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CASE ANALYSIS GROWING CONCERNS

CAPITAL STRUCTURE
AMBARISH (15) | BIBHU (40) | MARY (86) | SURESH (155)
Group C Batch 18

CAPITAL STRUCTURE
A mix of a company's long-term debt, specific short-term debt, common

equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
Debt comes in the form of bond issues or long-term notes payable, while equity is

classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

SIGNIFICANCE:
o The most heart-breaking examples are when the company continues for several

years, often showing great promise, and then the structuring flaws, built in during the start-up phase, cause it to collapse genetic defects in the companys DNA.
o Many of the structural inadequacies in a company are also very difficult to fix after the
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company is launched especially if there are external investors.

WHAT DO VENTURE CAPITALISTS PREFER?


VC like to have their cake and eat it too they want equity as well as debt. If company succeeds, equity will give VCs a big slice of profit, however if

company fails, then debts will give VCs their payment first
VCs usually invest in redeemable preferred stocks or debentures.

REDEEMABLE PREFERRED STOCKS:


A type of preferred stock in which the issuer has the right to call in or redeem

the stock at a pre-set price after a defined date.


The terms of a callable preferred stock issue, such as the call price, the date after

which it can be called, and the call premium (if any) are all defined in the prospectus at the time of issue and cannot be changed later.
As with regular preferred shares, dividends on callable preferred shares must be
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paid by the issuer ahead of any dividends on its common shares.

WHAT DO VENTURE CAPITALISTS PREFER?


DEBENTURES:
A type of debt instrument that is not secured

ADVANTAGE TO VC:
If the company succeeds

by physical assets or collateral.


Debenture holders have first right to their

capital before shareholders in the event of liquidation of the company.

they could convert to common stock i.e exercise warrants


If company doesnt do well

DEBENTURE WITH WARRANTS:


Allows VC to buy common stock at nominal

price.
Its a combination of debt and equity i.e.

they will get paid before the common stock holders i.e debentures
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taking advantage of both downside and upside.

WHAT ENTREPRENEURS SHOULD DO?


Convince VC to take pure equity because it is simpler and keeps the balance

sheet clean
Depends on strength of ones bargaining power

THINGS TO BE CAREFUL ABOUT:


Legal Structure of investments law governing the organization varies from

state to state. (NY do not permit issuance of preferred stocks at the holders option)
crafted carefully.

Dilution and anti-dilution provisions will have unexpected effects if not

Subordination provisions in debentures trade creditors and institutional

lenders will expect clear cut language placing the VCs claim to the companys assets.

GOOD WISHES TO ALL !!


THANK YOU

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