Lesson #6

Capital Markets

Lesson #6

43問 • 1年前Capital Markets

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Understanding Capital Markets Capital Markets are where savings and investments are channeled between suppliers and those in need. Suppliers are people or institutions with capital to lend or invest and typically include banks and investors. Those who seek capital in this market are businesses, governments, and individuals. Capital markets are composed of primary and secondary markets.

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Understanding Capital Markets The most common capital markets are the stock market and the bond market. They seek to improve transactional efficiencies by bringing suppliers together with those seeking capital and providing a place where they can exchange securities.

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Primary vs. Secondary Markets • When a company publicly sells new stocks or bonds for the first time, such as in an initial public offering (IPO), it does so in the primary capital market. This market is sometimes called the new issues market.

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Primary vs. Secondary Markets Primary Market • When investors purchase securities on the primary capital market, the company that offers the securities hires an underwriting firm to review it and create a prospectus outlining the price and other details of the securities to be issued.

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Primary vs. Secondary Markets • The secondary market includes venues overseen by a regulatory body like the SEC where these previously issued securities are traded between investors. Issuing companies do not have a part in the secondary market.

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Primary vs. Secondary Markets Secondary Market • The New York Stock Exchange and Nasdaq are examples of secondary markets.

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Raising Capital Some entrepreneurs consider raising capital to be a burden, but most consider it a necessity. Regardless of their stance on the matter, raising capital is an essential step for entrepreneurs, founders, business owners, or anyone looking to start a company.

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Raising Capital Raising capital is when an investor or a lender gives a business funds to assist with starting, growing, and managing day-to-day operations.

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Raising Capital A business owner might look at different fundraising methods to service different capital needs. Typically, there are two forms of fundraising: equity and debt financing. Equity Financing, Debit Financing, Convertible Debt and SAFE Notes are few of the more prominent methods of raising capital:

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Raising Capital Equity Financing: For those ambitious entrepreneurs in search of millions in upfront capital to push their piece of technology or product to market, equity financing might be the best option. In short, Equity Financing is selling a portion of a business in the form of stock to investors in exchange for funds in order to operate and grow the business. This form of financing has been made popular on ABC’s show Shark Tank, on which entrepreneurs seeking to raise capital pitch their business to a group of sharks (investors), generally as follows:

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Raising Capital : Unlike a credit line from which you can draw funds when needed, raising capital through equity financing is typically done in rounds. These begin with an angel round and/or series seed, then proceed to Series A, B, C, and beyond when additional funding is needed.

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Raising Capital : In early rounds, companies look to family and friends and angel investors to lead the round. Angel investors are usually wealthy individuals who invest in startups at the ground floor. As a company grows and matures, if additional funding is needed, the company will then look at taking venture capital

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Raising Capital : This is when companies can raise tens, if not hundreds, of millions of dollars from funds dedicated to making investments in high-growth companies.

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Raising Capital : To understand exactly how this can play out, let’s consider a hypothetical scenario. Company A is a new software company that improves robots’ comprehension to exceed that of humans.

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Raising Capital : Company A has an incredible piece of tech and a brilliant team of data scientists but no money to grow their business. So Company A begins discussions with investors and looks to raise an initial seed round.

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Raising Capital : The investors have determined the company’s fair market value to be $15M. With the goal of raising $3M, Company A is faced with the challenge of selling off 16% of their business.

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Raising Capital : If you are a business owner not looking to be diluted, then you might explore other options of raising capital, like acquiring debt. Aside from maxing out personal credit cards, companies can raise debt through personal and bank loans, lines of credit, bonds, or convertible notes to service their fundraising efforts.

Debt Financing

Raising Capital : Unlike an equity sale, raising debt comes with the interest burden overarching the company’s financial statements. Since these creditors are not investing in the business, but rather providing capital with the expectation for it to be repaid with interest, it is important to make sure the company is generating sufficient revenues to support the repayment and interest obligation before settling for a conventional loan.

Interest Burden

Raising Capital Investors vs. Lenders Another important step is understanding the difference between investors and lenders. Investors buy stock in companies, with the expectation that the business will sell, go public, or at least produce healthy dividends down the road.

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Raising Capital Investors vs. Lenders By allowing others to invest, you give up ownership in your business, but investors can provide resources besides just capital, such as networks, mentorship, and business advice

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Raising Capital Investors vs. Lenders Since investors have skin in the game, they’ll want the business to succeed just as much as you do. Lenders give companies money upfront as well, with the expectation to be paid back with interest in a timely manner, but they typically don’t provide any other resources.

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Raising Capital Convertible Debt: Bridging the Gap Many early-stage startups, from my experience, raise what’s known as convertible debt. This mechanism was created to bridge the gap between debt and equity financing.

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Raising Capital Convertible Debt: Bridging the Gap Convertible debt is exactly what it might sound like. Initially, it functions as traditional debt; however, it has the option to be converted into the company’s equity in the future.

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Raising Capital Convertible Debt: Bridging the Gap Depending on how the agreement is written, convertible debt has certain provisions, or triggers, that determine when the debt can be converted into equity. Consulting with outside counsel before signing a definitive agreement is always recommended.

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Raising Capita l SAFE Notes : Another popular alternative is referred to as a SAFE note. SAFE is an acronym that stands for Simple Agreement for Future Equity. It functions similarly to convertible debt (less the interest). Nonetheless, a SAFE note is where an investor gives upfront capital now in exchange for equity in the future upon reaching certain triggers, such as closing a round of financing. It was created by the popular startup incubator Y Combinator as a way to fund the businesses that successfully graduate from their program. Using SAFE notes is a great way to generate initial funding, except similar to using convertible notes, it is important to understand the conversion terms before signing the agreement.

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What is Revenue? Revenue is the money generated from normal business operations, calculated as the average sales price times the number of units sold.

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What is Revenue? It is the top line (or gross income) figure from which costs are subtracted to determine net income. Revenue is also known as sales on the income statement.

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What is Revenue? Revenue, often referred to as sales or the top line, is the money received from normal business operations.

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What is Revenue? Revenue is money brought into a company by its business activities. There are different ways to calculate revenue, depending on the accounting method employed.

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Types of Accounting Methods: ________ will include sales made on credit as revenue for goods or services delivered to the customer. Under certain rules, revenue is recognized even if payment has not yet been received.

Accrual accounting

Types of Accounting Methods: __________, on the other hand, will only count sales as revenue when payment is received. Cash paid to a company is known as a "receipt."

Cash Accounting

Two types of Revenue : ___________ is generated from a company's core business operations and is the area where a company usually earns most of its income. What constitutes operating revenue varies depending on the nature of the business or industry. Examples of _________ Revenue: Sales: A sale refers to the exchange of goods for cash or cash equivalent. For instance, a clothing retailer would record the income from selling shirts to customers as sales or merchandise sales.

Operating Revenue

Two types of Revenue : ___________ is derived from activities not related to your company's core business operations, usually non-recurring or unpredictable transactions. Some examples of _________ Revenue include: Interest revenue: This is the most common form of _______ revenue, as most companies earn small amounts of interest from their checking and savings accounts. Interest income not only includes bank account interest but also interest accrued from accounts receivable or other contracts.

Non-Operating Revenue

How to Calculate Revenue? The formula and calculation of revenue will vary across companies, industries, and sectors. A service company will have a different formula than a retailer, while a company that does not accept returns may have different calculations than companies with return periods. Broadly speaking, the formula to calculate net revenue is: Net Revenue = (Quantity Sold * Unit Price) - Discounts - Allowances - Returns

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How to Calculate Revenue? The main component of revenue is the quantity sold multiplied by the price. For a service company, this is the number of service hours multiplied by the billable service rate. For a retailer, this is the number of goods sold multiplied by the sales price.

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How to Calculate Revenue? The obvious constraint with this formula is a company that has a diversified product line. For example, Apple can sell a MacBook, iPhone, and iPad, each for a different price. Therefore, the net revenue formula should be calculated for each product or service, then added together to get a company's total revenue.

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What is Profit? In general, the profit is defined as the amount gained by selling a product, which should be more than the cost price of the product.

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What is Profit? It is the gain amount from any kind of business activity. In short, if the selling price (SP) of the product is more than the cost price (CP) of a product, then it is considered as a gain or profit.

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What is Profit? • It describes the financial benefit obtained if the revenue from the business activity exceeds the taxes, expenses, and so on, which are involved in sustaining business activities.

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Types of Profit? __________ is the amount gained by any business or company after removing the cost associated with the making and selling of the product from the selling price. The revenue yielded in the company’s income after sales of the commodity should be reduced by the amount or cost it took to make the product or provide any service to the customer’s, to get the gross percentage of the profit. The formula to calculate the ________ Profit is: __________= Total Sales - COGs Where COGs represents the cost of goods sold.

Gross Profit

Types of Profit? A business’s ________ profit tells what is the contribution of the company’s operations to its profitability. The _______ profit is basically the ratio of ________income and sales revenue. The formula to calculate the _________ Profit is: ________ profit = Gross Profit - ________ Expenses Also, ________Profit Margin = ________ Profit / Total Sales

Operating Profit

Types of Profit? __________ includes all the cost amount generated by the business as revenue. It represents the actual sum of money made by any business. The formula to calculate the Net Profit is: _____ Profit = Operating Profit - (Taxes and Interest)

Net Profit

How to Calculate Profit? To calculate the profit gained by any business, follow the steps below: • Determine the cost price of the products sold. • Now calculate the total selling price of the products sold. • Subtract the cost price and selling price, to get the profit amount. • To calculate the profit margin, divide the profit amount with cost price. • Multiply the profit margin with 100 to get in percentage.

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Lesson #2

Jay Jayel · 30問 · 1年前

Lesson #2