VEE FINANCE.FINAL TEST 2026\2027.
Angel Investors
wealthy people; difficult to value business in beginning so angles hold "convertible notes" rather than
equity which allow investors to convert notes into equity, @ discounted prices to what new investors pay
when company raises finances w/ equity for the first time)
Venture Capital Firms
limited partnership specializing in raising $$ to invest in early stage companies
-consist of: general partners who run the firm
limited partners consisting mainly of institutional investors
they are actively involved in running the company, sit on the board of directors and assume key
management roles
-also take share of profit generated by the fund as "carried interest" (20-30%)
-management fee
Private Equity Firms
-invests in equity of privately held firms
-buys a publicly traded firm & privatizes it in a leveraged buyout (LBO)
Institutional Investors
pension funds, insurance companies, endowments, & foundations
-seek returns & invest strategically
-corporate partners, strategic partners, corporate investors
when a private company first sells equity, what type of stock do they sell?
they sell preferred stock instead of common stock
preferred stock difference between mature vs young private companies
mature--> preferential dividend, liquidation, or voting rights
young private company --> preferred stock doesn't receive cash dividend
-gives owner option to convert it into common stock
what is a funding round?
when a private company raises money
pre-money valuation
,VEE FINANCE.FINAL TEST 2026\2027.
value of firm before funding round
pre-money valuation
value of firm before funding round
= # of shares before funding round x pre-money price per share
post-money valuation =
pre-money valuation + amount invested
= # of shares after funding round x post money price per share
percentage of ownership for each new investor =
= amount invested/post money valuation
=(# of shares owned X pre-money price per share)/ post-money valuation
OR
= (# of shares owned)/total number of shares
Liquidity Preference
in the event of a liquidation, sale/merge of company, minimum amount must be paid to preferred
stockholders before any payments are made to common stockholders.
liquidation preference = multiplier x initial investment
Seniority
investors in later rounds might demand higher seniority than investors in earlier rounds
when those investors are given equal priority, they are deemed pari passu, "on equal footing"
Participation rights
allows preferred stockholders to get both liquidity preference and any payments to common
shareholders as if stocks have been converted
anti-dilution protection
Investors typically will want to be protected from dilution from shares being issued in the future for less
than the amount that they pay, often called a "down round." This is generally accomplished by issuing the
existing investors additional shares in such an event. (allows preferred stockholders to convert their
shares to a common stock at a cheaper price, so they can increase their ownership percentage in a down
round)
, VEE FINANCE.FINAL TEST 2026\2027.
board membership
a VC investor can arrange appointment of one or more of firm's board of directors
What two ways are there for an investor to exit from a private company?
Acquisition
IPO
What is an IPO?
An initial public offering (IPO) occurs when a company issues stock in the public market for the first time.
What are the advantages of an IPO?
liquidity: diversify by selling shares (for PE investors)
better access to capital --> more ability to raise capital in public markets
What are the disadvantages of an IPO?
-equity for PE investors are more diversified so there are more shareholders, individual investors have
less influence
-compliance --> costly & time consuming; paperwork for SEC, Exchanges; more rules to comply with
Types of Public Offerings
Primary offerings: new shares are issued to raise capital
Secondary offerings: existing shares are sold by current shareholders allowing current shareholders to
exit their investment
What is best efforts underwriting?
usually for smaller IPOs, underwriter doesn't guarantee stock will be sold, but will give its best shot
All or none: either all shares sold or IPO is called off
firm commitment underwriting
guarantees all stock will be sold @ offer price; underwriter purchases all the shares themselves @
discount to offer price then resell shares @ offer price to outsiders
-underwriter may lose money if it can't sell shares which creates a bias for underwriters to underprice
shares to encourage their sale
auction ipos
shares are sold directly to the public using online auction mechanism
Angel Investors
wealthy people; difficult to value business in beginning so angles hold "convertible notes" rather than
equity which allow investors to convert notes into equity, @ discounted prices to what new investors pay
when company raises finances w/ equity for the first time)
Venture Capital Firms
limited partnership specializing in raising $$ to invest in early stage companies
-consist of: general partners who run the firm
limited partners consisting mainly of institutional investors
they are actively involved in running the company, sit on the board of directors and assume key
management roles
-also take share of profit generated by the fund as "carried interest" (20-30%)
-management fee
Private Equity Firms
-invests in equity of privately held firms
-buys a publicly traded firm & privatizes it in a leveraged buyout (LBO)
Institutional Investors
pension funds, insurance companies, endowments, & foundations
-seek returns & invest strategically
-corporate partners, strategic partners, corporate investors
when a private company first sells equity, what type of stock do they sell?
they sell preferred stock instead of common stock
preferred stock difference between mature vs young private companies
mature--> preferential dividend, liquidation, or voting rights
young private company --> preferred stock doesn't receive cash dividend
-gives owner option to convert it into common stock
what is a funding round?
when a private company raises money
pre-money valuation
,VEE FINANCE.FINAL TEST 2026\2027.
value of firm before funding round
pre-money valuation
value of firm before funding round
= # of shares before funding round x pre-money price per share
post-money valuation =
pre-money valuation + amount invested
= # of shares after funding round x post money price per share
percentage of ownership for each new investor =
= amount invested/post money valuation
=(# of shares owned X pre-money price per share)/ post-money valuation
OR
= (# of shares owned)/total number of shares
Liquidity Preference
in the event of a liquidation, sale/merge of company, minimum amount must be paid to preferred
stockholders before any payments are made to common stockholders.
liquidation preference = multiplier x initial investment
Seniority
investors in later rounds might demand higher seniority than investors in earlier rounds
when those investors are given equal priority, they are deemed pari passu, "on equal footing"
Participation rights
allows preferred stockholders to get both liquidity preference and any payments to common
shareholders as if stocks have been converted
anti-dilution protection
Investors typically will want to be protected from dilution from shares being issued in the future for less
than the amount that they pay, often called a "down round." This is generally accomplished by issuing the
existing investors additional shares in such an event. (allows preferred stockholders to convert their
shares to a common stock at a cheaper price, so they can increase their ownership percentage in a down
round)
, VEE FINANCE.FINAL TEST 2026\2027.
board membership
a VC investor can arrange appointment of one or more of firm's board of directors
What two ways are there for an investor to exit from a private company?
Acquisition
IPO
What is an IPO?
An initial public offering (IPO) occurs when a company issues stock in the public market for the first time.
What are the advantages of an IPO?
liquidity: diversify by selling shares (for PE investors)
better access to capital --> more ability to raise capital in public markets
What are the disadvantages of an IPO?
-equity for PE investors are more diversified so there are more shareholders, individual investors have
less influence
-compliance --> costly & time consuming; paperwork for SEC, Exchanges; more rules to comply with
Types of Public Offerings
Primary offerings: new shares are issued to raise capital
Secondary offerings: existing shares are sold by current shareholders allowing current shareholders to
exit their investment
What is best efforts underwriting?
usually for smaller IPOs, underwriter doesn't guarantee stock will be sold, but will give its best shot
All or none: either all shares sold or IPO is called off
firm commitment underwriting
guarantees all stock will be sold @ offer price; underwriter purchases all the shares themselves @
discount to offer price then resell shares @ offer price to outsiders
-underwriter may lose money if it can't sell shares which creates a bias for underwriters to underprice
shares to encourage their sale
auction ipos
shares are sold directly to the public using online auction mechanism
