Learn about An IPO Video

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Learn about An IPO

In the last video not the last offering I guess it was a bit of both we had completed our series B, we had gone back to the tail we’re got another round of venture capital funding and we raise $10 million more dollars is going to help us build up the website and do some marketing and higher up some more engineers and other employees and to do that we had to sell one million shares. We essentially sold them at $10.00 a share and so after that our offering well our pre money evaluation was $30 million and our post money is not $40 million. That’s the value of our assets as, I mean you know this, you know, the website and that’s kind of arbitrary evaluation and I've gotten a letter asking how do you evaluate that and that’s a whole subject for another play list and I will do that I will do a whole play list on evaluation eventually. But to get there the first thing to understand is just capital structure and how capital markets work in general so that’s what we’re doing here. But anyway, so after you got the $10 million you have $30 million before you get $10 million your close money is $40 million and we have to issue a million extra shares to do it so before the money we had 3 million and now we have 4 million shares. So let me draw what our balance sheet looks like. So we already had a $1 million and then we raise $10 million more so if we look at the left hand side of our balance sheet we have $11 million in cash and we have our website and intellectual property maybe we have some paths now so you can say you know, assets of the firm. I guess you could say none cash assets, right that cash. And some of them intangibles like branding or maybe we made some small acquisitions of other people or do more video and actually the mechanics of acquisition all that but you get the idea. These are all of the assets of the firm, whatever they maybe. And then on t equity side because we have no liabilities so in this case assets will be equal to equity. On the equity side of the equation we just have 4 million shares. ¼ went to the series big I, right. Series B ¼ went to the series a guy he bought a $1 million shares of exquisite 750 of share then the Angel Investor had given us a million shares and I think it was $5.00 a share that was the Angel. And then there is me and my buddy that we split the last that first million shares five ways and if I wanted to draw my sliver I still have my $200,000.00 shares. We can keep doing that. We can get a series C and a series D that will keep us going. But let say that a couple of other people have decided to sell socks on the internet and we realize that this get becoming a very competitive space and we really wanted to just lay down the conflict and make sure that ours is the dominant players because we figure that whoever gets the biggest market share fastest is going to become the Amazon.com and everyone else has going to turn into these meet two players and they all going to go out the business. So size has benefits in this situation. So we don’t want to do this kindly $10 million offerings and $20 million offering we want to go big time. We say, “You know what, we're going to expand our company huge, we’re going to push marketing hard and so we want to raise a lot of money. Let say we want raise $50 million to invest in the business to do some hardcore marketing. And it happen to be the time, let say its 1999 the stock market is raising ahead. People would love to get in on this kind of stuff so said, “Hey, let's do initial public offering” and that has two benefits. One will be able to raise a lot of money for the firm to invest in you know, maybe building distribution centers or the marketing I talked about. And then the other side benefits which you won't really talk about much of the board meeting but all of these people right now they're holding these shares, right. I have this $200,000.00 shares as Angels Investor has this million shares and there's really not a lot they can do with them, right, maybe the Angel Investor, maybe he has some—that maybe had expensive divorce settlement and he has to make some alimony payments now and he doesn’t really have the cash he can't do anything with his shares, right. Same thing with these BC’s these BC’s are cannibal to their investors and they can say like this BC’s could say, “Oh you know, I bought those shares at $7.50 per share and then this guy came in and bought it at $10.00 per share so I already got 33% gain on my investment. But the investor aren’t that impress by that because you still holding the shares, you can't really say their worth $10.00 until you actually turn them into $10.00 or you turn them to actual cash. So by doing an initial public offering all of the sudden, all of the players will have liquidity which mean that it can exchange what they have, right, including myself then they can exchange what they have for actual cash if they need too. So does that work? So I will go to an investment bank although they’ve all turn into commercial banks now. But we’re talking in a pre 2008 world I will go to an investment bank and I'd say or more likely they would come to me and say, “Hey, you guys could raise big money in the public market right now why don’t you do an IPO.” And in a few seconds we realize why they're so came to do it. And I say, “Sure we can raise a lot of money” and it’ll also you know, would be in the press so that will be free marketing in on itself. So we say, “Sure do all of the works.” So what they’ll do is they’ll be a lead under writer. And that essentially the person who does all of the legal work, their going to write, they're going to file documents with the SCC that describe the company and their going to make models and projection all of that. And then they're also going to have kind of people writing along with them other banks and they're going to form a syndicate. A syndicate is just a group of banks that worked together to kind a handle a larger transaction than anyone of them would be willing to handle by themselves and it king of spreads the risks among them. So that the bottom line is what the banks do other than doing all the legal work they’ll value the company and then they’ll go to all of their clients. So all of the people who trade through that bank all of the institutional clients, all of the hedge funds that have their prime brokerage accounts at those banks and just so you know, a prime brokerage account is just like a brokerage account but it a brokerage account for big guys. It’s a brokerage account for people managing a $100 million and not, you know their E-trade account. That’s all the prime brokerage is. And they’ll go in these guys and say, “Hey, we have this hot IPO issues socks.com and we've done our models and we thing this is a $5 billion market and we thing that this company is worth. We think this company is worth at least a $100 million in its current form.” So once again realize, I mean even though we’re kind of doing something a little different now all of the other things were essentially you could call them private offerings or private placement in some way. We were dealing—essentially this were private equity sales and I know that word is use a lot private equity and that’s what venture capital essentially is although normally when people talk about private equity their not talking about venture capital. Now I'll do a whole other video on that but venture capital fundamentally is private equity, right because these shares that you're selling their not traded on the public exchange like the New York stock exchange or the NASDA or something like that. So anyway, back to what we were doing. These guys, these banks they go to their clients and say, “Hey, I have this hot new issue and we are—”and they're kind of gage sentiment they’ll talk to clients, they’ll talk to each other and they say, “Oh, you know what the demand is” and they’ll essentially come up with some price which is essentially as high a price as—they wanted to a high price because obviously there's a company I want to sell those stock for as much as possible but they don’t want to do it so high that the stock doesn’t trade up. Most banks you want your IPO to look like this and this is the first day of trading and this is your IPO price they wanted to look like that so that in the future when there's an IPO people get excited to get in. It was the IPO if the stock just did this, if it start collapsing one and the little people will lose interest on IPO in general and then people will get suspicious about this company and I'll do a whole video on that. So how the mechanics work? Well they’ll say, “Hey, if you want to raise $50 million—” you can do a couple of ways. We say, “Hey, you know we’re willing to issue another 10 million shares” and I'm not drawing it proportionally. Let say we’re willing to issue another 10 million share and this should be a lot higher because this was $4 million right here. We’re willing to issue another 10 million shares how much money can we get for it? And let see this bankers talking to essentially the market and talking to each other they say, “Hey, we think we can justify these guys and were going to do it for a little bit lower than they’re actually work but we think the market will buy the fact that this guys are worth, I don’t know let say they're worth $80 million in their current incarnation, right, which is essentially says before we raise the money we've had $80 million we have 4 million shares so they're saying $20.00 of share. So if we go on the issue another 10 million shares at $20.00 of share we’re actually raise $200 million, actually for the sake of—so I don’t have to edit my math. Let say that how much we want to raise $200 million. So essentially with this guys would do our board of directors will issue this new shares and then this syndicate of banks led by the lead on the writer well then sell to their brokerage client to mainly institutional investors but it might be some favor of rich guys. If it is not that favorite of an IPO maybe you might get a call as well. And they’ll sell it to all of them and you say, “Oh why are they doing that, why are they doing all of these work for the company helping them raise $200 million and they're going to pain of the legal work and you know they had to put team of maybe ten guys on this and they have to make models and a probably took them maybe two or three months to do it that a lot of work. What they're going to exchange for all of these, will they actually get a commission and that commission at least historically has been 7% of the offering and now you get a sense of why in a good market when you can do this things why it has in history paid to be an investment banker because 7% of $200 million and frankly it’s not a lot more work to do a $200 million offering that it is to do a $20 million offering as probably about the same amount. But 7% of $200 million is $14 million so actually these guys aren’t going to see $200 million they're going to see $200 – $14 million so they're going to see $186 million and then these bankers are going to split $14 million and that probably is about two months of work for maybe ten guys. So you can imagine and then of course they have the whole bank that has supported, they have all these, you know, not anyone could do this you have to have what they called retail distribution. You have to have kind of a channel that you can plug these shares into and to actually get rid of the 10 million shares. As you see it’s a fairly proper business, so that’s what an initial public offering is, is for the first time a company is selling shares to the public that is not just to this private investors and usually on initial public offering all those not always a case these guys aren’t selling their shares as much as they would like too. They usually lock in for certain period just because it looks bad if especially the insiders, right those were the founders of the company are actual sell their shares and maybe but six months later then I can go and sell my shares maybe if I do it on a small amount I can go and sale them and ask that can I have a publicly traded price so at any given day. I know exactly what my shares are worth. And this is an important thing to realize because a lot of time when people buy a stock they're like, “Oh I've invested in that company.” Well kind of when you normally buy a stock on an exchange as in New York stock exchange your just buying the stock from somebody else you're not buying the stock from that company so when you pay a $100.00 for an IBM stock—when you buy a stock from someone else so I if I give my $100.00 and I get a stock certificate of IBM most of the time if I were to do this today I'm just, you know, this is me with the mustache I'm just getting it from the other lute, right or maybe he’s happy because he got a $100.00. He got a top hot. And this is what happens in the stock market at risk when I buy that I'm really investing in IBM I'm just buying the money, I'm just buying that shares from another guy we’re just exchanging shares. In IPO if I'm one of the IPO investors this is me my $100.00 in this situation let say we’re dealing with socks.com. This time it’s actually going to the company, it’s actually going to the or the website in this case so of course 7% is being redirected to the investment bankers. So when you're buying from an IP you really are to some degree making an investment just like if you were doing in venture capital you really are making an investment in the company. You're money will then be used by the company to higher people and build factories and make out a website and do marketing. In this case you're essentially just trading shares on a secondary in the secondary market. Secondary market just mean it is not going to the actual company it just going to another share holder who bought it before you. Anyway, I've really gone over my time on that so I'll see you in the next video.

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In the last video not the last offering I guess it was a bit of both we had completed our series B, we had gone back to the tail we’re got another round of venture capital funding and we raise $10 million more dollars is going to help us build up the website and do some marketing and higher up some more engineers and other employees and to do that we had to sell one million shares. We essentially sold them at $10.00 a share and so after that our offering well our pre money evaluation was $30 million and our post money is not $40 million. That’s the value of our assets as, I mean you know this, you know, the website and that’s kind of arbitrary evaluation and I've gotten a letter asking how do you evaluate that and that’s a whole subject for another play list and I will do that I will do a whole play list on evaluation eventually.

But to get there the first thing to understand is just capital structure and how capital markets work in general so that’s what we’re doing here. But anyway, so after you got the $10 million you have $30 million before you get $10 million your close money is $40 million and we have to issue a million extra shares to do it so before the money we had 3 million and now we have 4 million shares. So let me draw what our balance sheet looks like. So we already had a $1 million and then we raise $10 million more so if we look at the left hand side of our balance sheet we have $11 million in cash and we have our website and intellectual property maybe we have some paths now so you can say you know, assets of the firm. I guess you could say none cash assets, right that cash.

And some of them intangibles like branding or maybe we made some small acquisitions of other people or do more video and actually the mechanics of acquisition all that but you get the idea. These are all of the assets of the firm, whatever they maybe. And then on t equity side because we have no liabilities so in this case assets will be equal to equity. On the equity side of the equation we just have 4 million shares. ¼ went to the series big I, right. Series B ¼ went to the series a guy he bought a $1 million shares of exquisite 750 of share then the Angel Investor had given us a million shares and I think it was $5.00 a share that was the Angel. And then there is me and my buddy that we split the last that first million shares five ways and if I wanted to draw my sliver I still have my $200,000.00 shares.

We can keep doing that. We can get a series C and a series D that will keep us going. But let say that a couple of other people have decided to sell socks on the internet and we realize that this get becoming a very competitive space and we really wanted to just lay down the conflict and make sure that ours is the dominant players because we figure that whoever gets the biggest market share fastest is going to become the Amazon.com and everyone else has going to turn into these meet two players and they all going to go out the business. So size has benefits in this situation.

So we don’t want to do this kindly $10 million offerings and $20 million offering we want to go big time. We say, “You know what, we're going to expand our company huge, we’re going to push marketing hard and so we want to raise a lot of money. Let say we want raise $50 million to invest in the business to do some hardcore marketing. And it happen to be the time, let say its 1999 the stock market is raising ahead. People would love to get in on this kind of stuff so said, “Hey, let's do initial public offering” and that has two benefits. One will be able to raise a lot of money for the firm to invest in you know, maybe building distribution centers or the marketing I talked about. And then the other side benefits which you won't really talk about much of the board meeting but all of these people right now they're holding these shares, right.

I have this $200,000.00 shares as Angels Investor has this million shares and there's really not a lot they can do with them, right, maybe the Angel Investor, maybe he has some—that maybe had expensive divorce settlement and he has to make some alimony payments now and he doesn’t really have the cash he can't do anything with his shares, right. Same thing with these BC’s these BC’s are cannibal to their investors and they can say like this BC’s could say, “Oh you know, I bought those shares at $7.50 per share and then this guy came in and bought it at $10.00 per share so I already got 33% gain on my investment. But the investor aren’t that impress by that because you still holding the shares, you can't really say their worth $10.00 until you actually turn them into $10.00 or you turn them to actual cash.

So by doing an initial public offering all of the sudden, all of the players will have liquidity which mean that it can exchange what they have, right, including myself then they can exchange what they have for actual cash if they need too. So does that work? So I will go to an investment bank although they’ve all turn into commercial banks now. But we’re talking in a pre 2008 world I will go to an investment bank and I'd say or more likely they would come to me and say, “Hey, you guys could raise big money in the public market right now why don’t you do an IPO.” And in a few seconds we realize why they're so came to do it. And I say, “Sure we can raise a lot of money” and it’ll also you know, would be in the press so that will be free marketing in on itself.

So we say, “Sure do all of the works.” So what they’ll do is they’ll be a lead under writer. And that essentially the person who does all of the legal work, their going to write, they're going to file documents with the SCC that describe the company and their going to make models and projection all of that. And then they're also going to have kind of people writing along with them other banks and they're going to form a syndicate. A syndicate is just a group of banks that worked together to kind a handle a larger transaction than anyone of them would be willing to handle by themselves and it king of spreads the risks among them. So that the bottom line is what the banks do other than doing all the legal work they’ll value the company and then they’ll go to all of their clients. So all of the people who trade through that bank all of the institutional clients, all of the hedge funds that have their prime brokerage accounts at those banks and just so you know, a prime brokerage account is just like a brokerage account but it a brokerage account for big guys. It’s a brokerage account for people managing a $100 million and not, you know their E-trade account. That’s all the prime brokerage is.

And they’ll go in these guys and say, “Hey, we have this hot IPO issues socks.com and we've done our models and we thing this is a $5 billion market and we thing that this company is worth. We think this company is worth at least a $100 million in its current form.” So once again realize, I mean even though we’re kind of doing something a little different now all of the other things were essentially you could call them private offerings or private placement in some way. We were dealing—essentially this were private equity sales and I know that word is use a lot private equity and that’s what venture capital essentially is although normally when people talk about private equity their not talking about venture capital.

Now I'll do a whole other video on that but venture capital fundamentally is private equity, right because these shares that you're selling their not traded on the public exchange like the New York stock exchange or the NASDA or something like that.

So anyway, back to what we were doing. These guys, these banks they go to their clients and say, “Hey, I have this hot new issue and we are—”and they're kind of gage sentiment they’ll talk to clients, they’ll talk to each other and they say, “Oh, you know what the demand is” and they’ll essentially come up with some price which is essentially as high a price as—they wanted to a high price because obviously there's a company I want to sell those stock for as much as possible but they don’t want to do it so high that the stock doesn’t trade up. Most banks you want your IPO to look like this and this is the first day of trading and this is your IPO price they wanted to look like that so that in the future when there's an IPO people get excited to get in. It was the IPO if the stock just did this, if it start collapsing one and the little people will lose interest on IPO in general and then people will get suspicious about this company and I'll do a whole video on that.

So how the mechanics work? Well they’ll say, “Hey, if you want to raise $50 million—” you can do a couple of ways. We say, “Hey, you know we’re willing to issue another 10 million shares” and I'm not drawing it proportionally. Let say we’re willing to issue another 10 million share and this should be a lot higher because this was $4 million right here. We’re willing to issue another 10 million shares how much money can we get for it? And let see this bankers talking to essentially the market and talking to each other they say, “Hey, we think we can justify these guys and were going to do it for a little bit lower than they’re actually work but we think the market will buy the fact that this guys are worth, I don’t know let say they're worth $80 million in their current incarnation, right, which is essentially says before we raise the money we've had $80 million we have 4 million shares so they're saying $20.00 of share.

So if we go on the issue another 10 million shares at $20.00 of share we’re actually raise $200 million, actually for the sake of—so I don’t have to edit my math. Let say that how much we want to raise $200 million. So essentially with this guys would do our board of directors will issue this new shares and then this syndicate of banks led by the lead on the writer well then sell to their brokerage client to mainly institutional investors but it might be some favor of rich guys. If it is not that favorite of an IPO maybe you might get a call as well. And they’ll sell it to all of them and you say, “Oh why are they doing that, why are they doing all of these work for the company helping them raise $200 million and they're going to pain of the legal work and you know they had to put team of maybe ten guys on this and they have to make models and a probably took them maybe two or three months to do it that a lot of work. What they're going to exchange for all of these, will they actually get a commission and that commission at least historically has been 7% of the offering and now you get a sense of why in a good market when you can do this things why it has in history paid to be an investment banker because 7% of $200 million and frankly it’s not a lot more work to do a $200 million offering that it is to do a $20 million offering as probably about the same amount.

But 7% of $200 million is $14 million so actually these guys aren’t going to see $200 million they're going to see $200 – $14 million so they're going to see $186 million and then these bankers are going to split $14 million and that probably is about two months of work for maybe ten guys. So you can imagine and then of course they have the whole bank that has supported, they have all these, you know, not anyone could do this you have to have what they called retail distribution. You have to have kind of a channel that you can plug these shares into and to actually get rid of the 10 million shares.

As you see it’s a fairly proper business, so that’s what an initial public offering is, is for the first time a company is selling shares to the public that is not just to this private investors and usually on initial public offering all those not always a case these guys aren’t selling their shares as much as they would like too. They usually lock in for certain period just because it looks bad if especially the insiders, right those were the founders of the company are actual sell their shares and maybe but six months later then I can go and sell my shares maybe if I do it on a small amount I can go and sale them and ask that can I have a publicly traded price so at any given day. I know exactly what my shares are worth.

And this is an important thing to realize because a lot of time when people buy a stock they're like, “Oh I've invested in that company.” Well kind of when you normally buy a stock on an exchange as in New York stock exchange your just buying the stock from somebody else you're not buying the stock from that company so when you pay a $100.00 for an IBM stock—when you buy a stock from someone else so I if I give my $100.00 and I get a stock certificate of IBM most of the time if I were to do this today I'm just, you know, this is me with the mustache I'm just getting it from the other lute, right or maybe he’s happy because he got a $100.00. He got a top hot.

And this is what happens in the stock market at risk when I buy that I'm really investing in IBM I'm just buying the money, I'm just buying that shares from another guy we’re just exchanging shares. In IPO if I'm one of the IPO investors this is me my $100.00 in this situation let say we’re dealing with socks.com. This time it’s actually going to the company, it’s actually going to the or the website in this case so of course 7% is being redirected to the investment bankers. So when you're buying from an IP you really are to some degree making an investment just like if you were doing in venture capital you really are making an investment in the company. You're money will then be used by the company to higher people and build factories and make out a website and do marketing.

In this case you're essentially just trading shares on a secondary in the secondary market. Secondary market just mean it is not going to the actual company it just going to another share holder who bought it before you. Anyway, I've really gone over my time on that so I'll see you in the next video.

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