Learn about More on IPOs Video

Get it off your chest – be the first to comment on this video!

Learn about More on IPOs

I think a little bit overview is in order now and maybe just taking a little bit of step back to say why does the company even raise equity and why do people who buy the equity even do it in the first place. So the whole idea of what we’re doing in the last several videos is that a company wants to raise money. He wants to raise money to start a website or build the factory or do whatever else kind of invest in the world and it’s kind of productive capacity so it’s can build the things that a company’s meant to build. And in every examples so far you know, we have the example where you know, me and my buddies we have just a business plan, the asset and then we own all the equity where the board of directors initially so that’s all the equity. So let's call this the assets right now. This is the equity and we can go to eventually capital is it could have been an angel investor, it could have been, you know, we talked about series A, series B all of that and we could say, “Okay, you know we need to raise ex million dollars.” What percentage of your company we have to give away for that we will say, “Okay, well we’ll value what you have right now I do different number and I'll do the past. We value what you have right now as $1 millions.” And so if you need another $2 million so let say there's we value what you have right now is $1 million dollars let's say right now you have $1 million shares, right so the company money value is just a million so you're essentially saying that the company right now is worth the dollar per share there is a million dollar worth of assets and there's a million shares so a $1 million divided by a $1 million is a dollar per share so they're evaluating it at $1.00 per share and essentially they're saying that we’re willing to give you or we’re willing to buy more shares on you out of dollar. So if we give you box, we’ll give you $2 million and since we’re buying it at a dollar per share we get $2 million shares for that and now all of these this is the equity. This is what the founder hand, this is all the equity. And so now their company has what we say is worth a million dollar this kind of arbitrary thing and we’ll talk more about how you can actually value these intangible assets some things. But now they had that and now they have another $2 million so the post money evaluation pre money was $1 million post money is now $2 million and now we had $1 million shares now we have $3 million shares. So essentially for giving $2 million dollars this venture capitals is whoever so this shares goes to some DC or angel investor they have now 2/3 of the company. They have two out of three million shares for 66% of the company for giving the $2 million. So that was kind of private raise of capital. And so you're probably heard the words private company and public company. A private company is one who’s share are not traded on the a public exchange. So if this company wants to raise money by selling equity the only face it can do it is to venture capital is sort of private equity firms and we’ll talk a little bit more about kind of a difference so venture capital is really is a private equity firm because it buying private equity but private equity tense to invest in more establish business and people just talk about private equity by itself. But we’ll go—we’ll do several videos on that. So this is essentially this company is a private company raising private equity. Now the example we did in the video is, no let say this company grows to a certain size, but let me just do it another companies so it’s clean. Let say I have another company these are assets and this it’s I mean they're current equity base right there. They should be the same size but to give you the idea and you know these assets it could be, you know, have some cash, it has some factories or land could have a bunch of stuff. It could have some technology or it could have some intellectual property, you know maybe it’s a drug company or maybe it’s a technology company has a bunch of path and stuff and then it has some tangible a brand who knows what it has. These are the assets of the firm; this is the equity of the firm so this company right now has no debt we’ll talk about that in a second what it means to have debt. And this is his current share holder base maybe some of this are you know, some BC’s who invest in the company where it was private, there's you know, maybe the founder has this shares but this is the equity base right here. And let say this company wants there's a lot of money and I just kind of review the last video it can do it initial public offering so right now it’s private, right? All of the shares right now that are own by the BC’s and the initial founders of the company they're not paid on the public exchange this BC can't go to the NASDA and can sell their shares, they can't go to the broker and say, “Hey, sell by million share I have in company X” they have to just sit of them maybe they can find another private equity investor to buy their shares or maybe this founder. There's no liquidity here, there's no other person they can sell the shares too. And also if this company wants to raise money right now it has to kind of go to a BC and do a very kind of, you know, do the whole process or you negotiate what this value is, what free money value is and they have to come up with all this legal documents and all of these stipulations or around, you know, we’ll give you this money but if this happens and you have to give us this interest rate and all of these type of things. So what they might have say that we need to raise a lot of money, we want all of these guys want a way for them to be able to sell their shares easily if they need too. And this company said, “Well we need to raise a ton of money.” Let say we want to raise a $100 million and we can't that’s hard to rise from just any one individual investor even if they are big institution. So they’ll do it initial public offering and that really just means and you know IPO and this is review of the last one is that for the first time this companies going to register its shares, its going to register it shares with the SCC and it’s going to—because it does that and it’s going to list it shares on an exchange it will get a thicker symbol, you know, maybe it be a company this will be a sticker symbol TICK or the last video could be sucks because it's going to sell socks. And then people can trade these shares on that exchange. You know it could be on the NASDA or something and I think some of you all had experience doing that where your on your Charles Wobb account and you say, “I'm going to sell sock.” Well that company that you're selling at some point did initial pubic offering and register with the SCC and got listed on in exchange. And the way it really works is it’s fundamentally the same as when you raise money from a BC but now instead of raising money from BC all of the money comes from essentially the public, right? it goes through these banks and brokerages but its coming from a bunch of small I'm just giving it up, right here. You know it could be coming from millions and millions of people. But the same process kind of holes in order to see what price these shares are bought at someone has to say, “Well, what is the company worth before it gets the money?” Kind of a free money evaluation that still has to happen and that’s what the investment bank does. The investment will essentially fit do a model and they say, “Oh you know, this is worth the company before hand is worth $50 million” and it’s kind of a, you know, they’ll kind of go out into the market and say, “Well, you know, our—and let say the company right now has I don’t know let say the company already has—I'll make a number $5 million shares, right. So this right here is $5 million. So if the banks value the company at $50 million it has 5 million shares and it will say, “Okay, right now the pre money evaluation is $10.00 of share.” And the bank will go out there and they’ll kind of gage interest and say, “Well, you know does it seems like the market willing to pay $10.00 of share for a company like this or give this company a $50 million free money evaluation and then so they’ll move forward with the IPO and hopefully the market actually wants to not pay $10.00 per share the market maybe wants to pay $20.00 in share. So all of these guys essentially let say they’ll pay $10.00 on share so let say that they raise—they sell $10 million shares at $10.00 of share so the company’s able to raise a $100 million. Right, 10 x 10 a $100 million that it can do to make new big adds and all of that. And what the bank hope is by selling these shares at $10.00 of share so let say this is days and this is price. So what the investment bank want to hope is that on day one you sell at $10.00 of share and then price moves up that the demand was actually to sell it for much more. And there's a bit of bouncing act because if they sell for too little then the company won't get as much money as they deserve but it they sell it for too much and the stock price goes down then you can have a stigma associated with IP up. But anyway, this bag of a question of, you know, sure I understand why the company is selling shares it needs money, it needs to operate, it needs to build factory or put out advertising all that but why are people buying shares to begin with, why do people shares to the stock market? And frankly there's two answers and you know and one is kind of the obvious one because they think the shares will go up and put something that’s speculation if I'm buying a share at $10.00 just because I'm hoping that there some other do out there who maybe a few weeks later going to pay $15.00 I'm just speculating if, you know, I'm saying, oh, I feels go up so let me buy it. But economically why was this even worth $10.00 to begin with? How do we even think about that evaluation at a very even high level? Why is this even worth $10.00 of share to begin with? And the idea is that these assets, assets are nothing but claims on the future benefits. A house is an asset because you get the future benefit of getting to live in it or the future benefit of not having to pay rent. So the future benefit of this is they’ll hopefully at some point in the future generate and income stream and even more that generate cash and at some point in the future the companies don’t do it right now they’ll actually dividend doubt that cash. So there's a couple of things that might like that will make this equity have kind of an economic, it will grounded economically and it could be these assets starting to pop up cash and then each of the share holders will get a dividend, right. A dividend is just cash that given to the share holders so let say that this is stock certificate in sock so at some point when the assets of the his company start generating cash each of the shares holders might be getting a dividend or maybe a large company at some future dates it say, “Wow, you know this is an awesome technology it will compliment what we already have” and maybe they’ll buy out the company, maybe they’ll pay $300 million for this company and then you know, essentially they're paying $300 million it was that and there's $15 million shares so they're paying $20.00 of shares. So those of the economic kind of grounding points that why this shares even have a value and I'll go a lot into a lot more detail I'll make a whole play list on how do we even think about whether this is worth $50 million or is it worth $5 million or is it worth $500 million and it’s kind of an art more than a science because you can make—you're going to make tons of assumptions in terms of how fast the company grows, what's the risk free rate of return that you can get on other assets, you know, essentially where else you can put your money? When does the company dividend that as much, you know, there's so many assumption so it’s more of an art so it’s really kind of trying to get a handle on things but there's no real right answer. The real answer is kind of what someone’s going to pay for. But anyway, I'll see you in the next video.

Khan Academy

The Khan Academy is a not-for-profit organization with the mission of providing a high quality education to anyone, anywhere.

http://www.khanacademy.org/

I think a little bit overview is in order now and maybe just taking a little bit of step back to say why does the company even raise equity and why do people who buy the equity even do it in the first place. So the whole idea of what we’re doing in the last several videos is that a company wants to raise money. He wants to raise money to start a website or build the factory or do whatever else kind of invest in the world and it’s kind of productive capacity so it’s can build the things that a company’s meant to build.

And in every examples so far you know, we have the example where you know, me and my buddies we have just a business plan, the asset and then we own all the equity where the board of directors initially so that’s all the equity. So let's call this the assets right now. This is the equity and we can go to eventually capital is it could have been an angel investor, it could have been, you know, we talked about series A, series B all of that and we could say, “Okay, you know we need to raise ex million dollars.” What percentage of your company we have to give away for that we will say, “Okay, well we’ll value what you have right now I do different number and I'll do the past. We value what you have right now as $1 millions.”

And so if you need another $2 million so let say there's we value what you have right now is $1 million dollars let's say right now you have $1 million shares, right so the company money value is just a million so you're essentially saying that the company right now is worth the dollar per share there is a million dollar worth of assets and there's a million shares so a $1 million divided by a $1 million is a dollar per share so they're evaluating it at $1.00 per share and essentially they're saying that we’re willing to give you or we’re willing to buy more shares on you out of dollar. So if we give you box, we’ll give you $2 million and since we’re buying it at a dollar per share we get $2 million shares for that and now all of these this is the equity. This is what the founder hand, this is all the equity.

And so now their company has what we say is worth a million dollar this kind of arbitrary thing and we’ll talk more about how you can actually value these intangible assets some things. But now they had that and now they have another $2 million so the post money evaluation pre money was $1 million post money is now $2 million and now we had $1 million shares now we have $3 million shares. So essentially for giving $2 million dollars this venture capitals is whoever so this shares goes to some DC or angel investor they have now 2/3 of the company. They have two out of three million shares for 66% of the company for giving the $2 million.

So that was kind of private raise of capital. And so you're probably heard the words private company and public company. A private company is one who’s share are not traded on the a public exchange. So if this company wants to raise money by selling equity the only face it can do it is to venture capital is sort of private equity firms and we’ll talk a little bit more about kind of a difference so venture capital is really is a private equity firm because it buying private equity but private equity tense to invest in more establish business and people just talk about private equity by itself. But we’ll go—we’ll do several videos on that.

So this is essentially this company is a private company raising private equity. Now the example we did in the video is, no let say this company grows to a certain size, but let me just do it another companies so it’s clean. Let say I have another company these are assets and this it’s I mean they're current equity base right there. They should be the same size but to give you the idea and you know these assets it could be, you know, have some cash, it has some factories or land could have a bunch of stuff. It could have some technology or it could have some intellectual property, you know maybe it’s a drug company or maybe it’s a technology company has a bunch of path and stuff and then it has some tangible a brand who knows what it has. These are the assets of the firm; this is the equity of the firm so this company right now has no debt we’ll talk about that in a second what it means to have debt.

And this is his current share holder base maybe some of this are you know, some BC’s who invest in the company where it was private, there's you know, maybe the founder has this shares but this is the equity base right here. And let say this company wants there's a lot of money and I just kind of review the last video it can do it initial public offering so right now it’s private, right? All of the shares right now that are own by the BC’s and the initial founders of the company they're not paid on the public exchange this BC can't go to the NASDA and can sell their shares, they can't go to the broker and say, “Hey, sell by million share I have in company X” they have to just sit of them maybe they can find another private equity investor to buy their shares or maybe this founder. There's no liquidity here, there's no other person they can sell the shares too.

And also if this company wants to raise money right now it has to kind of go to a BC and do a very kind of, you know, do the whole process or you negotiate what this value is, what free money value is and they have to come up with all this legal documents and all of these stipulations or around, you know, we’ll give you this money but if this happens and you have to give us this interest rate and all of these type of things. So what they might have say that we need to raise a lot of money, we want all of these guys want a way for them to be able to sell their shares easily if they need too. And this company said, “Well we need to raise a ton of money.” Let say we want to raise a $100 million and we can't that’s hard to rise from just any one individual investor even if they are big institution. So they’ll do it initial public offering and that really just means and you know IPO and this is review of the last one is that for the first time this companies going to register its shares, its going to register it shares with the SCC and it’s going to—because it does that and it’s going to list it shares on an exchange it will get a thicker symbol, you know, maybe it be a company this will be a sticker symbol TICK or the last video could be sucks because it's going to sell socks.

And then people can trade these shares on that exchange. You know it could be on the NASDA or something and I think some of you all had experience doing that where your on your Charles Wobb account and you say, “I'm going to sell sock.” Well that company that you're selling at some point did initial pubic offering and register with the SCC and got listed on in exchange. And the way it really works is it’s fundamentally the same as when you raise money from a BC but now instead of raising money from BC all of the money comes from essentially the public, right? it goes through these banks and brokerages but its coming from a bunch of small I'm just giving it up, right here. You know it could be coming from millions and millions of people.

But the same process kind of holes in order to see what price these shares are bought at someone has to say, “Well, what is the company worth before it gets the money?” Kind of a free money evaluation that still has to happen and that’s what the investment bank does. The investment will essentially fit do a model and they say, “Oh you know, this is worth the company before hand is worth $50 million” and it’s kind of a, you know, they’ll kind of go out into the market and say, “Well, you know, our—and let say the company right now has I don’t know let say the company already has—I'll make a number $5 million shares, right. So this right here is $5 million.

So if the banks value the company at $50 million it has 5 million shares and it will say, “Okay, right now the pre money evaluation is $10.00 of share.” And the bank will go out there and they’ll kind of gage interest and say, “Well, you know does it seems like the market willing to pay $10.00 of share for a company like this or give this company a $50 million free money evaluation and then so they’ll move forward with the IPO and hopefully the market actually wants to not pay $10.00 per share the market maybe wants to pay $20.00 in share.

So all of these guys essentially let say they’ll pay $10.00 on share so let say that they raise—they sell $10 million shares at $10.00 of share so the company’s able to raise a $100 million. Right, 10 x 10 a $100 million that it can do to make new big adds and all of that. And what the bank hope is by selling these shares at $10.00 of share so let say this is days and this is price. So what the investment bank want to hope is that on day one you sell at $10.00 of share and then price moves up that the demand was actually to sell it for much more. And there's a bit of bouncing act because if they sell for too little then the company won't get as much money as they deserve but it they sell it for too much and the stock price goes down then you can have a stigma associated with IP up.

But anyway, this bag of a question of, you know, sure I understand why the company is selling shares it needs money, it needs to operate, it needs to build factory or put out advertising all that but why are people buying shares to begin with, why do people shares to the stock market? And frankly there's two answers and you know and one is kind of the obvious one because they think the shares will go up and put something that’s speculation if I'm buying a share at $10.00 just because I'm hoping that there some other do out there who maybe a few weeks later going to pay $15.00 I'm just speculating if, you know, I'm saying, oh, I feels go up so let me buy it.

But economically why was this even worth $10.00 to begin with? How do we even think about that evaluation at a very even high level? Why is this even worth $10.00 of share to begin with? And the idea is that these assets, assets are nothing but claims on the future benefits. A house is an asset because you get the future benefit of getting to live in it or the future benefit of not having to pay rent. So the future benefit of this is they’ll hopefully at some point in the future generate and income stream and even more that generate cash and at some point in the future the companies don’t do it right now they’ll actually dividend doubt that cash.

So there's a couple of things that might like that will make this equity have kind of an economic, it will grounded economically and it could be these assets starting to pop up cash and then each of the share holders will get a dividend, right. A dividend is just cash that given to the share holders so let say that this is stock certificate in sock so at some point when the assets of the his company start generating cash each of the shares holders might be getting a dividend or maybe a large company at some future dates it say, “Wow, you know this is an awesome technology it will compliment what we already have” and maybe they’ll buy out the company, maybe they’ll pay $300 million for this company and then you know, essentially they're paying $300 million it was that and there's $15 million shares so they're paying $20.00 of shares.

So those of the economic kind of grounding points that why this shares even have a value and I'll go a lot into a lot more detail I'll make a whole play list on how do we even think about whether this is worth $50 million or is it worth $5 million or is it worth $500 million and it’s kind of an art more than a science because you can make—you're going to make tons of assumptions in terms of how fast the company grows, what's the risk free rate of return that you can get on other assets, you know, essentially where else you can put your money? When does the company dividend that as much, you know, there's so many assumption so it’s more of an art so it’s really kind of trying to get a handle on things but there's no real right answer. The real answer is kind of what someone’s going to pay for.

But anyway, I'll see you in the next video.

Transcription by: Scribe4you Transcription Services