Business Basics Engineer: Entrepreneur (Modern Denition):

solves problems educated designs and builds things applies math and science brings things to the public at a reasonable cost knows how far to push cost savings

creates something new of value devotes time and effort assumes a manageable amount of risk, with the
expectation of growth

secures and allocates skills and resources

Inventor: does not build a company, merely sells patent rights Small Business Owner: does not get growth, but has much lower risks Salary-Substitute Firm (Subsistence Business): a small rm that afford their owner(s) a similar level of income to what theyd earn in a conventional job Lifestyle Firm: a rm that provide their owner(s) the opportunity to pursue a particular lifestyle and earn a living while doing so Entrepreneurial Firm: a rm that brings new products and services to market by creating and seizing opportunities

Characterized By: innovation growth

Revenue (Sales Revenue) (Sales) (The Top Line): the total amount of money collected from customers in exchange for goods and or services in a given period of time

includes accounts receivable the size of a company is measured by its revenue the growth of a company is measured by its change in revenue
Revenue Can Be In The Form of: NOT Revenue:

currency check credit card PayPal electronic transfer wire transfer purchase order

loans money from investors money from selling stock refunds for payments made donations (from unicorns) random money that isnt from selling stuff
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 Cash = currency + checking account balances + cash equivalents every business keeps its cash in a bank account some businesses keep a small amount of currency and coins around to give change to customers cash is cash; its not earmarked; it doesnt make sense to say money from here went there, only $xx
came from that and $xx went to this Bootstrapping: the process of starting a company with essentially no investment or borrowing; best reserved for companies with large prot margins

donations almost always indicate that an organization is a nonprot

Investing: selling stock to raise money in exchange for a percentage of ownership Borrowing: raising money while retaining ownership with the promise to pay back the money plus interest over a specied time frame How to Buy Stuff: A Company Needs Cash For:

pay cash promise to pay cash soon (account receivable)

Sources of Cash:

wages rent raw materials general utilities: power heat phone Internet

investment - selling stock, etc borrowing - loans, etc operations - selling a product or service

once a company runs out of cash, it is unable to pay for the above things and will end its operations bankruptcy is a legal action, NOT merely running out of money chapter 11 bankruptcy is to try to reform the business and become protable again, e.g. GM chapter 7 bankruptcy is to give some order to liquidation the CEO, founders, etc. generally dont face any personal consequences in bankruptcy, their company
just dies and VCs, and other investors simply made a bad investment and lose money

try to monetize a company to become protable

Theoretically, A Company Does NOT Need To:

be protable grow sell any products or services advertise

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Prot: the net income of a company (presumably positive) Loss: when net income < 0 Expense: the sacrice of resources to achieve a business purpose

the amount of a loan itself is NOT an expense, but the interest expense (interest) for the loan IS an expense
Payment: giving cash to another party Account Receivable: the promise that payment will be made soon Net Income (Bottom Line): the money made from revenue after subtracting the expenses

[net income] = [revenue] [expenses] EPS = [earnings per share] = [Normalized Net Income] = [net income] [average number of shares over time period]

Deferred Wages (Postponed Wages): when employees are able and willing to work for postponed wages Asset: a resource to be used in the future, rather than something used up like an expense; land, buildings, major equipment, etc

assets are NOT expenses

Depreciation: the loss of value of an asset over time

depreciation IS an expense typically depreciation is estimated to be

1 30 of the initial cost for a building

Production Volume: number of units made per year Sales Volume: number of units sold per year

P = S SP (S VC + FC) SP = Selling Price per unit S = number of units Sold

(prot)

VC = Variable Cost per unit P = Prot for the period

FC = Fixed Cost (total)

P = 0 at the breakeven point FC SBE = (number of units sold at the breakeven point) SL VC
Baseline Year: the rst year of sales

s2 = (1 r2 ) s1

(rate of growth)

s1 = year one sales [CAGR] = rg = Sn S0

1 yn y0

s2 = year two sales 1

r2 = year two rate of growth

(compound annual growth rate)

multiple by 100 to get percent use net income for Sn and S0 and the corresponding years for yn and y0
Four Basic Kinds of Financial Statements: 3

1. Balance Sheet (statement of nancial position or condition): reports on a companys assets, liabilities, and ownership equity at a given point in time 2. Income Statement (Prot and Loss Statement) (P&L): reports on a companys income, expenses, and prots over a period of time. Provides information on the operation of the enterprise. Includes sales and the various expenses incurred during the processing state 3. Statement of Retained Earnings: explains the changes in a companys retained earnings over the reporting period 4. Statement of Cash Flows: reports on a companys cash ow activities, particularly its operating, investing and nancing activities

includes purchase and selling of assets

Start-Ups Corporation: a legal entity chartered by the state government which is authorized to issue stock and conduct business in such a manner as described in the charter

Inc. or incorporated implies a corporation with stock Ltd. or limited is the same as incorporated but used in different countries a corporation has a certain number of shares it is authorized to issue and can keep issuing up to this limit you have to pay a fee per share for authorization and can always pay to authorize more later, so you dont need to ask for or similar there is NO ownership associated with stock that has been authorized but not yet issued the founders typically buy some of the stock initially and dont sell it, instead they keep issuing more
stock

the founders dont have to pay for their initial stock in the company, they just get it issued to themselves
In A Pre-IPO Business, Investors Can Sell Stock By:

selling to another investor (very unlikely) selling to another company in an acquisition - most common selling on a stock exchange in an Initial Public Offering (IPO)
Dilution: as more shares are sold to outside investors, each founder then owns less and less as a percentage of the corporation Burn Rate: the expenses in a pre-revenue company Staged Funding: an investor giving a startup company only enough money to operate for a year to year and a half at a time Round of Funding: an installment of staged funding

prevents too much money from being risked at any time

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 ensures that the company stays on the right path (in the eyes of the investor) typically, an investor wants to see some sort of liquidity event within 5 years of investing how much is a lot of money? at least a million dollars, probably more
Down Money Round: a funding round where stock is sold for less per share than the last round

only preferred stock gets a new conversion price screws over common stock holders such as the founders
Unvested Shares: shares that have no value at all and will vanish if the company is acquired or if the employee leaves for another company Cliff: a period to wait before vesting starts, but after the period, the time of the cliff counts towards vesting

[money raised] = [number of shares sold] [value per share] [shares outstanding; post money] = [shares outstanding; pre money] [number of shares sold] [ownership fraction] = [number of vested shares owned] [total number of shares outstanding]

Pre-Money Valuation: the value of the business before the investor pumps any cash into the business Post-Money Valuation: the sum of the pre-money valuation plus the total cash paid by the investor for more shares of stock in the company

[post-money valuation] = [pre-money valuation] + [money raised] [pre-money value per share] = [pre-money value] [pre-money number of shares outstanding] [post-money value] [post-money number of shares outstanding]

[post-money value per share] =

[post money value per share] = [pre-money value per share]

Angel Investor: a semi/non-professional investor using their personal money; usually a really rich person Venture Capitalist (VC): a professional investor using money from their rm Common Stock: regular stock

founders and employees get common stock most stock bought on stock exchanges are common stock MUST give friends, family, and fools common stock try to give angel investors common stock
Preferred Stock: stock with special provisions determined by a term sheet created in the process of being issued

angel investors may or may not demand preferred stock venture capitalists will require preferred stock
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Dividend: a percent of amount invested similar to loan interest may be paid, usually reserved for preferred stock

only gets paid in liquidation, but accrues over time

Pari Passu: treating all preferred shareholders equally Pro Rata: the option to or act of purchasing shares to maintain the same percentage of ownership

you have to pay for Pro Rata shares

Sideways Deal: a non-spectacular liquidation where the company is sold at a modest price Participating Preferred Stock: a type of preferred stock where the holder gets their original investment back PLUS the amount from converting their shares to common; designed to protect investors in a sideways deal Preferred Stock Converts to Common in the Event of:

initial public offering (IPO) sale of the company at the option of the holder
Liquidation: the sale of the company or substantially all of the companys assets Liquidation Preference: 1. Debtors 2. preferred shareholders 3. common shareholders Structural Anti-Dilution: provisions to prevent the value of an investment of an investor from decreasing over subsequent funding rounds

structural anti-dilution is always included in preferred stock

Redemption Rights: some predetermined terms where the company must repurchase the concerned stock after a certain date if the shareholder wants to cash out

the company founders should try to avoid including redemption terms if unavoidable, try to put the redemption date 5 to 7 years into the future and spread out the payments over 2 to 3 years redemption of preferred stock is rare because the company usually doesnt have enough cash to pay them
back Right of First Refusal (Preemptive Rights): the right given to preferred shareholders to share in future offerings to maintain their ownership percentage Stock Split: if the share price is too high for an IPO, for example, you can issue enough shares to reduce the price to the desired amount Reverse Split: to raise the stock price, shares can be consolidated to increase their value

the whole point of an IPO is to raise as much money as possible and is why good underwriters like Goldman
Sachs get lots of money to set up a good IPO 6

 [# of common shares] = NCP = OCP NOP IOP

[original money invested] [conversion price]

(preferred to common shares conversion; simple case)

(full ratchet conversion to common shares)

NCP = New Conversion Price OCP = Old Conversion Price NOP = New Offering Price IOP = Inital Offering Price NCP = OCP
MI OB + OCP OB + SI

(weighted average conversion to common shares)

NCP = New Conversion Price OCP = Old Conversion Price MI = Money Invested SI = number of Shares Issued in the new round OB = total number of Outstanding shares, including common, Before this round

Investments Good Investments:

good rate of return market viability liquidity solid prot margin

low volatility effecting positive change good job creation technology and innovation

the best measure of pre-revenue start-up health is the amount of cash on hand
Return: the amount earned when investing money

Fn = P0 (1 + r)n

(total value of investment after n years)

Fn = total value of investment after n years P0 = initial investment r = annual rate of return n = number of years investment is held [public valuation] = [# of shares] [stock price]
private valuation is a value negotiated between the CEO and the investor(s):

portfolio t sales revenue (past year) net income (past year +) market share (probably last year) growth rate (past few years) last post money valuation
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projected return on investment

how much return time to liquidity

 value of physical property value of intellectual property patents trade secrets

brand name trademarks copyrights net sales 5 years from now

Patents

Patents Must Be: useful (but not really) novel not previously produced not obvious to an expert in the eld patents last 20 years pharmaceutical companies often try to get extensions for 6 12 months with limited success
Statuary Bar: you have one year to patent something after public disclosure or you lose the right

keep a nice neat notebook and dont erase, take out, or scribble over anything, just simply cross stuff out really should make a prototype you cant patent something that someone else invented rst must use courts to defend patents products sold can be reversed engineered licensing a patent is probably the best option upon discovering someone infringing suing for patent infringement is like the lottery, low chance of success and long process, but huge payoff if
on the off chance you win

suing should be a last resort and you should realize you are seriously burning bridges by doing so Joseph Swan SOLD light bulb patents to Thomas Edison Antonio Meucci, NOT Alexander Graham Bell invented the telephone

Pricing

pricing is a type of information enhanced price comparison keeps prices similar

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 can be easily compared today with the internet in the past prices were compared with newspapers, telephone, etc similar or identical items create intense pricing between competing sellers one of a kind or unique products are hard to price TRUST may inuence consumers choices in addition to prices trust/reliability is huge, you have to know you wont get screwed warranty, return policy, shipping time factor into quality and are closely tied to trust and brand/image it isnt even a natural law that you must sell products for more than they cost to make

Branding

brands are an information signal brands are an indicator of quality or lack there of there may or may not be an actual difference between products but people will probably pay regardless registered patents and trademarks protect brands under law trademarks are free registered trademarks require a small fee

Imperfect Information Greshams Law (Lemon Problem): low quality goods drive high quality goods out of the market

it may be difcult or impossible to assess the quality of competing products lack of information encourages Greshams law

Entrepreneurial Opportunity Recognition Kirznerian: equilibrating activity; includes securities trading Schumpeterian: disequlibriating activity which requires new information, innovation, creation and is rare; includes entrepreneurial activity

Industries With Better Opportunities: closer ties to science more technological advances
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more patents

 Changes Represent Better Opportunities: political changes regulatory changes (either way)
Skills for Success:

population growth immigration other random changes that could be good

Good Opportunities:

intelligence education innovative creative risk takers that work to manage risk development people are more likely to be entrepreneurial than research people

create real value large gross margin large market sales revenue now or soon not true in some industries like pharmaceuticals

dont rely on only public information get private information from your social network
and access to a wide range of diverse people

price insensitivity avoid businesses where price is a key decision factor because it will seriously constrain revenue

Strategy

strategy originates from warfare consult war manuals for business strategy Art of War , etc are good Porters Five Forces are rather static should be coupled with a Resource-Based Evaluation (RBV) to account for the resources a rm bring to an
industry Switching Costs: any impediment to a customers changing of suppliers

learning/training costs paperwork/time incompatibilities with existing products and infrastructure

Andy Groves 10x Rule: due to switching costs, there must be order of magnitude improvements in costs, efciencies, and benets to the customer (Andy Grove is the former CEO of Intel) Porters Five Forces: 1. Power of Buyers: Increases: 10

 concentration of buyers customers could produce product themselves product is not important to customer customer knows how much the product costs to make switching is cheap and easy
Decreases:

purchase decision moved away from price cut out intermediaries (sell direct) increase incentives improve customer service increase brand loyalty
2. Power of Suppliers: Increases:

market is dominated by a few large suppliers there are no substitutes for the particular input the switching costs from one supplier to another are higher the business is not important to the supplier (low volume) threat of forward integration - vertically integrating - you have the materials, so just nish the product
Decreases:

buy the supplier buy some stock in the supplier corporation supply chain management build knowledge of supplier costs and methods
3. Threat of New Entrants: Increases:

low barriers to entry patents expire abundant necessary materials and resources such as smart engineers, etc small initial investment and xed costs
Decreases:

patents and IP create economies of scale tie up suppliers tie up distributors create a strong brand name
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 increase switching costs alliances with linked products/services

4. Threat of Substitute Products: your product either has substitutes or currently isnt important (emerging tech, etc) Increases:

low brand loyalty weak customer relationships low switching costs price to performance ratios favor competition market trends away from you
Decreases:

increase switching costs customer surveys to learn preferences enter substitute market yourself accentuate differences and advantages over substitutes
5. Rivalry Among Firms in the Industry: Increases:

large marketing campaigns small prots small prot margins intense brand competition (mac vs pc, pepsi vs coke, etc) multiple, comparably sized competitors competitors have similar strategies little product differentiation, so price competition becomes large low market growth rates barriers for exit are high
Decreases:

avoid price competition communicate with competitors focus on different market segments reduce industry capacity buy out competition differentiate your product

Business Narratives 12

Complete: completely describes entire process

go-to approach
Incomplete: doesnt describe entire process

only good if the product isnt completely developed, partners are responsible for certain portions, or something NEEDS to be kept secret Detail Level:

Overview: overview with all details omitted only acceptable if brevity is of key importance Overview with Embellishments: overview with only key details of interest only acceptable for describing the product to a potential new hire, etc. Detailed: describe business in great detail best approach make the most of your one chance to PROVE your business is a sound investment dont hold anything back unsuccessful if lots of questions questions should only be of a clarifying nature some investors feel the need to ask questions just because and hopefully will have to resort to things
already answered Tools:

Block Diagram: major task or group of tasks grouped into each block details not shown relatively clean and simple arrows show order Flowchart: each node contains only one detail all details included large and complex can be color coded and or shape coded Content: Customer Usage: entire cycle of product use by customer
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 purchase training or learning repairs or assistance disposal VALUE

Manufacture and Distribution: how the product is made

materials workmanship and manufacturing facilities and machines needed distribution

Function: how the product works

include all of the technical engineering details tell the complete story DO NOT DUMB DOWN

Product Development:
time and money needed to go from idea to sellable product specic, measurable milestones date and functions to be achieved or tasks completed

fail to meet milestones and youre fucked make the milestones too easy, and nobody will be interested

Marketing

who are the customers? how do we appeal to them?

Market Segmentation: the process of studying an industry and determining the different potential target markets in that industry

Proctor & Gamble - where marketing is done right

Niche Market: a place within a market segment that represents a narrow group of customers with similar interests Position: how a rm is situated relative to its competitors; the part of a market or of a segment of the market the rm is claiming as its own

focus on how your product benets the target customers, NOT the features and real fact based engineer
style benets

people are STUPID, tell them how you benet them

Brand: the set of attributes positive or negative that people associate with a company

cost based pricing is a bad idea

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The Four Ps of Marketing:

product price promotion distribution (place)

Product Characteristics:

quality level features design brand name packaging

Value-Based Pricing: pricing based on what consumers are willing to pay Promotion: activities a rm takes to communicate the merits of its product to its target market and persuade people to buy it

advertising raise customer awareness of product explain comparative benets create associations between a product and a certain lifestyle public relations press releases news conferences media coverage articles in industry press community involvement
Guerrilla Marketing: marketing activities that are non-traditional, grassroots, and captivating SKU: Stock Keeping Unit Early Adopters:

adventure/pioneer advantages over others productivity rapidly obsolete

15

high price

 should avoid products missing vital features should be able to see signicant improvements should wait for reviews

forced to upgrade

unreliable, doesnt work well

Sales Direct Sales: company sells directly to the consumer, who pays the retail price Indirect Sales: company sells to a retailer, who pays the wholesale price; then the retailer sells to the consumer for the retail price

direct sales allows better feedback and control over customer relations
Sales Milestones:

how many units how much money per unit when to be reached
Consequences of Missing Milestones:

not enough revenue to keep business going investors will/might refuse to invest more
In Startups:

EVERYBODY does sales not enough money to hire dedicated sales force
In High-Tech Sales:

sales person must understand the technology includes formal training customer should understand technology specs demos WHITE PAPERS written by engineers
Selling to a Business:

have more money genuine need for high tech products and services selling to a GROUP of people
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Initiator: identify need for product/solution - start buying process

usually a lower level technical person - cant make purchase themselves (authority)
Inuencer: steer the decision to a particular product

pre-existing mindset is common higher level/more experience help or hurt you, get them on your side
Decider: have authority to make the purchase decision

typically executives clueless with technology limited time few (maybe one) chance to impress so dont screw upward know who this person is
Purchaser: takes care of all of the details

delivery and installation can shut down a sale with poor execution
User: lower level technical types that actually use the product

feedback is important, especially INITIAL/EARLY do they need training, manuals, tech support, etc? trial periods/single user turn into multiple users
Gatekeeper: prevent you (sales) from talking to customers

get through or go around what golf courses are for @cornell.edu etc, is better than @gmail.com, etc
Hunter: aggressive, not afraid of rejection, but dont be an asshole

nd and investigate NEW sales leads get appointments with potential customers deliver presentations negotiate new business
Farmer: long term, repeat sales 17

 establish and nurture long-term relationships provide expert advice network within existing companies to nd new leads negotiate with existing companies to get more business contact lists
Structure: online and/or brick and mortar stores

sales people get commission for less efcient physical store purchases
Skills: engineer vs not, competent vs smoothly

training - must be minimally trainable

Compensation: stock options are typically over a 5 year period, but sales is too short term, so they get commissions (without a cap)

also receive a salary may unfortunately be the highest paid in the company (dont tell the engineers)

Forecasting

y = a + bx

(linear regression model)

y = estimate of the dependent variable a = y-intercept b =slope of line a = y bx

x = independent variable value

(coefcient a of linear regression; y-intercept)

in Excel, use the command =intercept()

b=

xi yi

( xi yi ) n 2 2 ( xi ) xi n

(coefcient b of linear regression; slope of line)

in Excel, use the command =slope()

1df = b (1 f ) f dt

(Fisher-Pry model)

1df = the relative rate of adoption f dt

the market still using the old technology

b = proportionality constant

(1 f ) = the proportion of

1 (Fisher-Pry model solution) 1 + aebt f ln = ln a + bt (Fisher-Pry model linear regression) 1 f f=

ln a = intercept

bt = slope
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f 1 = ebt 1 f a

ln

f 1 f

= ln f 1 f

1 bt e a

(derive linear regression from Fisher-Pry solution

1. plug data of adoption percentages ( f ) into ln

to get new values f

2. do a linear regression on the values (t, f ) to get slope b and intercept a 3. use the slope b and a year t to get a value of adoption percentage f from the equation f =

1 1 + aebt

Ethics

you are a trained professional with specialized knowledge and others depend on you to do what is right Ask: whos affected? what are the costs and benets? what are the rules? can I foresee a future ethical problem? sometimes people are afraid of a good design making a previous design look bad, even if it really was media and all often blame bad things on ethics rather than failure New Orleans: Hurricane Katrina missed it
federal government made levees failed simply shitty levees, dont blame it on the weather/geography many other places build good levees that handle harsher conditions, even in the USA

BP Offshore Drilling: engineering failure, not really ethics/greed issue

ignored warning signs that more competent corporations avoid with excellent track records

Real Ethics Problems: product safety/reliability concealing data faking data misappropriation of proprietary information to be a whistleblower
Whistleblower: someone who in the event that management isnt taking appropriate steps to deal with a serious issue, contacts outside authorities such as a department of the state or federal government

being a whistleblower essentially guarantees that you will be red and the company will do everything that
they can to cover up the problem

youre screwing yourself for the good of society at large because of an ethical obligation
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 GM Pontiac too hot for electronics (1987 1988): 50 PPM of CO is workplace maximum Pontiac had over 80 PPM wasnt illegal through loophole design of 1989 Grand Prix Turbo was outsourced to ASC/McLaren, so GM wasnt really doing the
engineering

car sold for $30, 000 each ($52, 800 today) no standard or law being violated did have a oppy disk with data on it Cornell is badass at automotive research door latches that stay closed in crash Crystler used shitty rear hatch on minivan killed 37 people Cornell MBA Paul V. Sheridan heads safety team for 1993 minivan makes anonymous phone call to national bureau and got red voluntary recall occurred

Ethics Philosophy Levels of Proper Behavior: 1. Etiquette: depend on culture

good manners dress code hygiene eating habits drinking rules

2. Morals:

accepted standards of right and wrong more serious than etiquette vary from place to place
3. Ethics: inquiry into the moral judgments people make and the rules and principles upon which such judgments are based Consequentialist: the rightness or wrongness of an act is determined by the acts consequences

good results good action bad results bad action

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 outcome based what engineers care about

Ethical Egoism: what is right or what one ought to do or what is moral is to act in accordance with ones own long-term self-interest

simple, exible, helps you in a Hedonist fashion doesnt care about others many things that would generally be considered bad are acceptable
Rational Egoism: an action is rational IF AND ONLY IF it maximizes ones self-interest (although it is not necessarily moral) Psychological Egoism: humans may be motivated by self interest, but may not necessarily be moral OR rational Act Utilitarianism: an act is morally right if it maximizes the utility taking everyone affected into account

proposed by Jeremy Bentham (1748 1832) considers everyone exible yet reasonable may be difcult to quantify all benets and costs to make meaningful comparisons
1. set out alternatives 2. calculate benet/cost ratios for everyone affected by acts:

[Benets] ? >1 [Costs]

3. choose alternative which maximizes total benet/cost equation Rule Utilitarianism: an act is moral if it is in conformity with a particular moral rule and the chosen rule maximizes utility over all alternative rules

proposed by John Stuart Mill (1806 1873) predictable and easy to use there are always exceptions, which defeats the purpose must universalize whatever course of action that is recommended some extreme actions allowed by Act Utilitarianism arent allowed when generalized
Non-Consequentialist: an act is right or wrong because of some factors independent of the acts consequences; MOTIVES determine morality Theologism: an act is right if it is the most consistent with Gods will; motives matter

solid set of rules taken very serious by some my be widely familiar depending on culture different religions have different rules
21

 non-religious people left out not easily applied to modern business and engineering
The Golden Rule: do unto others as you would have them do unto you

easy to apply widely acknowledged and generally considered fair doesnt always give acceptable results ambiguous when different status roles considered swapping pirated software would be allowed
Kants Categorical Imperative: an act is morally right only if the maxim of the act is universilizable (can be adopted by everyone) 1. state maxim (action & motive) 2. imagine a world in which everyone followed that maxim 3. look for resulting contradictions or irrationalities 4. if a contradiction or irrationality arises, then the maxim is not allowed 5. if no contradiction or irrationality, maxim is morally permissible

straightforward rules easy and fair considers everyone basis of many policies ZERO exceptions lost if two rules contradict each other
Normative Relativism: an act in a particular society is right if a majority of people in that society think it is right

clear answers likely to give bad results taking a poll is dumb because people are dumb

Investing Beta (): a measure of the volatility of an investment

the markets average is dened as = 1

22

 if < 1 then the investment is safer and will likely have lower returns than the market average if > 1 then the investment is riskier and will likely have higher returns than the market average
Certicate of Deposit (CD): give money to a bank for a specied period of time

more interest than a savings account ties up money and large fees to pull out early extremely safe horrible returns
Money Market:

extremely safe and liquid very low returns often used by large institutions and government specializes in debt securities that mature in less than one year
Mutual Fund: a professionally managed portfolio of stocks and bonds

simple and diverse without needing a large principle to invest mutual funds returns are killed by fees and thus often a weak investment there is no evidence that funds with a high expense ratio perform better than ones with lower fees favor funds with lower expense ratios
0.2% is really low 1.3 1.5% is typical 2% is really high

a load is a fee for buying or selling your funds dont buy funds with loads
Bond (Debt): a loan to a company

like a CD, you lend your money for a specied period of time there is a secondary market to sell bonds, but they should still be considered non-liquid you receive the interest at the rate called the coupon every year broken up into two payments, one every 6 months typical coupons are 5 6% junk bonds can carry a large risk, but most bonds are a safe investment
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Callable Bonds: a riskier variant where the company can pay you back sooner than planned and then get a new bond at a lower rate

often offer higher coupon rates

Zero-Coupon Bond (Strips): bonds where you dont get coupon payments, but get all of the interest with the principle at the end

often sold at a signicant discount really bad if you want to sell early (which shouldnt happen)
Stock (Equity): a share of ownership in a company Buying on Margin: borrowing money from a broker to purchase stock

you have to pay interest on the loan you can use this leverage to make more money, but also end up losing more than you invested best for short term investments you may be required to add more money to your account or sell at a loss

Investment Strategies Ladders: good strategy for building a portfolio with balancing liquidity and long term gains 1. buy a short term investment (bond, CD, etc) 2. make progressively longer term investments of the same category 3. when the rst investment matures, put it in an investment longer term than your current longest term one 4. as the other investments mature, put them in the same class and term investments as the rst reinvestment 5. you will have an investment mature on a regular basis such as every year while reaping the investments of long term investments Barbells: good strategy for balancing short and long term investments 1. split money between buying several long term funds ( 10 years) and short term (< 2 years) Bullets: good strategy for when you know youll need the money at a certain date such as a college fund, etc 1. make a long term investment that will mature at the date you will need the money for something like college, retirement, etc 2. in regular intervals make increasingly short term investments that will all mature at the same date that the money will be needed Short Selling: instead of the conventional buy low sell high approach to stocks,

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Five Basic Features of Market Design 1. information ows smoothly 2. people can be trusted to live up to their promises 3. competition is fostered 4. property rights are protected but not overprotected 5. side effects on third parties are curtailed

History of Capitalism Financial Capitalism:

Leonardo Pisano Bigollo (AKA Fibonacci) realized Roman numerals suck from Pisa, Italy wrote Liber Abaci in 1202
about arithmetic and the abacus

banking started in Italy Florence ruled by Signoria, a group of 9 people 8 were heads of labor unions
Trading: buy and sell nancial securities

need lots of money to invest and make serious money

25

 smart people make money off dumb people

English East India Company:

225 men invested a total of $18, 000, 000 4 ships went to Java Island of Bantum, Indonesia sanctioned by Queen Elizabeth I Good to Sell: scarcity portable no substitutes for sale demand
Industrial Revolution: 1. around 1780 James Watt made the rst efcient, practical steam engine

Risk: piracy disease shipwreck unfavorable price/demand

Reduce Risk: dont tie investments to

voyage

sell stock on exchange government

monopoly enforced

patents for hydropower for looms and spinning mills ended

2. cotton gin was invented by a Yale graduate 3. Bessemer furnace allowed for the mass production of iron and steel Capitalists Control Wage Costs: Workers Improve Standard of Living:

low skill requirements destroy unions use advanced technology to reduce labor child labor housing as part of wage England used wool (from sheep) to make clothing

long hours unionize improve skills buy company start own company (usually already rich)

Fulling: fullers earth (aluminum silicate) and water beat into the wool to clean and make tighter weaves

fulling mills using water power helped increase production 25 times more efcient than fulling by hand rewood became scarce and thus expensive, so coal was mined for fuel and heating in 1347 1350 30% 60% of Europe died due to the Bubonic plague
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 Professor Malcom Casad~~~~ died in 2009 from the Bubonic plague created a huge labor shortage
wages went up and living standards increased

Martin Luther published 95 Theses in 1517 130 years reformation Max Weber (1864 1920) faked shitloads of data Protestant work ethic, Puritans developed capital
Good Things in Europe: For Markets to Function:

property rights - patents, land, etc no slavery limits on state power mobility of merchants church and state separation limited state role in commerce society respects commerce as a vector of upward
mobility

information ows smoothly competition fostered property rights protected people can be trusted to fulll promises side effects on third parties curtailed (dont screw
people over)

pollution is a 3rd party issue international differences in contract laws can

make business agreements difcult

non-delivery is a problem
Competition: Market Transaction: Non-Markets:

try harder be different lower prices

voluntary either party can opt out agrees to terms

house work government work inside rm work - account

transfers, etc internal transfers,

intermediaries (middle men) are necessary but not major part venture capitalists are important because: small group to go to (a few hundred rms) saves time expert and experienced, give advice large amounts of money pooled PROBLEM: people can copy and free ride off anothers paying for expertise if you refuse to pay for advice, everyone is worse off
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 examples: computers, interior design colors, golf balls gray when water logged
Futures: a contract to sell a product in the future at a price xed today

good for agriculture

Dutch Auction: start price high and lower until everything is sold

many variations, but everyone pays the same rate [shares recieved] = [# shares bid] [# total shares bid] [# shares to be issued]
(Dutch auction; Pro Rata)

Ownership

asset owner has rights to any residual returns shared ownership doesnt work well secure property rights are critical creates motivating incentives to work hard and make things work well large rms dominate on efciency/optimization and economies of scale gives more negotiating power with suppliers small rms are exible, less bureaucratic, take risks, and innovate free trade helps economies of scale and allows a few international corporations to dominate Examples: semiconductor industry requires huge initial investments and thus favors economies of scale Ben & Jerrys went from natural hippies to chemical laden mega corporation Scott Olson got froze out of roller blades Aptera founders ousted (3 wheel electric car) Apple clutches Steve Jobs

Property Rights

the state builds a lot of institutions credit markets needed procedures for initial ownership established boundaries physically demarcated judges, lawyers, etc must get things done quickly
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 patents give legal monopoly so innovation occurs downside is it can slow stuff down Napster - better or worse for the music industry Grateful Dead - better off giving music away Silicon Valley has culture of open relationships engineers move around and spread knowledge Massachusetts is stricter and enforces post-employment covenants

Externalities

beyond monetary cost - time, pollution quotas & regulations can help but are rarely ideal must be enforceable to have meaningful affect
Niche Market: narrow part of a market Creative Destruction: process where old products are replaced by new technology

reduce a patent to practice with detailed drawings, prototypes, etc

The Free Market is Better Than Planned Economies

markets gather and disperse information to steer prices better than top-down planning lying is bad for the free market economy restricting prices and screwing up supply/demand is bad for the free market economy any exceptions must be made on non-economic grounds - moral, etc good solutions allow you to continue operations and bad solutions make you stop, but the market decides
what is good and bad, not reality/best product State is Important For:

rule setting/referee laws and antitrust provide goods and services that markets would otherwise undersupply

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 education military public services infrastructure create trust for elaborate exchanges international trade regulations

welfare healthcare farm subsidies currency/federal reserve pure research funding disaster/emergency relief coordination

Arrow-Debreu theory - Existence of an Equilibrium for a Competitive Economy prices steer the economy economy is coherently directed by the invisible hand supply up price down supply balances US citizens make less in engineering with Ph.D. internationals make money in US with H1B1 visa rather than home country thanks to engineering Ph.D. immigration doesnt impact middle income American wages, only low and high skill level are compromised immigrants have the most to gain from immigration labor market for engineers is not free because big corporations lobby and prevent it because they dont want
to pay

middle income will be OK, youre screwed over though (anybody from a 4 year college) engineers create value, entrepreneurship is a way to monetize VCs dont give out information, you need to be in the know and have an introduction to them
Things That Should Not Be Sold:

assassins gun silencers slaves organs

endangered animals U235 passports forged currency

stock insider information harmful drugs shitty stuff

rm transactions are subject to hierarchical control rather than free market most economic activity occurs within organizations owners/board of directors monitor managers - i.e. CEO, etc. market system provides checks and balances corporate jets, retreats, etc are inefcient BS perks
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 products must be good at the right price cost < price long term viability is important people are stupid for Chevy Silverado pickup to be the best selling US car nancial markets withhold funding from corporations going in the wrong direction securities ratings have become compromised of late 1990 Clean Air Act created emissions allowances for SO2 to reduce acid rain and were a huge success diesel fuel, unlike oil can be made without SO2 if you use natural gas, but then it contaminates the catalytic
converter

smoke plums contain H2 O (g) , CO2 , trace stuff in good plants smoke plums contain H2 O (g) , CO2 , SO2 in crappy plants in California electricity crisis, rather than high prices bringing themselves down, xed retail prices led to super
high prices

no clear winner in energy source problem coal - cheap, bad nuclear - scary natural gas - kinda clean wind/solar - good, but unliked and inefcient

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