Investments in your new venture will involve financial contracts between you and outside investors. Outside investors can be angel financers, venture capitalists, private financing companies, banks, credit unions, and so on. Financial contracts can have negative and positive impacts on your new venture. For example, an angel financer can add a clause on the financial contract which will not let you borrow additional funds without lender's permission. This happens when a lending institution has a mortgage/lean on your new venture's property. The lending institutions (e.g., banks, angel financers) add this clause to reduce foreclosure risk. Therefore, you must evaluate financing alternatives for your new business so that you are not controlled by the lending institutions.
Given the material and readings in this module, consider the entrepreneurial venture that you chose for this course. Reflect on the lessons from the readings about financial contracting. Then write a 4-5 page report concerning the type of financial contracting you would consider for "your" venture (the one you considered in Modules 1, 2 and 3.)
In particular think of the following situations and consider the contract provisions that might be arrived at between an entrepreneur and a prospective investor:
1. There are only a few specific possible outcomes that might result from the venture. The parties know what the possibilities are and agree about the probability of likelihood of each outcome.
2. Same as (a), except that the parties disagree about the probabilities of various outcomes.
3) What do you perceive you have learnt in Module 4 SLP? Which of the following learning objectives do you feel you have mastered?
-Demonstrate the effects of alternative financial contracts on the value of financial interests of the entrepreneur and outside investors
-Describe the basic information and incentive problems that impact new ventures
The main ways in which an organization can find long term finance for its business are:
- Retained earnings
- Bank loans
- Money from informal network
- Assistance from government bodies
- Equity Via Public Issue, Private placement, stake sale
But for a start up or a new organization retained earnings, bonds and public issues are ruled out. There can be broadly two categories of financing: INTERNAL and EXTERNAL sources of finance. As per tutor2u, "Internal sources of finance are generated from the business itself (e.g. cash from sales) and external sources of finance from outside the business (e.g. a bank loan, venture capital)."
Equity financing is when a company decides to give up ownership in the company to raise funds. This is usually done by selling company stock to investors. Sometimes this could include seeking out angel investors or venture capitalists. If you are expecting to get external financing through equity financing make sure that your business has a product or service that is unique, and that there is a high demand for your product or service. Most venture capital investors or even angel investors will not look at an offer unless they see a large growth potential.
Basic information and incentive problems that impact new ventures
Early stage venture capital financing is a setting plagued by large ...
New venture will involve financial contracts