Agriculture Reference
In-Depth Information
fi nancing organization, the
venture capitalist
, focuses on providing equity capital to new
and high-potential businesses. These venture capital fi rms typically take an equity position
in a fi rm that may be very risky, but be deemed to have major long-term potential. Many of
the Internet start-up companies in the food and agricultural markets have venture capital
backing.
Some owners are not anxious to sell equity to other people. These owners feel that the
loss of complete control over the business is not worth the additional capital. Such owners
should be aware that the borrowing of funds may place far more restraints on their control
than the sharing of ownership. And if an owner defaults, or is slow in paying a term loan, he
or she can completely lose control of the management of the business. Remember, equity
capital does not have to be repaid at any certain time, and often there is no absolute need to
generate funds for distribution to the owners. Equity capital should always be considered as
an alternative, and weighed against other capital sources.
Common stock
The most prevalent form of equity capital is the kind that is secured through the sale of
common stock
. For the small company, this may mean selling shares of stock primarily to
people who are known to the present owners. There are always people in any community
who have funds to invest in a promising business venture. The fi rm's banker can often be
helpful in suggesting interested people. Employees of the fi rm are also a potential source of
stock purchasers, especially if the fi rm offers a special purchase plan that grants employees
preferential prices. Common stock is usually voting stock; that is, owners of common stock
have a voice in the management of the fi rm. Sometimes common stock is divided into
classes, of which only one kind carries the voting privilege.
Doug Davies has carefully studied the fi nancial needs of his fi rm. He has decided on what
he views as an optimum mix of borrowed and equity funds. His intentions are to offer the
lumberyard's owner, as part of the purchase price, a certain amount of stock. He also intends
to offer stock to his employees and to members of the community on a limited basis. He
determined this ratio of equity to borrowing by using the tools in
Chapter 10
that relate to
solvency.
Care must be exercised that laws relating to the sale of securities are observed when stock
is offered to the public. All states have blue-sky laws, which regulate the sale of securities
and stocks. In some cases, federal laws regulating the sale of stocks also apply. It is essential
that a team of advisors be assembled before a public offering of stock is made. The busi-
ness's banker, legal counsel, and auditor should be among those involved. If a fi rm wants to
make a larger public offering, it will usually secure the services of an investment banker.
These bankers perform a very special service by offering for sale the new stock offerings
presented by companies. When an investment banker underwrites a stock issue, that banker
makes an agreement with the corporation to market its securities by buying them and resel-
ling them to the public. Investment bankers typically charge a commission for underwriting
a stock issue.
Present owners of the business do not necessarily have to lose control of a business by
sale of its common stock. They can retain control by keeping a suffi cient amount of the stocks
issued themselves. Often bonds or debentures are sold as convertible issues. This means that
they can be converted at some future time to a certain quantity of common stock. Companies
offer this conversion feature as an inducement to secure buyers for their bonds and deben-
tures, because if a company is successful, its stock may appreciate considerably in value.
