Finance: A Handbook for Sustainable Entrepreneurs is part of the Sustainable Entrepreneur’s Library of Resources for Finance. The Handbook begins with a Research Paper from the Sustainable Entrepreneurship Project that discusses various factors to be considered when analyzing and comparing national financial systems including investment and savings, growth and financial structure, risk sharing, information provision, corporate governance and political and legal factors. The Research Paper investigates the determinants of capital structures in different countries and then compares and contrasts various types of financial markets around the world: public financing markets, bank financing; private equity markets (including venture capital) and financial markets in developing countries.
The Handbook continues with a Guide that discusses financing activities and the roles and responsibilities of the finance function typically led by the chief financial officer (“CFO”). The Guide covers the scope of financing activities and the factors that should be considered when developing a financing strategy for the company. Another Guide includes an overview of the sources of funding and a discussion of the transactional aspects of common financing methods including venture capital, debt financing from commercial lenders and public offerings. In addition, the Handbook includes a Guide that discusses how the finance function should be organized and managed with a particular focus on the duties and activities of the CFO in various functional areas such as controllership, treasury, reporting, financial planning and analysis and tax, as well as the increased responsibilities of the CFO with respect to corporate governance and internal controls.
A Guide about equity and debt securities creates a foundation for many of the issues and activities covered elsewhere in the Handbook by describing the types of securities that will be offered and sold to investors. Assuming that the business is operating in the corporate form, a choice must be made between “equity securities”, such as common or preferred stock, that provide investors with a true ownership stake in the corporation, or “debt securities” that provide investors with enforceable contractual rights against the corporation to recover the amount of capital advanced for use in the business but no permanent ownership interest in the corporation. The choice between equity and debt securities depends on a variety of factors described in the Guide and companies must choose carefully and pay close attention to the terms of the securities and their impact on the business of the company, existing shareholders and anticipated future financing needs and opportunities. Prospective investors will have their own preferences based on how they wish to allocate their funds and balance their investment portfolios. In many cases, the parties agree on a “middle ground” that involves the issuance of debt securities coupled with rights in favor of the investor-debtholders to convert those securities into equity and/or invest additional capital in exchange for an equity interest.
A Guide on “seed capital” focuses on the capital required to complete the initial business plan and the first version of the product prototype. While the amount of seed capital that may be required may be quite small in relation to the money that will eventually be needed to fully develop the business model, finding sufficient funding from the right sources can be a frustrating experience, even for founders who have previously been successful in raising venture capital funding for prior companies. Approaching friends and family can be uncomfortable for the founders and they need to be sure that they carefully explain the risks to persons who generally have little experience with this type of investment. So-called “angel investors” often promise access to connections and advise based on their own successes; however, caution should be exercised when taking money from professional investors with whom the founders do not have a pre-existing relationship. Venture capitalists set aside only a limited amount of funds for seed financing and “accelerators” and “incubators” often demand a generous percentage of founder’s shares while falling short on their promises of support. Also not to be ignored is that raising seed capital will be the company’s first step into the world of securities law regulation and bringing new stakeholders into the company beside the founders.
The next Guide in the Handbook includes an extended discussion of the advantages and disadvantages of venture capital funding and an overview of the stages of development for companies that are supported by venture capital investors. The Guide then continues with coverage of all of the key steps in launching and maintaining a business relationship with a venture capitalist including a discussion of how venture capital funds operate, how to local potential venture capital investors, the factors that venture capitalists general consider when making their investment decisions, the questions that founders and managers should ask when evaluating and selecting venture capital investors, the terms of securities typically issued to venture capitalists, the considerations that go into valuation and pricing for a venture capital financing and, finally, the covenants and agreements of companies and their managers that are generally included in venture capital deals. The Guide also covers the procedures used by venture capitalist to monitor the performance of their portfolio companies and exit strategies.
The last Guide in the Handbook provides information for sustainable entrepreneurs on how to create and use disclosure and offering documents for capital raising activities. The Guide covers relevant legal requirements on the process of using the company’s business plan and other strategic planning materials to satisfy regulatory conditions and provide prospective investors with sufficient information to make an informed business decision.
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