Assignment 6

1. What is the meaning of harvesting a venture?

Harvesting is the final phase in the entrepreneurial value creation process, which includes
building, growing, and harvesting. Harvesting is the process entrepreneurs and investors
use to exit a business and liquidate their investment in a firm. While all three phases are
important pieces of the entrepreneurial process, many entrepreneurs who fail to execute a
successful harvest do not realize the full benefits of their years of labor. Harvesting is the
means for capturing or unlocking value, reducing risk, and creating exit options. It is
about more than money, as it also involves personal and nonfinancial considerations. As
a consequence, even upon realizing an acceptable monetary value for the firm, an
entrepreneur who is not prepared for the lifestyle transition that accompanies the harvest
may come away disappointed with the overall outcome. Thus, crafting a harvest strategy
is as essential to the entrepreneur's personal success as it is to his or her financial success.
The message to the entrepreneur is this: the time to develop an effective harvest strategy
is now, not later.

2. Describe an initial public offering (IPO). What are the difference between a primary
offering and secondary offering?
An initial public offering (IPO) is the first sale of stock by a private company to the
public. IPOs are often issued by smaller, younger companies seeking the capital to
expand, but can also be done by large privately owned companies looking to become
publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it
determine what type of security to issue (common or preferred), the best offering price
and the time to bring it to market.
The first of issuance of stock for public sale from a private company. This is the means
by which a private company can raise equity capital through the financial markets in
order to expand its business operations. This can also include debt issuance.
This sort of secondary public offering is a way for a company to increase outstanding
stock and spread market capitalization (the company's value) over a greater number of
shares. Secondary offerings in which new shares are underwritten and sold dilute the
ownership position of stockholders who own shares that were issued in the IPO.
Typically, such an offering occurs when the founders of a business (and perhaps some of
the original financial backers) determine that they would like to decrease their positions
in the company. This kind of secondary offering is common in the years following an

IPO, after the termination of the lock-up period. Owners of closely held companies sell
shares to loosen their position - usually gradually, so that the company's share price
doesn't plummet as a result of high selling volume. This kind of offering does not
increase the number of shares of stock on the market, and it is most commonly performed
in the case of a company that is very thinly traded. Secondary offerings of this sort do not
dilute owners' holdings, and no new shares are released. There is no "new" underwriting
process in this kind of offering.
3. What is meant by due diligence? How does a traditional registration differ from a shelf
registration?
Due diligence is the process whereby an investment bank investigates an issuing
companys financial condition and investment intent. A traditional registration specifies
details ahead of time including date, price range and underwriter, while the shelf
registration procedure allows the firm more flexibility by issuing within a two year period
4. What is meant by initial public offering (IPO) underpricing?
Underpricing refers to the price run up of the IPO on the first day of trading. It is also
known as the initial return or first-day return of the IPO.
Underpricing = (First-day closing price Offer price) Offer price 100%
The first-day closing price represents what the investors are willing to pay for the firms
shares. If the offer price is lower than the first-day closing price, the IPO is said to be
underpriced and money is left on the table for new investors. Since existing shareholders
settle for a lower offer price/proceeds than what they could have got, money left on the
table represents the wealth transfer from existing shareholders to new shareholders.
Money left on the table = (First-day closing price Offer price) Number of shares
On average, the amount of money left on the table is about twice the amount of direct
underwriting fees, and for many IPO firms it can equal several years of operating profit.
Although most IPOs are underpriced, the level of underpricing varies across IPOs with
different issue characteristics, allocation mechanisms, underwriter reputation, and general
financial market conditions. For example, the level of underpricing is reduced for larger
IPOs, those underwritten by prestigious investment banks, firms with a longer operating
history or more experienced insiders on the board, and those which intend to use the
proceeds to repay debt. On the other hand, technology firms, firms backed by venture
capital, firms with negative earnings prior to the IPO, or firms that went public during a
bull market experience greater underpricing.

5. DFC Valuation and ownership concept.

a) Enterprise operation value = $5,200,000/(0.15 0.06) = $57,777,778
Total enterprise value = $57,777,778 + $4,000,000 in surplus cash = $61,777,778
Value of equity = $61,777,778 - $17,500,000 = $44,277,778
b) Percent ownership: Venture investors = 3 million shares/5 million shares = 60%
Founders = 2 million shares/5 million shares = 40%
Venture investors value: $44,277,778 x 0.60 = $26,566,667
Venture investors value per share: $26,566,667/3,000,000 shares = $8.856
Founders value: $44,277,778 x 0.40 = $17,711,111
Founders value per share: $17,711,111/2,000,000 share $8.856
Total investors: $44,277,778/5,000,000 shares = 8.856
c) Venture investors percentage appreciation = [($8.856 - $2.50)/$2.50] x 100 =
$6.06/$2.59 x 100 = 242.40%
Founders percentage appreciation = [($8.856 - $.50)/$.50] x 100 = $8.356/$.50 x 100
= 1,671.20%