Video Transcript: Sources of Equity Capital

Hello, welcome. We're going to be discussing sources of equity capital, capital  needs planning, projection of required capital for running a business. We need  cash. We need liquidity. We need to be able to have cash to flow in and out of  

our business so that we're able to produce our products. Pay our employees,  pay the insurance, pay what notes payables we have. We need capital, and we  need to plan our capital wisely and our uses of capital wisely, so that we aren't  putting ourselves in a position to where we need excess debt projection of  required capital for running a business, working capital. This is what's in  process. This is what is being produced. So capital and production, like raw  materials and labor that capital is being put to work. It's known as working  capital. So human capital is our labor assets, right? Our human resources, our  employees that are in the operation function, right? Should be an ongoing part  of running a business. We need capital to stay in business. We it's like the oil to  our engine. We need the cash to keep it running, right? It's critical in a startup.  We need cash, a large cash infusion and a startup, right? So during the startup  initial phase, we're going to require probably certain amount of equity and a  certain amount of debt in the startup period, right during periods of growth and  expansion. So we've got our initial startup phase. We are underway. We are set. We are, you know, we have our foundation time to grow. So in this growth  process, you may find a company infusing themselves with capital from a stock  issuance, or you may find a, you know, funding themselves through debt a lot of  times by selling corporate bonds during succession planning. So if a CEO is  stepping down, and you have a new CEO set to take his place, there's going to  be maybe a little bit of turbulence during this time, a little bit of uncertainty. So  you need us maybe a small cash infusion to ensure that operations don't take a  nosedive. So sources of equity financing. First, we can use stock. We can sell  stock. A company. Can do an initial public offering, right? So you take your  company public. Now anybody is able to own a piece of your company, right?  Instead of it being private, now, I take it public. It's open on the market to bid on  and buy and that'll give you ownership shares into a company. So in the IPO  phase, Corporation sells common stock to the general public for the first time.  Right? The advantages of selling stock. Firm does not have to repay money  received from the sale of stock. So it's not, it's not a debt obligation. You're  selling ownership shares to the public. Firm does not have to pay dividends of  stockholders unless it decides to. Now, a lot of companies, they issue stocks  and they pay the dividend because they want to continue to attract investors,  right? But a firm doesn't always have to pay out those shareholder dividends,  they can retain that back in earnings and reinvest it in the business. It depends  on what your shareholders appetite is, on whether you want to retain those  earnings or give that back in dividends. Investors want to get paid, and are they  willing to sit out a round of dividend payments to have the board of directors  come back and infuse that capital as retained their earnings back into the 

operation. So in long term growth, their stock price will appreciate, and therefore their dividend payments will be worth more. So it depends on what do the  shareholders really want to do, and that is why the board of directors is so  important when issues come up like that, to whether retain earnings or pay out  net profits as dividends the shareholder, the board of directors can come in and  they can really guide the corporation through that and speak for the  shareholders and get those conflicts resolved. Now, also a source of equity  financing is personal savings, right? The least expensive source of funds  available. If you have personal savings, you have personal cash. You don't have to pay a dividend, you don't have to pay interest payment. That's your money.  It's free and clear cash. It's liquid. You can invest it. Entrepreneur keeps  ownership right. If you don't need to sell stock or you don't need to go to the  bank for a loan to finance your operations, you keep your ownership as an  entrepreneur, 70% of entrepreneurs utilize as primary source of financing  startups, right? Personal savings. If I am going to start a business, I'm going to  use my cash to get it going. I'm not trying to start out, you know, in a negative  situation, by going to the bank and getting a loan. And a lot of startups, they  aren't big enough to go public, so no one's going to buy the stock if they try,  provides an estimated 35% of average initial capital requirements. So that's  great, right? So entrepreneurs need to come to the table with 35% of the initial  capital required in order to have a successful venture, assuming risk is good for  potential investors and lenders. So look, there's always going to be risk in  business. Anytime you put your capital up, your cash up to be invested, you  know, there's a risk that that that cash could be lost. So there is some risk, but  having a strong management, having strong management allows the company  to mitigate those risks, alleviate some of those risks, reduce some of those risks, and make smart risks with their money. So family and friends is another source  of equity financing. Family and friends are more willing to invest due to the  relationship with you that's typically small amounts of investment. You know, you need million dollars friends and family. You might have 10 people to give you 10  grand, right? 100,000 can they can get start up running. So if we can get  enough cash just to get it up and running, then we can worry about infusing  capital later, when that time arises. But for now, let's get it going. Friends and  family help me out, give me the cash I need, and you know, we'll give you a  return on your investment for your risk possibilities of ruining friendships and  relationships with family. So if you have a business venture that goes bad and  you're not able to repay your friends and family, let alone give them a return on  their investment. It might not be a good outcome with a relationship there. So  you know you need to be careful on who your sources of equity are. Be honest  and treat friends and family like an outside investor, just because you know  they're your friends and family. Don't try to sugar coat it right. Don't try to make it seem better than it is. If things are going bad, you need to be honest with your 

friends and family and treat them like you would any other investor. You actually  have a fiduciary responsibility to them to do so partners, bringing on a partner  for a source of equity, if I don't have enough cash to get you know my operations running, I can bring you a partner that does have enough cash and provide him  an ownership stake into the company and allow him to have a return on his  investment partners allow for additional sharing capital towards the business.  Right? Ownership is split up among partners, right? So now I have a partner,  and I have part of his capital, and now he has part ownership into my company.  Partner share liability and risk, although can be unequal. I may have 70% stake.  He may have he or she may have 30% stake. So it all depends on how the  capital financing, or whoever has the control with the most cash is usually how  the ownership is split control and profits are shared, right? So the distribution of  equity is usually how profits are going to be shared, as well as control. So if I  have a 70% stake and my partner has a 30% stake, I have a larger distribution  of the profits, as well as a risk. Essential documents should be in place to online  specifics of the partnership. You know you want to go into a contract, it needs to  be legal. Need to make sure that all of these things are specified and defined  and outlined in the contract, so that we when it's time to dissolve the  partnership, maybe somebody gets bought out, maybe the business goes belly  up. We need to know how to handle these parameters. Okay? So we have angel investors, right? Angel investors are private investors who invest their own  money in business startups for equity stakes. So I'm going to, I don't know this  person, but I know they're trying to start up, and I'm going to come in and say,  Hey, I'm going to give you $100,000 I know you need a million, but I want 10%  return on my money. And you know, it's up to the the entrepreneur, the business  owner, to take the money or not from the angel investor. They are usually  experienced, sophisticated entrepreneurs or angel investors. So they're going to target strong investment opportunities to invest their capital in investing  knowledge, experience and energy. So they're going to bring expertise and. Into  the industry or the market and help the company potentially navigate through  those type things, fill gaps between around 100,000 to a 5 million, right? So if I  need 5 million, you know, maybe we can get three angel investors to come in  and Tony up 1.5 bring advice, experience and network of con contacts, right? So we got to make sure that our angel investors, you know, they bring the  experience and they help guide us through a turbulent startup period, venture  capital, private for profit organizations, right? Pool large amounts of capital to  invest in. Businesses. Look for younger companies with considerable growth  potential. So they're just going out taking a fringe risk. Right? Venture capitals,  they say, Hey, this is small, young company. I don't know much about it, but I  think this industry is going to be strong forward looking after we do some more  due diligence. Hey, I like the potential for this company. And let's, you know, let's invest in it and see what happens. 80% invest in the expansion stage of the 

business. So once they've got, you know, the initial phase, the start up, right?  And then, you know, then they're in the growth phase. Once the growth phase is through, we see an expansion, a large expansion. So you want to see these  venture capitalists will come in during the expansion stage of business and  really try to capture returns there. They seek high rates of return, because a lot  of times, they are investing in greater than moderately risky businesses, take a  large portion of control on a company. So if they come in and they provide 50%  of the equity one, you know, venture capital deal, then they're going to want a  large control stage. So company stage investment comparison. Okay, so the  dark blue is the percentage of angel investments and the light blue is the  percentage of venture capital investments. So during the expansion stage, you  can see the 80% of venture capital investments happen here during the  expansion phase, 18% happen for both venture capital investments and angel  investments during the early phase, right in between startup and expansion and  at the startup phase, you won't see venture capital make many investments in  The startups like the angels will. But the venture capitalists want to see that you  have a foundation that you want to see that, hey, I've got my operation up and  running. Things are looking good. We're starting to expand. We're starting to  grow now that we are starting to expand and grow. Now we need the capital,  right? We're not big enough to sell stock, so now we need to bring in partners,  equity partners and sometimes can be venture capitalists, but angel investors,  they do make 75% of their investments during the startup.