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Public Private Placement

Financing Sources. www.entrepreneur.com/howto/raisemoney InternalFounder's resourcesExternal Private Investors AngelFundPublic InvestorsBanks. Private Ownership is restricted to a few investors rather than to the public at largeGenerally more expensivePublic Securities are offered

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Public Private Placement

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    2. Financing Sources www.entrepreneur.com/howto/raisemoney Internal Founders resources External Private Investors Angel Fund Public Investors Banks

    3. Private Ownership is restricted to a few investors rather than to the public at large Generally more expensive Public Securities are offered to the public and must be registered with SEC More disclosure required

    4. Private Equity Categories Venture Capital Leveraged Buyout Mezzanine Funding Distressed Debt

    5. PE Involvement Board Representation Required Vesting of Founders Shares Covenants Supermajority Provisions Mandatory Redemption Rights

    6. PE Attributes Alignment of interests of owners and investors Carried interest General Partners invest Ability to affect operational change Illiquid nature allows for long-term focus

    7. PE Illiquidity Commitment Drawdown J Curve No existing exchange Long term

    8. PE Investing Individual Funds High minimum commitment Qualified accredited investors Specialized Industry, LBO, VC, Secondary Fund of Funds Costs Mgmt fees, Carried Interest, Illiquidity Benefits Clawback, Low correlation

    9. PE Agency Issues Fund vs. Founder May differ on cash flow expectations May differ on exit preferences Valuation & Control Asymmetric Information

    10. Public Markets Alternative to private capital markets Less involved equity investors More disperse ownership Costly regulation SEC Interstate public offerings National stock exchanges Trading by corporate insiders Corporate proxy process Fed controls margin requirements Industry self-regulation

    11. Current stockholders can diversify Easier to raise future capital Going public establishes firm value More feasible to use stock incentives Increases customer recognition

    12. Reporting requirements Officers must disclose holdings New issue may not be actively traded Market price may not reflect true value Investor relations

    13. How to Go Public Select investment banker (underwriter) Register with SEC Choose price range for preliminary (red herring) prospectus Go on road show Set final offer price in final prospectus

    14. Choosing an I-Bank Reputation and industry experience Mix of institutional and retail clients Support in the secondary market Analyst Reputation Price Stabilization Syndicates

    15. Project firms future cash flows Examine publicly traded comparables data Price to set firms P/E and M/B ratios in line with comparables Underwriter specifies a range in the preliminary prospectus

    16. Most are underwritten (firm commitment) In small, risky deals, best effort is an alternative Underwriter isnt responsible for unsold shares

    17. Road Show Visit potential institutional investors 10-20 cities Both public and private issuances Investors indicate their interest

    18. IPO Returns First Day Most IPOs have price increases Average first-day return is > 10% ~ 10% have first-day returns > 30% Long Run Lower than for comparable firms On average, the offer price is too low, and the first-day run-up is too high

    19. Information asymmetry Bankers incentives Firm should prefer a high price Founders sell only a fraction of their stock Later offerings easier if first goes well Conflict of Interest

    20. IPO Costs Direct Gross Spread - 7% Solution Lawyers, printers, accountants, etc. Indirect Money left on the table (End of 1st day price - Offer price) x # shares Typical IPO raises $70 mil, leaves $9 mil on table Preparing for IPO consumes most of managements attention

    21. Net Proceeds

    22. Carve-Outs & Spin-Offs Special IPOs Selling stock of a subsidiary Parent usually retains controlling interest in new public company Palm/3Com

    23. Non-IPO Issuances Shelf registration One SEC registration Issue is sold over a period of time Public and private debt issues SEO Rights

    24. SEO Information asymmetry Announcement effects Less following earnings announcement Long-run underperformance

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