EFIM10030 Lecture 1b: Raising finance (1) 

 Equity, venture capital andaccountability We shall look at financing of a business in the context of the limited liability company. This is the primary legal form of businesses (other than small businesses) in the U.K. The characteristics of a limited company 1 2. 1. The first of these characteristics is describes how a Limited Company is a legal personality (or "legal entity") which is separate and distinct from its members. This means that the company can enter into contracts in its own name, and can sue and be sued in the courts. 2. The second characteristic means that the liability of the members (shareholders), or 'how much they stand to lose', is limited to the amount they have invested. Consequently if a Limited Company is sued or liquidated in order to settle debts, it will only pay out to the value of its current worth - the investors cannot be made to pay any more. This has serious risk implications for those who trade with a company particularly suppliers, and the investors themselves. Sources of long-term finance These split into equity (the issuing and selling of shares) and debt (borrowing, for example from banks). The remainder of this lecture will deal mainly with equity. The next lecture looks at debt more closely. The creation (incorporation) of a company seed-corn finance Seed-corn describes initial funding up to approx. 500k in most cases concerns pre- commercial launch R & D funding Founder management team (FMT) may have savings of their own There may also be friends and family who wish to invest Beyond this the FMT need to look externally(business angels or Venture Capitalists see below) Let us now turn to the mechanics of share issues Ordinary Shares (equity) When a business takes on Company status (Ltd. or Plc), its owners become known as shareholders. The capital of a company is divided into shares. These can be of any denomination (named value). Example: Ms A and Mr B and their associates wish to create a company with ordinary share capital of 10,000 total. This could be made up of (say): 1,000,000 x shares; or 100,000 x shares; or 20,000 x shares; or 10,000 x shares; or _____________________________________________ Any denomination can be used for a share this is known as the nominal value or par value and remains constant (although the book value and 'market' value may go up or down). All shares are ordinary shares (also known as equities) unless specified otherwise. The essential feature of ordinary shares is: