A company's financing structure, you can use one or from a variety of types of debt securities directly to a fairer features of debt securities (eg convertible bonds and warrants or debt) of common stock. Any type of security, provided certain advantages and disadvantages to both entrepreneurs and investors. Your situation and the current market forces will influence the nature together, and distribution of security package for you.
Stock Type
Senior Debt: This is a long-term risk companies or special situations, usually short-term financing, such as bridge financing. The purpose of the bridge financing, as in the case of interim financing, the company has received at a later date, the funds will be used to repay debt financing commitments. It is under construction, will be used to purchase and available for sale securities expectations
Subordinated debt: which is subordinated to other financial institutions, financing, usually converted into ordinary shares, warrants, or accompany the purchase of common stock. Senior lender that the subordinated debt as equity. This increases can learn from it so that the benefits of a large amount of resources.
Preferred stock: usually can be converted into ordinary shares. The joint venture, the cash flow to help, because there is no fixed rate loan or have to be made, if it is not redeemable preference shares or dividends required. Preferred to improve the company's debt-equity ratio. The disadvantage is that no dividends are tax-deductible.
Ordinary shares: This is normally granted ownership of venture capital is the most expensive conditions per cent. However, the sale of common stock may be the only viable option if the cash flow and collateral limits the amount of debt can wear in society.
Although these securities have their own character, they fall into two categories: debt or equity to be shared. In the corporate finance structure, the primary question is whether the funds in the form of debt or equity should be.
Disadvantages of debt of the company
From the company point of view there are two possible disadvantages of the debt.
Indebtedness may harm the reputation of the company, thus the flexibility needed to address future long-term basis for a good short-term funds. It can also get negative impact on the ability of the company, short-term loans. Of course, the debt in the form of the provision of venture capital funds, have to make a difference. For example, the subordinated debt in a position to reduce the impact of the loan than the senior debt capacity.
In his corporate credit option called if the company defaults in the loan agreement. This means, not through other financial arrangements with him in a better position to influence the affairs of his duty.
Advantages of venture capital debt
From the venture capital perspective, there are three main advantages of debt.
There is a greater possibility of venture capitalists will get the customer back, at least a small return. The average portfolio of venture capitalists, many companies as "dead or alive" means. Needless to say, their performance was a disappointment. In some cases these companies to repay principal and interest can, but limited appeal to potential acquisitions or the public. A company can not with such an investment in common shares of the venture capital to be able to recover their investment within a reasonable time, if ever.
As mentioned above, is a better impact on the affairs of the company, in some cases, the venture capitalists.
Venture capitalists have a tall order. However, it should be emphasized that a veteran would depend on the claim to the asset of the company's markets, and a whole lot to the status of its creditors pillow. For example, means that a case of lip-start situation with little or no equity, little or no high-level requirements.
The required percentage of ownership
Although the differences may not be large enough to include the company's debt to the particular circumstances of the case does not involve a risk for a condition of the assets of the investors risk. Therefore, the company was not on the ownership of the same in the form of financing is debt. However, this advantage must be weighed against the deficiencies of the debt.
No matter how the structure of venture capital to be priced to make it attractive to venture capitalists. There is no clear answer to how much responsibility will be to give up for a company to attract funding. In general, the larger believe the potential returns from venture capitalists that more responsibility, he said. In other words, if a company has a patented product, venture capitalists than be revolutionary, highly marketable, he will certainly have less of the product less attractive than the company's position in his four satisfied. Thus, his final position will be to evaluate a company, and his return.
Negotiations with the venture capitalists in the input, you should sell the value of your company and the number of firms. The following procedure may be used to obtain the number of owners, it is likely to give up, so that means even more attractive.
Risk estimates and investment risks. If the investment is very dangerous to venture capital in search of one to about 15 times he was within five years of high return on investment. On the contrary, if the relatively low risk for venture capitalists to be satisfied in connection with the doubling or tripling to more than 5 years of investment.
An indication of the estimated reasonable price / earnings ratio of comparable publicly traded companies. The company is the market value can be predicted projections for the year of income / earnings ratio of comparable companies by multiplying the estimated price.
Divided by the total return on the dollar, it is estimated that venture capitalists want to forecasts by the market value of the company. Hence the need for ownership of the share of venture capitalists, with the price of crude oil later date in order to achieve the desired returns. It is considered important to note you that make equity financing required during the transition period for the decision-to these calculations.
Case Studies
Suppose XYZ Corp. The company began operations will require about 50 million U.S. dollars. The company's products seem to have great potential. However, because the new untested product in the company's investment will be very, very dangerous. Therefore, it is reasonable to assume that venture capitalists want at least 10 times in his five years, the potential return on the entire investment. Management estimates that the company should be in a position listed, "" 20-fold in the 5-year gains. Estimated at $ 1,250,000 after the fifth year of after-tax earnings. Additional long-term capital 50 million, are allowed to enter the third year.
I
In the following calculation, provided that the venture capitalists that the initial funding ($ 500,000) also provided follow-up funding ($ 500,000), while he was at the equivalent of two 10-times available again. It should be noted, however, that if the company in the first two years of satisfactory progress can be made to assume that venture capitalists are equipped with a pair of future financing of working with a lower rate of return are happy because it would mean less risk .
The total return on dollar is estimated estimated that the total return on investment of 1 million × 10
$ 10,000,000
5, is expected to sixth in the five-year market value. 7. Pro forma income $ 1,250,000 8. Estimated P / E × 20
$ 25,000,000
The share of the property is estimated that five-year total return is expected of $ 10,000,000 dollars, that the required 5-years to get 25 million market value of the company
40% of the program 2
In this series of calculations, provided that the investors in the second follow-up funding ($ 500,000). The results show that the venture capitalists who were the original appropriation ($ 500,000) required a 20% ownership of the fifth year he wants to put returns are available. But given the operating costs for future funding, will diminish his property, he hoped that more than 20% stake in the initial phase. For example, if the assumed 15% of the shares in the funding for the future obtain, venture capitalists, who provided the first financial needs of 23% of the ownership of the original 20% by the end of the fifth year of ownership.
Suppose investors in addition to the second case, the fact that I, as an equal with 15% of the ownership of future financing.
The total return for dollar, it is estimated that the total return on invested × estimated at 50 million U.S. dollars 10
$ 5,000,000
Estimated market value of the expected full-year profit of $ 1,250,000 estimated fifth P / E × 20
$ 25,000,000
Ownership share of the 5-year estimate of the required return on the U.S. dollar is expected to be five million U.S. dollars in its fifth year of 25,000,000 market value of the company must
20%
So it seems that the investments (500,000 dollars) venture capital interest may strike if the company is XYZ, the contracting company is poised to up to 23% of the property.
Conclusion
Must be emphasized that the above procedure is very subjective. You should also remember that what really counts is to see how the relative attractiveness of the venture capital firm. Typically, venture capitalists are satisfied with a minority stake. While venture capital has a controlling interest may require, they usually no operational control. Some people like to deal with the amount of property and, finally, the performance of the company's reach to tie. For example, if you want a majority stake in the venture capital may be the first to the clients the opportunity to win a portion of the back. Such an arrangement can be used to compromise is between the price for the clients and venture capitalists are big differences.
Entrepreneurs and venture capitalists are not familiar, it can occur, are venture capitalists looking for an unusually high return on investment. However, it is important to understand that investing in even the best circumstances, only a few venture capitalists in companies will be successful. He knows it, his success must generate sufficient income in a whole a reasonable return to invest.
