In chapter ten, we are introducing the concepts of the financial strategy including the dept and equity alternatives. This course provide the students with a conceptual knowledge regarding the essentials for management practices of a technology-based organization, and the evolution of technology. The topics covered in this course would include: • Introduction to the concept of entrepreneurship. • What entrepreneurs do and their importance to economy • How to seize business opportunity; • Know the process of creativity and difference between invention and innovation • Know how innovation is important as a dimension of entrepreneurship • Critical factors in managing technology; including • The Time Factor (Osborn effect) • Technology Push and Market Pull • The S-Curve of Technology • Technology and Product Life Cycle • The Chain Equation of Technology Innovation • Price Knowledge Gape Relation • Difference between Entrepreneurship and Stewardship Management • Difference between technology leader and followers • Competition and Competitiveness Concepts. • The process of the technological innovation; • Who are the customers; and • How to optimize cost and find finance for your projects • Demonstrate the importance of business plan, including the marketing and financial plans and how to prepare it. • Know the structure and management of a technology organization

1. CS443 Course
Introduction To Entrepreneurship
p p
Spring 2009, Modern Science & Arts University
Chapter Ten: Finance Strategy: Debt or equity?
Instructor:
Al-Motaz Bellah Alaa Al-Agamawi
Chapter Source, “chapter eight: entrepreneurship starting and operating a small business”
book, by Steve Mariotti, 2007, Pearson Education, Inc.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

2. Sources of Capital
2
Family and friends (equity or debt)
Accounts payable (debt)
"Angels" (equity)
Banks, credit unions (
(debt)
)
Minority financing sources (equity or debt)
Small Business Investment Companies (SBICs, debt)
p ( )
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

3. Investors Wants their Money to Grow
3
Stocks: Shares of Company (equity)
Bonds: Loans to companies or government entities for more than one year.
Cash: Saving Accounts, treasury bills, and other investments that can be liquidated
(turned into cash) within 2 hours.
( ) 25
Real Estate: which is a land or building, is another important investment.
The greater the potential reward of an investment, the more risky it probably is.
High reward = High Risk.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

4. The Value of Money
4
Time Value of Money
Money grows fastest in investments that offer a compound rate of return.
A compound rate is one that is calculated with the interest that has already
accumulated.
Future Value of Money
The future value of money is the amount it will accrue (gain) over time through
y (g ) g
investment.
You can determine this easily using a Fu­ture Value Chart.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

5. The Present Value of Money
5
Inflation When prices rise, a dollar tomorrow will buy less than a dollar does today
Inflation- rise today.
Risk- When you put your money in an investment, there is always some risk of losing it.
Opportunity- When you put your money in an investment, you are giving up the
opportunity to use it f a better investment.
for
Present value is the amount an investment is worth discounted back to the present.
p
The present value of $1.00 at three years and 10 percent is $0.75.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

6. How you can Compensate Investors
6
Debt: You borrow the money and promise to pay it back over timeat a set rate of
interest.
Corporations sell debt in form of bonds.
Equity: You give up a percentage of ownership in your business for money.
The Investor receives a percentage of future profit from the business based on the
p g p
percentage of ownership.
Corporation sells equity in the form of stock.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

7. Debit Financing
7
Advantages
The lender has no say in the future or direction of the business as long as the loan
payments are made.
Loan payments are predictable-they do not change with the f fortunes of the
f
business.
Lenders do not share in the business profits.
p
Disadvantage
If loan payments are not made, the lender can force the business into bankruptcy.
The lender can even take the home and possessions of the owner of a sole
proprietorship or a partner in a partnership settle a debt.
Debt payments increase a business's fixed costs, thereby lowering profit.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

8. Equity Financing
8
Advantages
If the business does not make a profit, the investor does not get paid. The equity
investor cannot force the business into bankruptcy in order to get paid.
The equity investor has an interest in seeing the business succeed and may,
therefore, offer helpful advice and valuable contacts.
Disadvantage
Through giving up ownership, the entrepreneur can lose control of the business to
the equity holders.
Equity financing is riskier for the investor, so the investor frequently wants both to
investor
be able to influence how the company run and to receive a higher rate of return
than a lender.
The
Th entrepreneur must share profits with other equity i
h fi ih h i investors.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

9. Six C’s of Bank Borrowing
9
Collateral
Cash Flow
Credit History
Capacity
C i
Commitment
Conditions
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

10. Venture Capitals
10
There are also investors and investment companies whose specialty is financing new,
hi h potential entrepreneurial companies.
high i l i l i
Because they often provide the initial equity investment, or venture capital, to start up
a business, they are called venture capitalists.
Venture capitalists seek high rates of return. They typically expect to earn six times
their money back over a five-year period.
Venture capitalists want equity in return for their capital.
They are willing to take the higher risk for higher returns.
Venture capitalists typically reap the return on their equity investments in one of two
ways:
By selling their percentage share of the business to another investor.
By waiting until the company "goes public" (starts selling stock on the open market)
and converting their investment into stock. The shares can now be traded on the stock
market. Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

11. Angle Financing
11
If your business does not meet the high-flying profit picture that attracts venture
i li
capitalists.
It might still be of interest to Angle.
Angles are private investors (nonprofessional financing sources) who are typically
worth over $1 million and are interested in investing in start-ups for a variety of reasons,
from friendship to a desire to support entrepreneurship in a given field.
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

12. Business Plan is the Key to raise Capital
12
No matter whom you approach to raise money for your business. you will need a
b i l
business plan.
Venture capitalists and bankers will refuse to see an entrepreneur who does not have
one.
You may have a brilliant idea, but if it is not set forth in a well-written business plan, no
investor will be interested.
A well-written plan shows potential investors that the entrepreneur has carefully
well written
thought through the business.
All investors, bankers, friends, neighbors, or venture capitalists-crave information.
Th more information you offer investors about how their money will b used, th more
The i f ti ff i t b t h th i ill be d the
willing they will be to invest in your business.
Your plan should be so thoughtful and well written that the only question it raises in an
investor's mind is "How much can I invest?".
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi

13. 13
Q&A…
Finance Strategy: Debt or Equity? Chapter 10 By: Motaz Al-Agamawi