XV. Partnerships, Private Placements, & Venture Capital

1. XV. Partnerships, Private Placements, & Venture Capital

2. A. PARTNERSHIPS • Types of Partnerships • General Partnership an agreement between individuals to share in running a business, sharing gains and losses • Personal Liability – each partner has unlimited liability for partnership debts, could lose more than his or her investment • Unless specified otherwise, all gains and losses are shared equally among the partners • The partnership agreement provides the legal framework for operations, including division of profits and losses • Investment Club – a partnership formed to invest pooled funds – generally divides profit and loss by initial investment

3. A. PARTNERSHIPS • Limited Partnerships – a form of ownership in which investment control is assumed by a general partner, while the other partners have limited control • General Partner – organizes the partnership, writes the partnership agreement, assumes any partnership liabilities in excess of the limited partners’ investment, and obtains a majority of partnership profits in return • Limited Partner – passive investors, provide money only, can lose no more than the money invested, receive a share of the partnership’s profits

4. A. PARTNERSHIPS • Partnership Agreement – the legal document specifying partners’ rights and division of gains and losses • Prospectus – for limited partnership investments, includes the partnership agreement and details fees and the division of profits between limited and general partners • Limitations on Partnership Investment – for a general partnership, there are no restrictions, however, limited partnerships generally require limited partners to be accredited investor

5. B. PRIVATE PLACEMENTS • Can be used for either private (not publicly traded) stock offerings or other ownership shares of a business • For a formal private placement, the investor must be an accredited investor • Private placement memorandum – similar to a prospectus, details the risks of an offering, business officers, actual and pro forma financial standards, and related material • Subscription agreement – a contract between the business and the investors requiring the investor to provide the agreed upon capital

6. B. PRIVATE PLACEMENTS • Private Placement Defined • A private placement is an agreement for equity investment in a business made directly between the business and the investor • Offered to a limited number of investors • Illiquid – ownership interests can not be publicly sold or purchased – generally, the private placement agreement specifies who the investor will be, and the ownership interest is not transferable • No regulation – because private placements are a direct contract between a business and an investor, they are not regulated

7. C. VENTURE CAPITAL • Generally regarded as “seed money,” used to help start or expand a new business • A business can receive venture capital as a start up, when expanding before profitability, or after the business becomes profitable (but before a buy-out or an initial public offering) • The required rate of return or portion of equity required to receive venture capital funding is relatively high, the venture capitalist often provides advice and may take control of a corporation to protect its investment

8. C. VENTURE CAPITAL • Forms of Venture Capital investments • Debt – loan contract between the business and the venture capital firm, generally with above market interest rates • Equity – where the venture capital firm purchases an ownership share of the business, generally in the form of private placement stock • Preferred Stock – the favored type of venture capital investment, provides interest yields and seniority to capital in the event that the firm fails, but with an equity interest if the firm succeeds

9. C. VENTURE CAPITAL • Sources of Venture Capital Funding • Partnerships – business owned by individuals specifically to provide venture capital for other businesses • Limited Liability Corporations – a cross between a partnership and a corporation, does not have the restrictions on making investments that publicly traded corporations must adhere to • Investment Management Firms – pools of money from accredited investors, with an investment manager making decisions concerning which venture capital projects to fund

10. C. VENTURE CAPITAL • Advantages and Disadvantages of Venture Capital • Advantages • Venture capitalists generally have expertise in guiding new firms, can help with management • Venture capitalists can provide substantial funds for business development • A venture capital firm’s investment in a business can give the business a “stamp of legitimacy” • Disadvantages • The venture capital firm often requires some control over the business’ operations • Venture capital money is expensive – the venture capitalists expect to obtain investment returns commensurate with their risk of loss of capital