additional loan applications as long as each borrowed sum is paid back on a prearranged schedule
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Revolving credit agreement
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A loan that is backed by collateral, something of greater value than the loan amount
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Secured Loan
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Federal legislation enacted to establish the Securities and Exchange Commission; this act was a direct response to the stock market crash of 1929 and subsequent Great Depression.
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Securities Act of 1933
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Federal agency that regulates the public sale of stock in the United States.
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Securities and Exchange Commission (SEC)
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A document that indicates the name of the company, the number of shares owned, and the special characteristics of those shares
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Stock certificate
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A loan that must be paid back within a given time period.
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Term loan
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Credit given to a firm by the trade–that is, by the suppliers the company deals with.
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Trade credit
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Authorized shares in a company that have not been sold.
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Unissued stock
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Loans that are based solely on the good credit of the borrower.
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Unsecured loan
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The process of establishing the value of a venture.
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Valuation
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Funds provided to rapid-growth firms in exchange for a share of the ownership and frequently requiring control.
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Venture Capital
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In the early stages, most ventures don't generate sufficient capital from sales to sustain themselves.
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True
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One of the most common exit strategies is sell the venture to the highest bidder. (T or F)
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False
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Short-term debt is used to finance current operations, with required payback within three years. (T or F)
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False
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To secure a loan with accounts receivables is called pledging (T or F)
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True
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The bank preapproving a customer for an unsecured loan up to a certain amount means the customer enjoys a line of credit with the bank
(T or F) |
True
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Factoring is one of the most inexpensive forms of short-term credit. (T or F)
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False
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"4/10 net 45" means that the buyer can take a 4 percent discount if the invoice is paid within ten days; if the discount is not taken, the full bill is due in forty-five days. (T or F)
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True
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Reduction of excess inventory helps a new venture generate both internal and external funds
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False
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One popular form of financing for new, small, or struggling businesses is venture capital. (T or F)
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True
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Evidence of stock ownership is always a dividend payment
(T or F) |
False
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Which of the following is defined as "funds obtained through borrowing"?
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Debt Capital
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Earnings that the owners leave in the firm as additional investment are called
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Retained Earnings
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Loans that are based solely on the good credit of the borrower and that require no collateral are called
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Unsecured Loans
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Credit given to a company by its suppliers is called
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Trade Credit
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The primary sources of long-term debt for an entrepreneurial venture are term loans and __________________.
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SBA Loans
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is categorized into two types: short term and long term.
- Repayment is designated - Interest is an expense - Interest paid may be deductible - Firm's assets can have claims placed against them - Management power is not directly affected - Lenders may constrain management |
Debt Capital
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- No repayment required
- Dividends can be an expense but are optional - Dividends are not a deductible expense - Only secondary claims can be placed against assets. - Corporate control can be challenged - Shareholders typically will not block management |
Equity Capital
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The five forms of new equity capital are
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1)Retained earnings
2)Contributions 3) The sale of stock in privately held firms (Sale of Partnerships) 4) venture capital 5) Public or Private Sale of Stock |
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To qualify for the intrastate offering exemption, a company must:
To qualify for this exemption, the purchasers of the securities must |
- Be incorporated in the state in which it is offering the securities
- Carry out a significant amount of its business in that state - Make offers and sales only to residents of that state - Have enough knowledge and experience in finance and business matters to evaluate the risks and merits of the investment or be able to bear the investment's economic risk - Have access to the type of information normally provided in a prospectus - Agree not to resell or distribute the securities to the public |
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The principal advantages of Regulation A offerings, as opposed to full registration, are:
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- The financial statements are simpler and don't need to be audited
- There are no Exchange Act reporting obligations after the offering unless the company has more than $10 million in total assets and more than 500 shareholders - Companies may choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document - Companies may "test the waters" to determine if there is adequate interest in their securities before going through the expense of filing with the SEC |
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Provides an exemption for the offer and sale of up to $1 million of securities in a twelve-month period
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Rule 504
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Provides an exemption for offers and sales of securities totaling up to $5 million in any twelve-month period
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Rule 505
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Is a safe harbor for the private offering exemption
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Rule 506
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There are four basic categories of exit strategies besides the IPO, and these strategies comprise the more typical ways that investors are able to cash out as the venture makes forward progress. In order of occurrence, these strategies are:
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1) Acquisition
2) Earn-Out 3) Debt-Equity Swap. 4) Merger |
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Under an acquisition strategy, the venture initiates contact with a large supplier, distributor, or major competitor (perhaps one with a more widely diversified product or service line) to be acquired. The pitch to the potential acquirer is that the venture would add valuable cash flow to the acquiring company. At the close of the deal, the purchase price is high enough to buy out the original investors at a premium on their initial investment. The deal is built on the premise that the buyer needs the acquired firm to make its next leap of growth. As such, the terms of the transaction will likely be more favorable to the acquiring company. But a fair sales price based on post-deal increased sales and profits to the buyer should allow the original investors to realize a good return on their investment.
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Acquisition
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An earn-out strategy is used for ventures that have begun to generate consistently strong positive cash flow. The management team or others initiates a monthly or quarterly buyback of investors' common shares at a premium over the initial investment cost. Typically, an earn-out can be accomplished over three or four years and provide the original investors with a strong return as company sales expand and costs decline because of increased operating efficiencies. The purchase price is often scaled upward incrementally over time, as investors provide the luxury of time for the management team or others to complete the deal.
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Earn-Out
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If the venture's original funding was through a loan, the founders can incrementally trade common shares for portions of the principal on the debt. This strategy slowly reduces the interest due over time (as the face value of the loan decreases) and also rearranges the balance sheet as liabilities are eliminated and replaced with equity positions. A call feature allows the owners to decide at what pace–and at what price–the debt is retired. If the firm is doing very well and has prospects for being acquired at a premium, debt holders have an incentive to switch to equity positions.
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Debt-Equity Swap
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Like the acquisition, the merger involves negotiations between the venture and another firm, but this time the deal is based on mutual needs and benefits. One firm might have strong manufacturing capabilities and the other an excellent sales or distribution pipeline into the market. The two firms might be doing well in separate markets, and the deal will open up these complementary markets to each company's products and services. Whatever the rationale, the transaction will likely involve cash changing hands to arrive at the new company structure, and original investors can typically make their shares available for sale to close the deal
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Merger
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is used to finance current operations, with required payback within one year.
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Short-Term Debt
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Can come from serveral different sources:
- Family and Friends - Commercial Banks - Trade Credit - Credit Cards - Internal Funds Management |
Short-Term financing
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