Ch23-3310 Raising Equity Capital PDF

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Chapter 23: Raising Equity Capital -1

Chapter 23: Raising Equity Capital Fundamental Question: How do firms raise equity capital? 23.1 Equity Financing for Private Companies A. Sources of Funding 1. Angel Investors Khan Academy: Raising money for a startup 2. Venture Capital Firms 3. Private Equity Firms 4. Institutional Investors 5. Corporate Investors B. Outside Investors Khan Academy: Getting a seed round from a VC Going back to the till: Series B C. Exiting an Investment in a Private Company Concept Check: all 23.2 The Initial Public Offering A. Advantages and Disadvantages of Going Public B. Types of Offerings 1. Primary and Secondary Offerings 2. Best-Efforts, Firm Commitment, and Auction IPOs

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Chapter 23: Raising Equity Capital -2

C. The Mechanics of an IPO 1. Underwriters and the Syndicate 2. SEC Filings 3. Valuation 4. Pricing the Deal and Managing Risk a. Greenshoe provision Ex. RealNetworks The underwriters bought 3,000,000 shares from RealNetworks at $11.825 per share, but sold 3,450,000 shares in the initial public offering at $12.50 per share (they sold the shares they bought plus the 450,000 shares they have the right to buy with the Greenshoe provision). Implication: They are short 450,000 shares of RealNetworks. Q: How does the Greenshoe provision protect the investment bankers as they support the stock price after the IPO? 1) In reality RealNetworks stock started trading at $19.375 per share. => the underwriters cover their short position by exercising the greenshoe provision Additional profit = $303,750 = 450,000 x (12.50 – 11.825). 2) Assume, instead, that RealNetworks stock had fallen to $8 per share when it started trading. => the underwriters cover their short position (and support the stock price) by purchasing shares in the open market at $8 per share Additional profit = $2,025,000 = 450,000 x (12.50 – 8). Note: Underwriters have agreed to help support the price, so this additional profit is likely “spent” as buy up additional shares in an effort to drive up the price.

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Chapter 23: Raising Equity Capital -3

Khan Academy: An IPO More on IPOs Concept Check: all 23.3 IPO Puzzles A. Underpricing B. Cyclicality C. Cost of an IPO D. Long-Run Underperformance Concept Check: all 23.4 The Seasoned Equity Offering A. The Mechanics of an SEO B. Price Reaction C. Issuance Costs Khan Academy: Stock dilution Concept Check: all

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